Interesting to Know - How Does a Trend Look Like?

Interesting to Know – How Does a Trend Look Like?

The routine of buying call and put options is something that can easily be mastered by traders, especially now when there are several user-friendly brokers. After all, the mechanics of placing a Binary Option trade can be learned in about 5 minutes but that’s not the most important part and just knowing the steps to opening a trade will not bring you money. The difference between the successful and the struggling trader is made by their ability to predict the direction in which the market is moving for the underlying assets. In a nutshell, this is the definition of the trend: the overall direction of the market.

Those who know what a trend looks like and can identify in its early stages, are going to stay profitable for a long time and with minimal effort.

Distinguishing Between a Trend and Market Noise

Trends form on a daily basis and due to the fact that there are hundreds of underlying assets whose prices advance into one direction or the other, there are plenty of opportunities to take advantage of. The problem is that most of them don’t grow strong enough to be easily noticeable by regular traders and the overwhelming majority sinks into irrelevance before anyone takes notice. This means that rookies miss out on the opportunities without even knowing and keep focusing on the handful of trends that were already sucked dry. In other words, the trend is over before the rookie can notice it was even there. When they finally join what they believe to be a trend, the market reverses and the trade ends up Out of the Money.

The rule of thumb states that trends are viewed over different periods of time, with the main categories being short-term and long-term trends. The second are favored by both binary options traders and regular investors, with the latter extracting the most profits due to the fact that they hold onto stock. For the former, the challenge is to identify fledgling trends and buy call or put options depending on whether the asset price is going upwards or downwards. Being on a constant search for emerging trends is generally a good thing, but traders should be aware of the dangers resulting from mistaking market noise for trends.

Speaking of which, market noise can be defined by volume and price fluctuations in the market that don’t reflect the true direction in which the underlying asset is heading on the long run. These look more like spikes on charts but those who are desperately seeking promising trends are tempted to take a leap of faith with these oscillations. To identify trends and use them properly, binary options traders should dwell on tools like “moving averages” which observe the directions and amplitude of price movements over a determined period of time. One of the most respected type of moving average is the EMA which stands for exponential moving average and it is a very useful instrument for those traders who rely mostly on technical analysis.

Take Bitcoin Chart as a Great Example

An image is worth 1000 words and those who want to fully understand the importance of identifying a trend could use Bitcoin as the perfect example. Traders should take a look at the chart available at http://www.google.com/trends/explore#q=bitcoin cmpt;=q to see how the interest for this asset evolved over a long period of time. The same principles can be applied to all trends, regardless of their nature, which when properly interpreted can generate sizable gains.

When looking at the chart, people should be aware of the importance of cyclical analysis in order to determine where the underlying asset stands. What I am trying to say is that every asset has a certain cycle and even if the overall movement is up, there will be times when the interest for that asset drops and so does its price. After the fall, considering we are in an uptrend, interest (demand) picks back up and this is reflected in a bullish price movement. The trend then resumes, completing the cycle. The overall movement of the market alternates, going from a bull controlled period (uptrend) to a bear controlled one (downtrend) and these changes are also referred to as market cycles.

Past performance rarely predicts future results, but on the other hand history does repeat itself and some lessons are worth learning from former dips and surges. While the graph itself can only display the manner in which the Bitcoin search interest evolves, it doesn’t explain the triggers that prompted the price to go one way or the other.

The longer the period of time one tries to understand through trends, the more important it is to implement fundamental analysis elements into the equation. Once a cycle is understood and isolated, traders must also be aware of the fact that different time frames can show different cycles: in other words, a retracement seen from a Daily chart perspective can be considered a fully fledged trend if we were to analyze it on a 5 or 15 minute chart. The opposite is true also: what looks like a strong trend on a short time frame chart may as well be just a small retracement on a longer time frame chart. The end goal is to understand whether they are drawing closer to the end of the cycle, or if the trend has potential to endure.

If the conclusion we reach is that the end of the bull period is near, the best course of action would be to stay put and wait for the trend to go into reversal. Binary options traders are privileged by the fact that they can extract profits regardless of the direction in which the price is heading, through put and call options. Investing in countertrend is something that beginners should be particularly careful about, because although the upsides are obvious and potential profits significant, the risks are just as high.

To Conclude: The Trend Could Be Your Friend, If You Work

To sum it all up, I truly think that the most important lesson the new traders need to learn is that no matter how strong or weak the trend looks like, and sure you’re that is really a trend, understand the basics behind trends and market level is the key factor to success. Only good practice can bring results, mistakes could happen – but one must need to learn from those.

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