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A trend is a market that keeps making progress in one direction: higher highs and higher lows when it rises, lower highs and lower lows when it falls. Reading it is the first skill of a trader, because a trade taken with the trend has the market’s momentum on its side, while a trade taken against it needs the market to change its mind. Here is a four-step method you can apply on any chart in under two minutes.
The method works the same way for binary options, forex or CFDs. What changes with binary options is the time you have: the trade is decided at a fixed expiry, so the trend you read must be alive on a timeframe that matches that expiry. Our article on choosing a trade duration covers that second half of the decision.
Step 1: pick the timeframe that matches your trade
A trend exists on one timeframe and may not exist on another. EUR/USD can rise on the daily chart while it falls over the last hour. The rule of thumb is to read the trend on a chart whose candles are four to six times shorter than your expiry, and to check the chart just above it.
| Expiry | Chart to read the trend | Chart to check the context |
|---|---|---|
| 5 minutes | 1-minute candles | 5-minute candles |
| 15 to 30 minutes | 5-minute candles | 15-minute or 1-hour candles |
| 1 to 4 hours | 15-minute candles | 1-hour or 4-hour candles |
If the two charts disagree, the market is not trending for your purposes. That is information too: it tells you to wait.
Step 2: mark the swing highs and swing lows
Look at the last 30 to 50 candles and mark the turning points: each peak where the price stopped rising, each trough where it stopped falling. Then compare them.
- Uptrend: each peak is above the previous peak, and each trough is above the previous trough.
- Downtrend: each peak is below the previous peak, and each trough is below the previous trough.
- Range: the peaks and troughs stay at about the same levels. The market is moving sideways, and a trend method does not apply.
Two consecutive higher highs and higher lows are the minimum to call a trend. One is a bounce, not a trend. A trend is called into question the moment the price breaks the last trough of an uptrend, or the last peak of a downtrend.
Step 3: confirm with a moving average
A moving average is the average closing price over a number of candles, drawn as a line. It does not predict anything, but it summarises the direction of the last candles in a glance and smooths the noise. Two settings do most of the work:
- the 20-period average for the short-term direction;
- the 50-period average for the background direction.
In a healthy uptrend, the price is above both averages, the 20 is above the 50, and both point up. Pullbacks come back towards the 20 and bounce. In a healthy downtrend, everything is mirrored. When the price keeps crossing the averages and the two lines are flat and tangled, there is no trend to follow. Our article on indicators and their limits explains why adding more lines rarely adds information.
Step 4: judge the strength of the trend
Not every trend deserves a trade. Three signs tell you it is still strong:
- The pullbacks are shallow. In an uptrend, the price falls back less than half of the previous rise before resuming. Deep pullbacks mean sellers are gaining ground.
- The candles are convincing. Candles in the direction of the trend have large bodies and small wicks. Small bodies with long wicks show hesitation. Our guide to candlestick charts details what each shape means.
- The move is recent, not exhausted. A trend that has already run for 40 candles without a pause is more likely to pause than one that just made its third higher low.
In a strong trend, the trade with the best odds is usually taken on the pullback, when the price comes back to the 20-period average or to the last broken peak, not at the top of a long candle.
What this means for a binary option
With a binary option you do not need the price to go far, only to be on the right side at expiry. A trend helps because it tilts the probability in your favour, but it does not remove the risk: trends pause, reverse on news and fail against a strong level. So keep the rest of the method intact. Trade a fixed amount, 1% to 2% of your capital as in our money management rules, and write the trend you saw in your trading journal so you can check later whether your reading was right.
Frequently asked questions
How many candles do I need to identify a trend?
Two consecutive higher highs and higher lows (or lower highs and lower lows) are the minimum, which usually takes 20 to 30 candles to form. Fewer than that, and you are looking at a single move.
Which moving average is best for trend trading?
None is best in itself. The 20- and 50-period averages are common because they match the horizon of most short-term traders. What matters is to keep the same settings long enough to learn how they behave.
Should I trade against the trend when it looks overstretched?
Not as a beginner. Trends last longer than they seem, and a reversal trade needs a confirmed change in structure, the break of the last trough or peak, not a feeling that the move has gone far enough.
Binary options and leveraged products are high-risk: you can lose all the money you invest. Read our binary options guide and our risk disclosure before trading.
