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Binary Options Strategies
Why To Use Strategies While Trading Binary Options
There’s no doubt that financial instruments can appear intimidating. When news about the financial markets appears on TV, you’ll often see financial traders sweating over complicated-looking graphs on multiple computer monitors or barking at each other across crowded trading floors. The commentary will describe exotic investment vehicles that can seemingly only be understood by people with PhDs in rocket science. To be clear, there are financial instruments that are very hard for the layperson to understand, but that’s not true of all of them.
Binary options are more popular than some investment vehicles because they are less complicated. There’s a clue in the name, ‘binary,’ because as an investor you’re only having to choose between two options: will the value of an asset go up over time or down? Traders will place a bet on whether the price will increase, which is called a call, or decrease which is called a put. So, in terms of probability, you could look at binary options trading as a bit like gambling on a coin toss.
Now, having said that, binary options trading carries a high level of risk and can cause you to lose all of your funds, and it’s because of this risk that binary options strategies are so important. You can trade safely if you do your research and put effective binary options strategies in place. We’re going to help you spot the market signals that will help you to do just that.
For a start, here are your golden rules:
- don’t invest all your capital at once
- be aware of how your asset is moving before you invest
- never invest more than 10% of your total equity in a placement
Reasons to Use Binary Options Strategies
Although we think binary options strategies are worthwhile, you could just as easily go with gut instinct, flip a coin or consult a horoscope to help you decide what to do. You might even be successful here and there, but long-term this is a surefire way to lose all of your capital. Probability won’t let you win with random behaviour, any more than it will let you win 50 consecutive coin tosses. To win consecutively as a trader you will need binary options strategies, and we are using the plural because you will need more than one.
Binary Options Strategies – Description and benefits
The main reason to use any trading strategy is that it will stop you from making emotional decisions. As a trader, all of your decisions need to be grounded in logic and rationality. There is very little room for hunches or luck. The other benefit of using binary options strategies is that they allow you to do active ‘field research’, meaning that if you take a defined approach to each investment and document it, and may be it fails, then you can tweak and refine it, and if it succeeds you can use it again and maybe try to improve. The markets are your laboratory where you go about testing your trading strategies, over a set number of trades and a set period of time. When you hit your time limit then you can look back and ask yourself whether your strategy is working, is it making you enough money, could it be improved etc.
Any other approach is going to leave you guessing. If you base your trades on guesswork, then you won’t know why they succeeded or why they failed. Using binary trading strategies will give you something more concrete to base your future adjustments on.
It’s important to know not just why you succeeded or failed, but why you succeeded or failed. Conducting a series of stand-alone trades with nothing to link them is as reckless as hoping for those 50 consecutive heads to come up in a coin toss marathon. When you trade, you shouldn’t just be crossing your fingers each time and being surprised by every outcome. And long term, the law of averages says that the best thing you can hope for is to break even, which is no way to make a living. It may not even be a feasible ambition because to break even you have to win more than you lose, and that seems highly unlikely without binary options strategies.
Money Management Strategies – What They Are and Why You Need One
A lot of people fall into the trap of developing a trading strategy but not a money management strategy. It’s all very well choosing what kind of asset you want to trade and how much risk you want to be exposed to, but you also need to give some thought to money management, because it will help you to build the kind of account balance that will see you through bad periods and help you sustain winning streaks.
Let’s consider the effects of having no money management strategy on someone who gambles a tenth of their balance on a single trade. If the trade doesn’t win, they now have to increase their account balance by 20% just to break even. If three trades in a row go south, then they will need a 30% jump in their account balance to get back to the breakeven point. This is a common scenario that can dig you in deep quite quickly.
Lots of losing streaks are longer than three trades, so you can see how money management strategies play an important role within binary options strategies. Without a good money management strategy, you will undermine your efforts even if you have a good trading strategy in place. Losing streaks will inevitably happen, so you must have a plan to deal with them.
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Analysis and Improvement Strategies
There is no Rosetta Stone of binary trading strategies. The only constant with the markets is change, so the best traders need to adapt all the time. You could say they constantly evolve, even when they’ve become highly successful. It’s not like there’s a magic point that they get to where they know everything, and every trade they make is a winner. That day never comes. But they do get to the point where they analyse every trade deeply and thoroughly. If there’s any magic then it lies there.
By analyzing and improving your trading and money management strategies you’ll remove the parts that aren’t working, refine the parts that are and become more profitable over the long term. Even if you’re already making money, but you aren’t trying to constantly improve, who’s to say that you aren’t actually leaving profits on the table?
Types of Binary Options Strategies
There are three common elements to binary options strategies.
- Using signals to guide you
- Deciding how much of your funds to trade
- Constant refinement
To create a successful strategy, you need to understand as much as you can about every aspect of it. Here’s how to do that.
Step 1 – Using signals to guide you
A signal is something that tells you that the price of an asset is about to move one way or another. Asset prices move all the time of course, but what if there was something that could let you know which way it was going to move before it happened? There is, and we call this thing a signal.
Signals can be created using news events and/or technical analysis. Getting signals from news events is probably the more common one among new or inexperienced traders. Things like company announcements, industry announcements, governments releasing inflation figures, these sorts of things can all be viewed as signals that can affect prices.
If you want to develop a working strategy, then you need to think about what news events to expect and when. Most binary options trading platforms will feature economic calendars, so you’ll be informed that in a couple of days’ time a firm’s earnings reports are due. This kind of pre-warning will help to inform your analysis.
The best binary option trading platforms will also let you know what’s expected in that earnings report. This will help you to make decisions about which way the market is going to move before the report comes out.
A news-based approach to trading has the benefit of being fairly easy to learn and understand. It’s not like you need to gain secret knowledge. You’re just taking common knowledge and thinking about its implications for the asset that you’re interested in.
The disadvantage of news-based signals is that they don’t stop markets being unpredictable. For instance, if an earnings report shows that a company has boosted its profits, you might think that that’s a positive result. But that same report might suggest that profits were expected to be higher, or that the company expects to face stiff competition. There are all sorts of unknown quantities that can spook the markets and pull the rug out from under that good news.
Technical analysis gives traders a narrower view than that offered by the news. It focuses on how an asset price moved in the past, with the aim of finding patterns that may offer clues about how the price will move in future. This is an area that can become a rabbit hole of complexity—make no mistake—but the underlying principle is fairly straightforward. You try to work out future behaviour of an asset price based on its past behaviour.
So, the question is, which one of these binary trading strategies should you be using; a news approach or a technical analysis approach? Well, everyone is different, with different strengths and weaknesses, so the best advice we can give to you is to try them both and see which one works best for you. Either of them can bring you success if they gel with you.
Now, you may be wondering how much that little experiment is going to cost you. What if you’re terrible at using the analytical approach and it ends up costing you a fortune? Well, there’s no need for concern. Most decent brokers will be able to offer you a demo account to practice on. You’ll have full access to the trading platform, you won’t be using real money. You’ll get the chance to trade in binary options with zero risks. Sure, you won’t make any money with your demo account, but you won’t lose any either. Instead, you will have an ideal testbed on which to see how your strategies play out.
The last thing to say about signals and strategies is to concentrate on the short-term. Some investment strategies try to predict asset price shifts over long periods of time, even up to a decade. In binary options trading, you’re not really interested in this kind of information. You’re more concerned with what the price will do in the next two minutes, or hour or day.
Step 2 – Deciding how much of your funds to trade with
Money management strategies vary in their complexity. A simple one will have you investing the same amount for every trade, but it’s risky and doesn’t take your overall level of profitability into account or how much capital you have at your disposal. So, we only mention this because you might hear it mentioned and we want you to avoid it.
Another one that you may hear about is the Martingale money management strategy. The idea behind this approach is to recover from your losses as quickly as possible by increasing the size of your trades after each loss. For instance, you could set an amount of money that you will trade with, and if you experience a loss then you double it. If it’s successful then you aren’t just back to where you started, you’re ahead.
It shouldn’t be too hard to see that there is a problem with this strategy. Namely, if you experience a losing streak that won’t quit then the Martingale strategy would have you increasing your investment on every following trade. So, if you had a run of 11 straight losses, number 12 would be a gamble that was 2,048 times bigger than that first trade. Unless you’re a billionaire, it’s going to be hard to keep that kind of optimistic speculation going.
It all comes down to how good you are at making predictions and how good you are at ending losing streaks. You need to keep in mind that there are no certainties in binary options trading. Even surefire trades that you would stake your life on can end up losing, and losses can easily turn into streaks, even if you’re the best trader in the world because at the end of the day nobody has a crystal ball. That’s why the Martingale money management system is not for everyone. It does have its place, but it needs to be employed with caution, so it may not suit beginners.
A percentage-based system doesn’t come with as much risk, so it’s the one that the majority of traders usually prefer, especially binary options trading newbies. It’s a fairly simple concept. The amount of money you put into a trade is based on the amount of money you have in your trading account. It’s kind of the opposite of the doubling down approach that the Martingale strategy uses because after each losing trade your subsequent trades will be for lower amounts. But if you win, your following wagers will be for greater amounts, because your account balance will have gone up.
This conservative approach is designed to preserve as much of your capital as possible so that you can trade for as long as possible, and it gives you the best possible chance of clawing your way back from successive defeats and capitalizing on your successes.
The only variable for you to consider is what percentage of your balance to use. Typically, a trader who is not risk-averse will probably go for around 5%, while everyone else will probably prefer something nearer to 2%.
As an example, let’s assume you feel comfortable with 5% of your balance being invested in a trade. A $500 account balance gives you a $25 trade. If your balance dropped to $300, your trades would now be only $15. If your balance rose to $800, each trade would be $40.
With this strategy, you will only be gambling with what you can sustain. It’s a measured approach that adapts to your current situation and prevents you from throwing good money after bad when you eventually stumble into a rut of successive losing trades, and it won’t let you become overconfident if you win a few either. For these reasons, it’s one of the binary options strategies that’s hard to fault.
Step 3 – Constant refinement
Diaries aren’t just for moody teenagers. They are also essential for developing you into a better trader. It doesn’t matter whether you have a little black book or an Excel spreadsheet. Whatever works for you. The important thing is to record every trade that you make so you can build up a body of ‘evidence’. In time you’ll have a detailed history of what works and what doesn’t, and that will help to ensure that the trades you make in future are successful more often.
A diary is like a silent partner for beginning traders. It allows you to look back at trades and give yourself good advice. Try placing trades based on both technical analysis and news events signals but record them separately in your diary so you can see which one works the best for you. When you’re involved in the day-to-day business of trading, you may not realize exactly how you’re approaching it, but your diary will always tell you the truth. So, for instance, you might think that technical analysis suits you best because you’re getting twice the profits that you’re making with signals. But your diary will tell you that you’re actually spending twice as much time studying technical analysis, so it’s an unfair comparison. Maybe you’re getting greater returns per hour of invested time looking for news events signals. Only your diary can tell you.
A trading diary also delivers the kind of granular detail that is essential to fine-tuning any of your binary options strategies. This is important when you get to a decent level of competence and are only looking to improve by small amounts—icing the cake so to speak. But you can only do this if you understand the details of what you’re doing well enough to tweak them.
Don’t forget to use your trading diary to check every aspect of your trading strategy, including money management, your choice of assets, and the size of each trade.
When you get in to the detail, consider noting which days of the week are best and which times of day are best for the best results. Do you perform better with some brokers and some trading platforms? Make a note of it; it’s all-important.
Having said all that, try not to succumb to information overload. Although you’re recording everything you don’t have to change everything at the same time when you’re trying to refine your approach. If you do that it’s hard to know which aspect of the change worked. If you change broker and then asset class and then trade amount all at the same time and you have a run of successful trades, how will you know which one of those three things that you changed contributed to those successes? It is far better to change one thing at a time, then you will know that it was responsible for the change.
Binary Options Trading Strategy Examples
Let’s take a more detailed look at some binary options strategies. The ones listed below are some of the most frequently used, but there are plenty of others available as well. As you learn more, you’ll no doubt come across traders who split, combine and adapt their binary options trading strategies to suit their own goals. You’ll probably be tempted to try this kind of thing yourself, but it’s important when you start out to learn the basics and save the customized approach for later. Whichever one you choose, don’t forget to combine them with a money management strategy too.
Example 1 – Trading the Trends
Asset prices usually move in line with a trend. You’ll often see a zigzag of ups and downs that are actually all part of a larger upward or downward trend. When you understand the shape of the trend you begin to see that the zigzag movements can be predictable in certain situations, and when you can predict those movements you have an opportunity to execute profitable binary options trades.
To put it simply you have a couple of main options: you can gamble on the overall trend or on each of those zigzags. Trading the overall trend means looking at the big picture. You’re not interested in trying to capitalise on the minor ups and downs of an asset price. Instead, you are looking at a shift in price over the longer term.
Trading on swings in price requires that you place more trades, which is inherently riskier but potentially more rewarding.
Upward trend – New highs and new lows will usually be higher than past highs and lows in an upward trend.
Downward trend – New highs and new lows will usually be lower than past highs and lows in a downward trend.
Of course, you shouldn’t lose sight of the fact that you are free to use both approaches to trading. It’s a free country!
One of the most frequently used ways of trading trends is with High / Low options. Every binary options trading platform will offer this kind of trade. With a high option, you’re betting that the price will go up and with a low option you’re betting that the price will go down. The only variable is the period of time during which you think this will happen.
A riskier, but potentially more profitable variation of this is called a one-touch option. Instead of just betting on whether the price will go higher or lower, you’re predicting whether it will hit a specified number called the target price.
Example 2 – Trading on News Events
This is a fairly popular type of trading strategy. You will use the news as your source of intelligence. When a company reports greater profits or a new and exciting product then the theory states that generally, this will cause more people to want to own shares in that company and this demand will push up their price. The opposite is true if the company announces bad news of some sort. In both cases, binary options traders are in a position to make money if they can anticipate the direction of the next shift in the share price.
The downside of this type of approach is that it is not clear cut. When you trade on the basis of news events you place your fortune in the hands of fate.
So, it’s a good thing that there are other strategies that you can take to increase your chances of successfully trading binary options. Here are three of them.
Boundary options – when you’re certain that an asset price will change but you can’t be quite sure which way it’s going to go then a boundary option can be really useful. With it, you set two target prices, one of which is below the current price and one of which is above. The difference between them is called the price channel. If the asset price passes either of them then you win. If it only moves inside the channel then you lose.
Trading the breakout – The breakout represents a window of opportunity. It’s the time, anywhere from 30 seconds to several minutes after a piece of news about an asset goes public. It’s the perfect opportunity to use a high/low option because it’s here that traders will try to limit their losses or alter their positions for profit, and so it’s here that you’re likely to see significant fluctuations. You’ll sometimes hear breakout trading being called the 60-second option because the timeframe is literally that short.
Intelligent High / Low trades – it seems counterintuitive, but sometimes good news may result in falling prices in the markets. That’s because even though the news may appear to be good on the surface, such as a rise in manufacturing productivity, if the markets were expecting a greater rise then the news comes as a disappointment which they will then adjust for. If you can predict when such things will happen then high/low trades can help you to profit from them.
Example 3 – Using Candlestick Formations
As a new trader, you might find this strategy the most difficult to understand, but the good news is that once you do it is going to be the simplest one to put into practice and profit from.
When you look at a typical graph of an asset price then you’ll be looking at an oversimplification that features a before and after. If you want to know more (and you do) then look to candlesticks to fill in the details.
Candlesticks appear on an asset’s chart over time. The bottom of the Candlestick indicates the lowest price it reached during a particular time period and the top indicates the highest price it hit. In the middle you will also see the opening and closing price, so a candlestick gives you an easy to digest view of the price range fluctuations for that asset in that particular time period.
Now the way to use candlesticks in trading is to recognize different formations of them. Once you can do this you can better understand which way the price will go next.
For instance, if you see a candlestick with a gap then that means the asset price jumped significantly higher or lower. Gaps are unusual because prices usually move in a much more gradual fashion, hitting the majority of price points on the way. When one appears during a period of low trading volume then it’s telling you that there is likely to be a quick correction.
This can happen just before a market closes for the day when there aren’t many traders left placing trades. The gap can be produced in this situation by large trades, but that doesn’t mean that the asset is strong. Maybe the gap wouldn’t have appeared if more trading had been going on, so knowing this you can estimate the gap in the price of this asset and use that information to plan your trades.
If gaps appear when trading activity is high, but the price is not moving much then this can indicate that there may be a new breakout, or surge in that direction. Again, use this information to your advantage when you trade.
If a gap appears when trading volume is normal and there’s a trend in one direction, it might suggest that the trend is accelerating. Good intelligence to have for your next trade.
Developing a Binary Options Strategy Without Risking Money
If you’ve taken all of the advice in this article on board then you’ll no doubt be wanting to test your new binary options strategies, but you still might be reluctant to get your feet wet when you are aware of how easy it is to lose money. You don’t want to blow all the money in your trading account on testing out your theories, do you?
That’s where a binary options demo account comes in useful. Every half-decent broker will let you use their trading platform demo fashion, gambling nothing more than numbers on a screen instead of money from your account. It’s probably the best way there is to start testing (and recording in your diary, naturally) your binary options strategies, without losing your shirt.
One of the beauties of binary options trading is that there is virtually no limit to the kinds of assets that can trade in. Trade on those assets that are most familiar to you such as euro-dollar exchange rates. Consistently trading a single asset will help you to gain that all-important familiarity with it to help you predict changes more easily. There are two types of strategies explained below that can be of great benefit in binary options trading.
1. Trend Strategy
This is a popular strategy, and it is also called the bull-bear strategy. To implement it you’ll need to keep an eye on the rising, declining and the flat trend line of the traded asset. If you see a flat trend line and think that the asset price is about to climb, use the No Touch Option.
If the trend line shows that the asset is going to go up, choose CALL.
If the trend line shows a decline in the asset price, choose PUT.
This method works just like the CALL/PUT option but in this instance, you decide on a price that the asset mustn’t hit during the time period you specify. So, save Facebook’s share price is $490 and the trading platform says the No Touch price is $495. If it doesn’t hit $495 during the time of the trade, then you win.
2. Pinocchio strategy
Use this strategy when you expect the asset price to fall or rise dramatically. Choose ‘call’ if you think it’s going to go up or ‘put’ if you think it’s going to go down. This one is best tested on a demo account before you go live.
3. Straddle Strategy
This approach is best used when the market is volatile and when you’re expecting significant news about a particular asset to break. This is a strategy that’s much respected throughout the world of trading. It lets you avoid choosing between CALL and PUT; you put them both on the selected asset instead.
The overall plan is to use PUT when the asset’s value has gone up, but there is a suspicion that it will go down again soon. As soon as the decline starts, put the CALL option on it, because you expect it to rebound soon. You can also use this strategy in the other direction, by placing CALL on a low-priced asset and PUT on a rising asset value. This boosts your chances of success by covering you in both directions. The straddle strategy is a favourite of traders when the market or asset is tending to fluctuate.
4. Risk Reversal Strategy
This is one of the most popular binary options strategies because it’s designed to reduce the amount of risk involved with trading and boost the likelihood of securing a profitable trade. With this approach, you place CALL and PUT options on an asset at the same time. This can really help when assets are volatile.
5. Hedging Strategy
This is another one of those binary options strategies where you place both call and put positions, with strike prices that overlap. The thinking is that at least one of them will pay out. You can make more than if you just select one option, and if you lose then it will still be a lot less than the straight loss you would suffer from just one option. It’s a useful tool to add to your trading bag of tricks.
6. Fundamental Analysis
Binary options strategies almost always require that you have knowledge of the underlying assets that you are effectively gambling on. The theory with fundamental analysis is that you really go to town on understanding the business whose share movements you are interested in understanding. To do this you need to get to grips with things like their earnings reports and financial statements.
As a trader, this review helps you to understand how the company has been performing and how its stock reacts to particular market news. If you know well enough what kind of shape the company is in and what kind of events have caused its share price to fluctuate, then you’ll be much better placed to predict and therefore profit from future changes.
We hope that this guide has been useful in preparing you to take your first steps with creating your own binary options strategies.
Binary options strategies
A binary options trader is only as good as the strategy he follows. Finding a strategy that works, and fine-tuning it as you go, will focus your trading, build discipline and help ensure that you win more often than you lose.
In this lesson we will introduce you to three of the most popular and potentially rewarding binary options trading strategies.
We will talk you through how and why they work as well as what kinds of assets, time frames and expirations to use. We’ll also provide you with a concrete trading example for each to show you what a trade looks like.
Strategy No. 1: Short-term Boundary In options before big news events
One way binary options can be used is to predict whether the price of an underlying asset will remain within a specified range for a certain period of time or break outside its boundaries. This approach is known as boundary trading, tunnel trading or range trading.
The strategy we will introduce you to now involves making a short-term bet that prices will remain inside a specified range during a time when you think markets will be quiet and asset prices will trade sideways – for example in the ‘quiet before the storm’ often experienced ahead of a major event or news announcement that the market is waiting for.
How it works
In the run-up to major events like the monthly publication of US Nonfarm Payroll figures, the Federal Reserve’s FOMC meetings and press conferences or interest-rate decisions by central banks, many traders choose to keep out of markets, either because they are nervous of the volatility the event will trigger or are waiting to place trades on its outcome.
This often creates a lull in activity and creates a small range of price action that binary options traders can take advantage of.
How to trade the strategy
- First, choose an underlying asset to trade. Currencies tend to work best with this strategy. It’s also possible with other assets like indices or stocks, in which case you might choose to trade in the run-up to company reports, for example.
- Next, try and identify an upcoming event that you think will have a major impact on the underlying asset you have chosen. Our Economic Calendar outlines some of the biggest.
- Double-check which other factors could also affect that market and make sure there isn’t another major new event happening at the same time. This could seriously blow your strategy off course.
- If you are trading currencies, also remember that you are effectively trading two individual assets, each with a life of their own. So apply the step above to each currency in the pair you trade.
- Look for confirmation that the asset is entering or looks likely to remain within a range and form a view on where you think the upper and lower boundaries of this range will lie. Technical analysis offers a number of patterns or indicators that will help. For example, Bollinger bands or the Moving Average Convergence Divergence (MACD) indicators can help you identify a range-bound market. The appearance of certain kinds of doji candlesticks meanwhile can indicate a trend is about to reverse or that volatility will pick up and the price will break its range, in which case it might be best to avoid this strategy and try another.
- Next, identify the contract type that you will use. You’re looking for a ‘Boundary In’ option – also sometimes called an ‘In Range’ option – with a duration of no longer than 20 minutes and which will expire before the event starts. Not all brokers offer boundary options so make sure you’re using a company that does.
- Price ranges for boundary trades are usually determined by the broker, but occasionally you can choose your own range – pick one strike price above the current price and one below. Make sure the range allows the price plenty of room to move within the anticipated boundaries you identified earlier – you want some leeway. Remember, the tighter the range, the higher the potential payout if you are proved correct, but also the higher the risk that your trade will fail.
- Decide how much capital you want to risk on your trade. Our lesson on money management for binary options will help.
US Nonfarm payroll figures are set to be announced in 30 minutes’ time. The EUR/USD currency pair will be very sensitive to the result and you notice that volatility is low. It’s currently trading at 1.11. Your binary options broker is offering Boundary In options on EUR/USD with a range of 1.109 and 1.113. You buy one that expires in 20 minutes. The market then moves sideways and your option expires with EUR/USD at 1.112 – comfortably inside the range. Your option pays out.
Strategy No. 2: Long-term High/Low options following surprise events
This is a long-term strategy in which you use High/Low options to predict whether an asset price will be higher or lower than a specified level within a pre-determined time period (usually a number of weeks).
It tends to work well following a major, unexpected news event that you think will have long-term repercussions. This could be a pioneering decision by a central bank, surprisingly good or bad corporate results or even a natural disaster.
How it works
When an important news event takes markets by surprise it can trigger some big price moves in underlying assets that are directly affected by the event. If the event looks likely to have a real, fundamental impact on assets that will last for some time it can trigger the start of a long-term price trend.
For example, if war broke out in a major oil-producing region and threatened a big chunk of global crude production, this would usually be positive for oil prices. While crude oil prices would probably jump straight after the news as the market priced in the shock, they may continue to rise – albeit more slowly and steadily – for several weeks as production was actually taken offline and the conflict perhaps even escalated.
Similarly, if the central bank of a major economy announced a big or unexpected interest-rate cut, the currency of that country could enter a prolonged downward trend.
Binary options traders can take advantage of these longer-term trends by forming a view on how far they think prices will rise or fall and how long the trend will continue. They can then use a High/Low option to bet that prices will be higher or lower than a certain point on expiry.
How to prep the strategy
- Unlike Strategy 1, this isn’t a strategy where you can pick an event in advance and plan your trade around it. Rather, you have to act fast in the aftermath of an unexpected event.
- Your first job therefore is to pick one or two underlying assets to specialise in and really get to understand them well. It can help to choose underlying assets that you have some special interest in. For example, if you have worked in a specific industry you might choose to trade shares of companies in that industry or one of the commodities it produces. If you have lived abroad or have family ties with a different country, you may have a more indepth understanding of what affects its currency.
- Because this strategy is long term and involves a simple directional bet, a solid grounding in fundamental analysis is essential before you place your first trade. Apply fundamental analysis to the assets you have chosen to trade so that you understand in advance what are the biggest drivers behind its price, what other assets it is correlated to and what kind of events would be negative or positive for its price.
- Some basic chart work is also essential. Dig out charts that show you how markets behaved following a range of major events in the past. Study what happened to the price of the asset you trade.
- Before you place your first ‘real’ trade, it is also advisable to practise a few times with a demo account. Surprise events aren’t uncommon in financial markets, so simply wait for the next one and then place some dummy High/Low binary trades to experiment with the strategy. Even trending prices experience some volatility that could throw an otherwise winning trade out of the money if you don’t allow enough wiggle room for the price. Practice will help you learn how much to give.
How to trade the strategy
- This strategy relies on a high degree of certainty that an event will create the directional move you are betting on. So as soon as an interesting event occurs, double-check that it is strongly correlated with the asset you trade and big enough to produce the long-term move you need.
- Double-check also which other factors could affect the asset you will trade and make sure it isn’t simultaneously being impacted by another major news event or other head-winds.
- Although fundamental analysis is your best friend with this strategy, you might also want to apply some technical analysis to confirm that a trend is underway before you enter your trade.
- Next, identify the contract type you will use. You’re looking for a High binary option if you think the event will trigger an upward move or a Low binary option if you think it will trigger a downward move. Most brokers offer High/Low options.
- Now choose the maturity and strike price you want. Your broker will probably determine for you which are available. This is a long-term strategy so go for an expiry of at least a week or two, making sure that the trend has time to develop but not leaving so much time that it fizzles out. As with Strategy 1, you also have to leave room for unexpected volatility that could knock an otherwise successful trade out of the money right at expiry. This is perhaps the hardest part of the strategy to master.
- Decide how much capital you want to risk on your trade, remembering that the trade is generally higher risk – with a higher potential payout – the further the strike price from current prices. Our lesson on money management for binary options will help.
Japan’s central bank makes a surprise announcement that it will act to weaken the yen in the long term, for example by selling the currency or lowering interest rates. You now try to identify a currency pair comprising the yen and another currency that is currently fairly strong. You opt for EUR/JPY and buy a High option that expires in three weeks. When the option expires three weeks later, the yen has weakened against the euro and your trade pays out.
Strategy No. 3: Short-term Breakout strategy using previous day’s highs and lows
With this strategy, we again use High/Low options. This time however we are betting that if an asset price breaks through its previous day’s high or low, the price will then experience a large short-term push in the same direction.
How it works
The strategy hinges on the concept of support and resistance. These are levels that, in the case of support, a price struggles to fall below or, in the case of resistance, it struggles to rise above.
Technical analysts have observed that when a price does breach either of these levels, it often suddenly picks up momentum and moves further and faster in the direction of the break.
This is usually because a lot of other traders – range traders in particular – use support and resistance levels to set stop losses so they can automatically exit trades as they move out of the money. A surge of fresh orders often also enters the market at this point, pushing the price further in the same direction.
Binary options can take advantage of this phenomenon by keeping track of the highest and lowest points a price reaches within a single day. The following day they then wait for it to touch these levels again.
If, for example, the price breaks through the previous day’s high (its resistance level), a binary options trader would buy a High option with a short maturity of typically five minutes to bet that the price will be higher when the option expires.
If the price breaches the previous day’s low (its support level), the trader would buy a Low option, again with a short maturity, to bet that the price will be lower when the option expires.
How to trade the strategy
- First, choose an underlying asset to trade. Because this strategy depends on trading having paused overnight, avoid 24-hour markets like foreign exchange. Indices, shares or commodities tend to work well with this strategy.
- Next, identify the previous day’s high and low. You don’t usually need any complex indicators for this – it should be clear from a simple price chart.
- If prices have ‘gapped’ overnight and the opening price on the morning of the day you will trade has already broken through the previous day’s support or resistance levels, do not use this strategy.
- This strategy relies on fast action, so prepare in advance what option you will use. It tends to work best with short time frames, so you want a short-term option with a five-minute expiry. Use a High option if the previous day’s High/Resistance level is breached, and a Low option if the Low/Support level is breached. If you use Japanese candlestick charts, it’s a good idea to wait for a second candle to form that confirms the breach and lets you know there is decent momentum forming.
- As before, decide how much capital you want to risk on your trade. Our lesson on money management for binary options will help.
Germany’s DAX30 index achieves a high of 10.800 and a low of 10.680 on Monday. On Tuesday morning at 10.30am, it breaks the 10.800 level and quotes at 10.803. You buy a short-term High option with a five-minute expiry.
At 10.35am, the DAX30 quotes at 10.823 and your option expires in the money.
So far you have learned that:
- there are 3 common strategies to trade binary options: a short term ‘Boundary In’, a long-term, surprise event, and a short-term Breakout strategy that uses the previous day’s high and low
- these strategies are based on real market dynamics and they repeat over again across different markets
- you can apply any of these strategies with the right practice and preparation
Binary Options Trading Strategies
Opportunities in flat or volatile markets.
You have undoubtedly heard, binary options offer opportunities in all market conditions. And that they do. From up or down trending markets to flat or range bound markets and even to the most volatile or whipsawing markets there is a strategy using binary options.
It is very important though, to understand which strategy to use in each situation and in every event, you should have a well thought out strategy for every market condition.
Before we dive into the basic strategies for binary options, it is important to reiterate that binary options are not a different market, they are simply a different way to express an opinion about the same markets you already love.
Whatever analysis or indicators you are using to signal moves, or lack of moves, in the market now, are the same you would use for binary options. Additionally, as with any type of trading, even before having a sound strategy, you need to employ sensible money management.
That part is perhaps a bit easier with binary options as you always know the maximum risk up front, before the trade is placed. If it doesn’t meet your risk tolerance, don’t take the trade. If it does, then determine what type of market it is and if you are willing to place the trade or now.
So, let’s look at a few different binary options strategies for different market conditions.
Binary options strategy #1 – Flat markets.
A flat market is defined as a market demonstrating very little directional movement. For most types of trading this can be very frustrating as it provides almost no opportunity.
With a binary option, because of the non-linear nature (meaning the price of the binary option can move, even if the underlying market does not) of binary options, this can provide great opportunity.
The key point to remember here, a binary option will always settle at 0 or 100, there are no other outcomes.
In flat markets, traders will tend to buy binary options which are well in-the-money (options trading over a price of 50, often a price of 70 or more) and sell binary options that are well out-of-the-money (options trading under 50, often at a price of 30 or lower) with the goal that time erosion, rather than price movement in the underlying market will push the price of the option toward their ultimate goal of 100 or 0. This is very similar to what is called a premium collection strategy in traditional options.
In this strategy, traders are putting up more capital to make less, and are willing to do so as they believe the probabilities of a positive outcome are in their favor.
Binary options strategy #2 – Volatile markets.
Volatile markets, as one can probably conclude, are the opposite of flat markets. These markets are typified by wild price swings, often of a magnitude several times larger than under normal conditions. Just as a market in this condition is the antithesis of a flat market, so also is the strategy required to trade.
In volatile markets, binary options traders will typically look for a lower risk to higher reward strategy. They are estimating that these large swings can take a deep in-the-money binary option, out-of-the-money quickly, and vice versa.
In this strategy traders may look to sell binary options at a price of 70 or greater and buy binary options at a price of 30 or lower.
With volatility being the key to this strategy, moves can come quickly and just as quickly reverse. Because of this characteristic, experienced traders will often not look for the ultimate payout of 0 or 100, but will utilize limit-orders at various levels to take off a full or partial position and lock in profit, before the market turns against them.
No strategy is perfect and all trades are unique. The above outlines the basics of how strategies for different market conditions can be implemented; however, this is just a first step and it is the responsibility of every trader to fully understand their strategies and follow their trading plan on every trade.
For more detail on these strategies, and many more strategies for binary options, register for an upcoming webinar, or check out our archived webinars covering a wide range of topics and strategies, from basic to advanced.
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