Binary Option Trading Strategy: Reversals for Dummies

The reversal strategy is usually the easiest binary trading strategy for beginners to get their heads round. Basically all it requires is for you to be in front of a live chart of the asset you want to trade on and to be looking for a trend that looks as though it may start to go in the opposite direction. Trends are when an asset is either going mostly upwards, or mostly downwards. Of course the movement is never completely smooth and at shorter time scales it will appear much choppier than at longer ones, but what you are looking for is a general direction to be emerging in an asset's chart. The longer this movement continues and the higher the asset's price goes then the more likelihood it has of reaching a point where it will begin to reverse and move the other way.

The reversal strategy is to monitor this price movement and to be looking for the best moments for a reversal in either direction. So, on an uptrend you want to get in at or as close to the peak as possible and on a downtrend you want to get in at or as close to the lowest point as possible. What you are doing when you enter such a trade is banking that the asset you are trading on will rise or fall and that you have gotten in right at the point where it is most likely to do so.

The problem of just referring to the asset's price action chart on its own is that you do not have enough information there to make the most educated guess as to when a possible reversal is due to take place. You can keep your expirations short and capitalise sporadically on the fluctuations but a true reversal strategy requires you to get in either at the ground or the top floors respectively. To this end you will want to begin dabbling with a few technical indicators. These provide additional information at the bottom of the graph you are monitoring. The way they work is by performing certain calculations of the previous price performance of the asset you are looking at and comparing this to what is happening right now.

There are a number of different ones but a particularly useful one for spotting reversals is the Relative Strength Index (or RSI for short). This indicator tracks the momentum of trades being placed on an asset and defines whether the asset is being overbought or oversold. When using RSI to look for possible reversals you want to be placing PUT trades if RSI is indicating an overbought security (I.e it is due to drop back down), and CALL trades if it is indicating an oversold security (I.e it is due to climb back up. The levels to look at on RSI are 30 and 70. RSI levels of below 30 indicate overselling and RSI levels over 70 indicate overbuying. There are other technical indicators that you can use to confirm the RSI readings but for now get comfortable with this one indicator and have a play with it, see how it works for you.

 

Happy Trading.

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George Milios

George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.

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