Two key components are used in this binary options trading strategy. One is Parabolic SAR and second is the ADX indicator. Both tools measure the market strength, pointing to the periods when the price has more chances to continue the trend rather than to change its direction several times. Parabolic SAR was invented by Welles Wilder, the same person who developed one of the most popular oscillators - Relative Strength Index. The key idea of Parabolic SAR is based on measuring the momentum strength, searching for slowdown periods in order to indicate risk-factors for the current trend. Parabolic SAR dots are placed above the price when the market is bearish and below the price for the bullish patterns and those are the main conditions before making the trading decision whether to buy call or put options. Default settings (increment 0.02 and start value 0.2) are suitable for any timeframe, so we don’t see any reason to change them.
As long as any trend indicators have a huge number of fake signals, especially in weak trend conditions, binary options traders often use an additional tool in order to filter the unnecessary noise. The Average Directional Index (ADX) is exactly the needed technical tool which calculates the momentum strength. It also contains two additional lines - Negative Directional Indicator (-DI) and Positive Directional Indicator (+DI). It also includes settings of the period for calculation which is equal to 14 bars as the default parameter. We prefer enlarging the period to 28 in order to avoid too often signals. The second setting to be changed is the threshold, dividing strong trends from weak consolidation momentum. The default setting is equal to 20 level, however, it’s better to decrease it down to 13, according to our practice.
The main condition to buy CALL options is when both indicators point to the same direction of the trend. Parabolic SAR dots have to be below the price while the ADX main line should be above 13 threshold level. Another important condition is that -DI line has to be below +DI line, meaning that the power of potential uptrend is more likely. Once you see such a convergence pattern, you may start buying CALL options for any asset on any timeframe suitable for the moment management rules. Remember, that if both indicators do not confirm each other, the trading signal has to be ignored. Meaning that if Parabolic SAR points to a bullish trend while -DI line is above +DI line, then no entry is applicable. The next huge question is when should traders stop buying options in the same direction. Two possible outcomes could point to such a step: Parabolic SAR reverses the trend when dots appear below the current price or -DI and +DI lines cross each other back. In this case, the main ADX line is not so important, however, it would be better to avoid additional risks and stop buying options in the same direction if it drops below 13 thresholds horizontal line.
Conditions for buying PUT options are same with the inverse pattern. Parabolic SAR dots have to be constantly above the price, pointing to the bearish market. ADX main line has to appear above 13 thresholds, showing enough strength of the current trend, while -DI line has to be above +DI line, with the downtrend power exceeding the average value. Once traders started the buying cycle in the PUT-direction, they should monitor both tools for changing the signals. PUT options have to be constantly bought until Parabolic SAR dots appear below the current price or -DI line crosses +DI line from upside down.
An example is shown below, indicating such a convergence pattern for the binary trading strategy based on Parabolic SAR and ADX technical indicators.