The authorial strategy for trading binary options that is called Trend following is another tool which is based on the application of the trend’s analysis methods. To be fair, it is necessary to say that the modern financial market abounds with the different strategies, but the trend following trading strategy has introduced the new work approaches, which, however, had to be known perfectly for anyone.
This strategy is based on the usage of two indicators: Alligator and Aroon. Both these tools are the trend tools and allow opening the long-term positions in the direction of the main trend’s movement. Both these indicators promote the trend’s determination, but the Alligator indicator can be considered the main tool for conduction of the technical analysis because of its force, significance, and opportunities provided.
The basic indicators’ settings specified below are used for working with this strategy. On the left you can familiarize with the Alligator’s settings and on the right with the Aroon’s settings.
We would like to remind once again that some platforms don’t support working with the Aroon, and it incites to work with the live chart. This platform is absolutely free, it doesn’t require installation of any additional software, and, at the same time, supports working with the main tools, which are used by traders to conduct the technical analysis of the binary options’ market.
Practical application of trend following trading strategies
In order to have the correct understanding of the opportunities provided by this strategy, we will consider the tools which form the basis of this strategy.
Alligator consists of three lines:
- blue one is jaws
- red one is teeth
- green one is lips
Sequential arrangement of these lines indicates the presence of the ascending or the descending trend in the market. In fact, we can say that when the Alligator opens upwards, we have to buy the binary option for the raise, and if the indicator is opened downwards, then the binary option for the reduction has to be bought. These are the basic trading parameters which are essential for the usage of the trend following trading strategy too.
The Aroon is mainly based on working with the strong zones in the range from 85 to 100 and from 0 to 25. Therefore, if the indicator’s lines are located in these zones sequentially, we can draw the conclusion that there is the trend’s formation, and we can trade binary options in the direction of this trend’s movement.
One would think that the considered tools are good methods without flaws. It is partially correct, but any indicator has some disadvantages along with benefits too. The main trader’s task it to select tools in such a way as to make them complement each other and deprive strategies of their disadvantages, which can cause the negative outcome.
As soon as we grasp the main principles of trading using this method, we can accentuate the main rules of the trend following trend strategy, and the abidance of these rules is necessary.
Buying the PUT binary option
- The Alligator has to have the accurate sequence of the descending trend. It can be attained by the following arrangement of lines from up to down: blue – red – green.
- The blue line Aroon is located higher than 85, and the orange line is located lower than 25.
Buying the Call binary option
- The Alligator has to have the accurate sequence of the ascending trend. It can be attained by the following arrangement of lines from up to down: green – red – blue.
- The blue line Aroon is located lower than 25, and the orange line is located higher than 85.
The illustrating screenshot is located below.
Considering expiration, it is necessary to remember the distinctive features that are specific for the trend’s indicators, including the possibility of the long-term perspective. It allows saying that the trend which has formed and was confirmed by the trend following trading strategy signals is substantial and impulsive enough to provide the strong movement. As a result, we can say that a binary option is bought for 10 levels ahead. In other words, if the analysis is conducted based on the timeframe of 30 minutes, as indicated in the example, then we have to purchase the lot for 300 minutes or 5 hours. It would be enough for a trend to become strong and provide the momentum in the direction of our entry into the market.
Benefits and disadvantages
Any trading method has its benefits and disadvantages that describe it unambiguously. The trend following trading strategy gives the small amount of signals and is desirable to be applied only in the trend’s market, but, at the same time, the signals’ capability is very good, and its’ principles are based on the basic concepts of the technical analysis.
And the most important thing lies in a fact that the considered method is fairly profitable in the long-term perspective, and even if there are occasional losses, they will be covered by the further profits.