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§5.14 Using the idea of a channel when trading in options

Trading in binary options has some advantages over traditional exchange trading. One of its key benefits is that an options trader doesn’t have to know exactly where the price will be in a certain period of time and how far it will go. That is because the options trader’s payoff doesn’t depend on that at all. The only thing you need to learn is whether the price will be above or below the current level. This is relatively easy to calculate if you use the idea of a price channel.

The idea of the price channel is based on the assumption that the price will not be above or below a level in a period of time. For example, if we buy an option with the opinion that the euro will rise, and the price is at the 1.0060 level now, while we predict that it will be between 1.0070 and 1.0080 levels in an hour then we can buy such an option with confidence. Practice shows that the channel can be rather easily predicted if you apply all of the important theories of technical analysis. Traders can benefit greatly by applying this technique.

How to define the channel’s boundaries

What is required to know where the channel’s boundaries are located? In this case it makes sense to use the above-mentioned resistance and support lines.

If the price breaks out of a support level then it will more likely go on, at least, to half of the distance between the broken support line and the former resistance level. That is, if it was between the 1.0100 and 1.0040 levels before, then we can predict that the price will reach the 1.0010 level, if it breaks the support line. It will be precisely this lower boundary of the “channel” which we place our bet on.

The very same line which has been broken by the price will be the upper boundary of the channel and it will perform another function and turn into a resistance line. If the price breaks the barrier and even tests it from the opposite side and bounces off of it, then the price will not likely break the barrier again soon.

Therefore, it follows that if the price breaks

Therefore, it follows that if the price breaks such a level then it will surely be between the 1.0040 and 1.0010 levels soon. It is less important where and when will it happen, but rather the fact that the chart will be more likely locked inside such a channel, which indicates a high probability that the forecast will be accurate and you will be able to make a profit.The same is true for the situation when the market has been “flat” for a long time or the price has been squeezed between two horizontal lines. If it is able to exit the corridor upwards or downwards then it is likely that the price will be at the required level during the trade’s time which is enough to win the option contract.

Such a technique doesn’t require much knowledge and is not especially complex but it can be successful when applying it appropriately.

Exploiting all of the possibilities in technical analysis will create many opportunities for successful options trading. If you study all of these chapters then the time you’ve spent studying will certainly pay off.

Let’s repeat it one more time: knowledge of technical analysis is the key to a trader’s success.

§6 Trading strategy: personalisation→