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Binary Options Strategy
Strategy is a key element of long term successful binary options trading. The best binary trading strategies can be defined as: A method or signal which consistently makes a profit. Some strategies might focus on expiry times, like 60 second, 1 hour or end of day trades, others might use a particular system (like Martingale) or technical indicators like moving averages, Bollinger bands or breakouts.
Traders just want a strategy that works. Novice investors might be interested in the 3 binary options strategies for beginners laid out in the “Strategies For Beginners” section. More advanced traders can find forex strategies, scalping or arbitrage tips and mt4 strategy. Whatever you are looking to learn about strategy, you will find here.
This page provides a definitive resource for binary trading strategy. No more searching for books, pdf, videos, software downloads or ebooks! These pages list numerous strategies that work – but remember:
A Guide To Strategy
When trading binary options, a winning strategy requires a method that wins more trades that it loses, and crucially, at a payout that more than covers the losses. Digital trades generally payout at less than 100% on the investment amount – so simply winning more trades than are lost may not necessarily be enough to turn a long term profit.
The art of trading binaries profitably shares some similarities with the sports betting world. The important trait that links both enterprises is that of expectancy. Long term profit trading binaries can only be derived where the expectancy (the theoretical profit within any trade) results in a positive expectation from that trade.
Binary options trading strategies are therefore used to identify repeatable trends and circumstances, where a trade can be made with a positive (profitable) expectancy. It may be as simple as;
- If asset ‘X’ falls in value for three sessions in a row, open a call option for the duration of the next session.
The above is an extremely simple example of a trading ‘strategy’. Strategies do not need to be hugely complex (though they can be), sometimes the simplest strategies work best.
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Types Of Trading Strategy
There are a range of techniques that can be used to identify a binary options strategy. New investors may like to explore all of them – each has the ability to be profitable when used correctly.
In addition to the type of basic, or traditional, trading strategy highlighted above, there are also alternative methods;
- Charting and technical analysis charting (the analysis of graphs and other technical indicators) is often considered first when discussing strategy. Much has been written about the trends and patterns that are regularly seen within the pricing charts, and many of these can translate directly into trading strategies. Retaining a simple strategy whilst trying to drill into technical analysis is not always easy, but does provide a route to some insight that may not be immediately obvious elsewhere.
- Fundamentals – Analysis of the fundamentals is almost a prerequisite for most types of investment or trading. With binary options trading however, the time scales are often too short for the fundamentals to shift the price in the expected direction. There are still some binary options trades that can be gleaned from study of the fundamentals though, and it is another potential route for a successful strategy. Particularly longer term options. Some brokers now offer expiry times of one and two months ahead making this form of strategy much more realistic.
The Benefits Of Good Trading Strategy
A good binary trading strategy will simplify much of the decision making about where and when to trade. With timing the key to everything where trading is concerned, the less guess work there is around entry and exit points, the better. Particularly for less experienced traders.
A repeatable strategy will always highlight the trading opportunities, where otherwise, the majority of those openings would be missed. Strategies encourage discipline, aid money management and provide the clearest predictor for positive expectation. While it is possible for traders to profit from binary options without a strategy, it will be exponentially harder.
Novice traders will also benefit simply from trying to build their own binary options trading strategy. Once some time has been spent analysing different methods and building a strategy from scratch. It is much easier to appraise strategies offered by others. Without that initial grounding in the art of trading strategies, it would be very easy to become intoxicated by the promise of untold riches using someone else’s trading strategy or expensive software.
Demo accounts can be a good place to start experimenting with binary options trading strategies without risking any capital. Read our full list of demo account brokers here.
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Elements Of A Profitable Strategy
There are three binary strategy elements every trader must know. In this article, we present each type strategy and examples for beginners and advanced traders.
In detail, you will learn:
- Which types of binary options strategies are there?
- Why do I need a trading strategy?
- Why do I need a money management strategy?
- Why do I need an analysis and improvement strategy?
- With this information, you will immediately be able to pick the right strategies for you and become a successful binary options trader.
To create a successful binary options strategy, you have to combine three sub-strategies:
- A trading strategy
- A money management strategy
- An analysis and improvement strategy.
Each of these strategy does a very specific thing for you. To be successful, you need all three. If you lack one, the other two become useless.
Let’s take a look at each type of sub-strategy and see how you can find the right one.
Why Use A Strategy?
The trading strategy is the most famous type of sub-strategy for binary options. It is so famous that many traders make the mistake of thinking that it is the only strategy they need. But more on that later. For now, let’s focus on how you can find a good trading strategy.
A trading strategy helps you to find profitable investment opportunities. It defines which assets you analyze, how you analyze them, and how your create signals.
For example, a trading strategy could define that you trade only big currency pairs between 8 and 12 in the morning, that you use a 15 minute price chart, and that you invest when a 10 period moving average and the Money Flow Index (MFI) both indicate the same direction – for example, the moving average has to point up, and the MFI has to be in an oversold area, or vice versa.
The great advantage of such a definite strategy is that it makes your trading repeatable – you always make the same decisions in the same situations.
This way of trading is crucially important to your success because binary options are a numbers game. Financial investments, in general, include the risk of losing trades, but the short time frames of binary options are especially erratic. You can never be completely sure what will happen next. Even the best traders will win only 70 to 80 percent of their trades, those with high-payout strategies might even turn a profit with a winning percentage of 30 percent.
Successful trading does not mean to be always right. It means to be right often enough to turn a profit. Think of a coin flip. When you win 50 percent of your trades and get twice your investment on winning trades, you know that you would break even after 100 flips. If there were some way for you to increase your winning percentage to 60 percent, however, you knew that you would make money. The same applies if there were a way to increase your payout. Your trading strategy does exactly this for your binary options trading.
When you trade high/low options, for example, you can expect an average payout of 70 to 75 percent. This means you need to win 60 percent of your trades to make money. A trading strategy helps you to identify situations in which you know that if you always invest according to your strategy, you will win at least 60 percent of your trades and make a profit.
Without a concrete trading strategy, you would never know if you would win enough trades to make a profit. On some days, you might get lucky and make a lot of money, but on others, you would lose half of your account balance. Sooner or later, you would have a bad day and lose all of your money.
With a trading strategy, you can avoid such a disaster. A trading strategy is a crucial cornerstone of long-term trading success.
Why Use Money Management?
A money management strategy is the second cornerstone of your trading success. To understand its purpose, let’s get back to the example of the coin flip. Even if you have a strategy that gets the odds in your favour, for example by guaranteeing that you will win 60 percent of the flips, this strategy will lead to disaster if you always bet all your money on every flip. You might win the first one, but you will soon lose a flip, and all your money will be gone.
To prevent bankruptcy, you have to limit your investments. This is the first purpose of a money management strategy.
The second purpose is to help you adjust your investment according to your capabilities. Let’s get back to the coin flip with a strategy that wins you 60 percent of your trades and look at a number of possible money management strategies that would fail:
- Always invest the same amount. If you start with £100 and invest £1 on every single trade, you would make a nice profit in the beginning. You would also have enough room to survive a streak of bad luck. As your account balance increases, however, your investment would soon get too small. Once you reach the £1,000 mark, for example, winning a £1 trade will hardly make a difference. The problem with this type of money management is that it fails to grow with you.
- Invest the way you feel. Some traders vary their investments based on their intuition. When they feel or have won their last trades, they invest more. This strategy is dangerous because losses weigh heavier than wins. When these traders lose a few trades in a row and have invested a little more on these trades, they have lost a large percentage of their overall account balance. They have to significantly reduce their investment, which makes it difficult for them to make it back. Step by step, they lose more and more money. The holes they dig for themselves will always be bigger than your ability to get out of them.
- Invest more after a loss. Some traders increase their investment after a loss, for example by doubling their investment. They hope to eventually win a trade, make a profit, and start the cycle anew. Such strategies work great – until they fail. Even if you choose a very small starting investment, binary options enable you to make so many trades that you will be broke within a year.
Lessons In Managing A Bankroll
What can we learn from these examples of failing strategies? There are three lessons:
- You need to adjust your investment to your overall account balance.
- You have to have a precise definition of how much you invest and increase your investment in proportion to your overall account balance.
- You must reduce your investment after a losing trade and increase it after a winning trade.
To fulfill all three of these criteria, a good money management strategy always invests a small percentage of your overall account balance, ideally 2 to 5 percent. For example, if you decide to invest 2 percent per trade, you would invest £2 with an account balance of £100. If your account balance increases to £200, you would invest £4 per trade and so on.
Whether you should invest 2 percent or 5 percent on every trade depends on your risk tolerance and your strategy. Investing more can make you more money, but losing streaks will be more expensive. We recommend using a demo account to find the right setting for you.
Analysis And Improvement Strategy
An analysis and improvement strategy is the most overlooked sub-strategy you need. It helps you to find the weak points in your trading and improve over time. Without an analysis and improvement strategy, long-term success is at least difficult, if not impossible.
When you get started in binary options, you still have a lot to learn. That means you have to try different strategies, vary the parameter of each strategy and make improvements. This might sound simple, but it is very difficult to figure out what works for you and what does not. There are so many variables that it is almost impossible to connect all the dots.
Without an analysis and improvement strategy, newcomers lose themselves in the endless complexity of trading. An analysis and improvement strategy makes this complexity manageable.
There is no precise definition of what your analysis and improvement strategy should look like, but by far the most common approach is using a trading diary. In a trading diary, you note every aspect of your decisions. After you invested, you write down which indicators you used, which time frame, which asset, and which expiry. You also write down your location, your mood, the time of the day, and your trading device. Once the trade is finished, you note the result.
After a while, you can analyse your diary. You might find that you won significantly more trades in the morning in the afternoon, that you are a better trader with your phone than with your PC, or that you can interpret moving averages more effectively than candlestick formations.
Spot Trends To Identify Strengths And Weaknesses
Regardless of what you find, the result helps you to focus on the elements of your trading strategy and your money management that work for you and eliminate everything else. You will get better and better, and eventually, you will be good enough to turn a profit. Keep writing your diary anyway, and you will be able to recognise mistakes creeping in before they cost you a lot of money.
In theory, anything can be your trading diary. Some traders take screenshots, others keep an Excel file, and some write old-fashioned books. Pick the diary that works for you, and you will be fine.
A binary options strategy is your guide to trading success. While it can seem difficult to find the right strategy at first, with the right information, things are rather simple. You need a trading strategy, a money management strategy, and an analysis and improvement strategy, and you will be fine.
Specific Strategy Examples:
60 Second Expiries
This basic strategy aimed at 60-second (Listed as 1 minute options at some brokers) goes as follows:
1. Find support and resistance levels in the market where short-term bounces can be had. Pivot points and Fibonacci retracement levels can be particularly useful, just as they are on other timeframes while trading longer-term instruments.
2. Take trade set-ups on the first touch of the level. When you are trading assets that have a high level of ‘noise’. I believe that taking a higher volume of trades can actually play to your advantage. 60 second / 1 minute trades certainly fall into this category.
For those who are not familiar with this form of analysis on longer term expiries: The advice is to look for an initial rejection of a price level already marked ahead of trading. So marking support and resistance is a vital. If it does reject the level, this helps to further validate the robustness of the price level. Trade on any subsequent touch. This will lead to a lower volume of trades taken in exchange for higher accuracy trades. The first touch is not traded, but used to validate following trades. So less trades, but more accurate.
60 Second Trades Lead To Higher Trade Volume
Since the inherent noise in each 60-second trade is so large to begin with, I believe trading more often can actually work to the trader’s gain. In that it helps to even out the accuracy fluctuations that come when trading such short-term expiry times.
Overall accuracy of ‘in the money’ trades will drop. This means lower expected value from each trade. Higher volume however, can compensate.
For example, 100 trades with an expected profit of 1.25 would return 125 (Profit of 25). But 200 trades with a lower value, say 1.18, would net 236 (Profit of 36). So a lower strike rate does not always mean lower profit if more trades can be found over the same period.
Let us take a different view. If you’re trading 60-second options, and only taking 1-2 trades in a 4+-hour session (i.e., being super conservative). It is very likely that you are going to be waiting a long time before your true trading skill level becomes clear.
I could be that you are not profitable using 60 second options. It is better to find that out sooner, rather than later.
3. Don’t blindly trade all touches of support and resistance. Continue to consider price action (e.g., candlestick types and formations), trend direction, and momentum. Also be open to ‘gut feel’. Your trading experience will continue to grow, and your ‘feel’ for the markets will improve. On occasion, those instincts can over-ride any other signal. But bear in mind many trading lessons are learnt the hard way – with losing trades.
The momentum is an important indicator of the speed with which the price of an asset moves. For binary options traders, it can be both a great way to find trading opportunities and a helpful tool to pick the right binary options type for the current market environment.
What Is A Momentum Strategy?
The momentum is a technical indicator that compares where the price of an asset now to a price in the past. There are different ways of calculating the momentum:
- Absolute. This way compares the current price to a price in the past and ignores everything in between. The most popular absolute interpretation is the momentum indicator, which compares the closing price of the last period to the closing price 14 periods ago (you can also choose any other number, but 14 is the default setting).
- Process oriented. This way of analysing the momentum considers every period and calculates the distance which the average period has moved. Many technical indicators calculate this value in slightly different ways, but the most popular of them is the Average True Range.
- Relative. Some indicators compare the current momentum of the market to a historical average. These indicators help you understand whether the current market environment is better suited for binary options types that create higher payouts but require strong movements (for example one touch options or ladder options) or for their low-risk alternatives that can win trades with smaller movements but create lower payouts.
Most of the time, these indicators display their result as a percentage value of the average momentum, with 100 being the baseline.Both indications are similar, but also very different. Let’s see how you can use them to trade binary options.
How Can I Trade A Momentum Strategy
Binary options offer a number of great strategies to trade the momentum. The simplest of them uses the momentum indicator and boundary options.
Boundary options are such a great way of trading the momentum because they are the only options type that enables you to win a trade on momentum alone. Boundary options define two target prices, one above the current market price and one below it. Both target prices are equally far away, and you win your option as soon as the market touches one of the target prices.
This means it is unimportant where the market moves, as long as it moves. The momentum can help you make this prediction. Assume that an asset is trading for £100. Your broker offers you a boundary option with target prices at £99 and £101, and when you adjust your momentum to meet your expiry, it reads 2.
Now you know that the market has moved twice as far in the recent past as it would have to move to win your boundary options. This seems like a good investment opportunity. If the momentum were only 0.5, you know that this would be a bad time to invest.
A good 5-minute strategy is one of the best ways of trading binary options. To get it right, there are a few things you need to know.
What Is A 5-Minute Strategy?
A 5-minute strategy is a strategy for trading binary options with an expiry of 5-minutes. While there are thousands of possible 5-minute strategies, there are a few criteria that can help you identify those that are ideal for you. In the eyes of many traders, 5-minute expiries are the sweet spot of expiries.
- The market does not move as random as on shorter time frames, which reduces your risk.
- You can still make a lot of trades in a day, which increases your earning potential.
5-minute expiries are as short as possible but as long as necessary. A 5-minute strategy allows you to take advantage of this perfect connection. Let’s take a look at two possible 5-minute strategies. Strategy 1: Trading MFI extremes with high/low optionsWith one exception, all 5-minute strategies are based on technical analysis.
Over the next 5 minutes, fundamental influences are unimportant – for example, no stock will rise because the company behind it is doing well. The only thing that matters is the relationship of supply and demand on the stock exchange –whether traders are currently buying or selling. Technical analysis is the only way of understanding this relationship. One of the technical indicators that can best describe the relationship between supply and demand is the Money Flow Index (MFI). The MFI compares the numbers of assets sold to the number of assets bought and generates a value between 0 and 100.
- When the MFI reads 0, everybody who wanted to trade the asset wanted to sell it.
- When the MFI reads 100, everybody who wanted to trade the asset wanted to buy it.
- When the MFI reads 50, the number of traders who wanted to sell the asset was exactly equal to the number of traders who wanted to buy it.
The relationship between buying and selling traders allows you to understand what will happen to the price of the asset next. Since the price is determined by supply and demand, a strong movement where too many have already bought or sold exhausts one side of this relationship. The market has to turn around.
- When too many traders have already bought an asset, there are too few traders left to push the market upwards. Demand will exhaust, and the market will fall.
- When too many traders have already sold an asset, there are too few traders left to push the market downwards. Supply will exhaust, and the market will rise.
The MFI helps you to identify these situations:
- When the MFI reaches a value over 80, the market is overbought. It will likely start to fall soon.
- When the MFI reaches a value below 20, the market is oversold. It will likely start to rise soon.
Binary options offer you the ideal tool for trading this prediction:
- Invest in a low option when the MFI reaches a value over 80.
- Invest in a high option when the MFI reaches a value below 20.
This strategy work especially great as a 5-minute strategy. During long-term trends (one year or longer), the MFI often stay in the over- or underbought areas for long periods. Fundamental influences are strong on these time frames and can keep pushing the market in the same direction for years. On shorter time frames, fundamental influences are unimportant. It is more important to identify the number of traders that are left to buy or sell an asset and draw the right conclusions from this indication.
The MFI is the perfect tool for this diagnosis, and binary options are the ideal way of trading it.
5 Min Strategy 2: Trading the news
If you feel uncomfortable with a strategy that uses only a mathematical basis for its prediction, there is one alternative to technical analysis as the basis of a 5-minute strategy: trading the news. When important news hits the market, there usually is a quick, strong reaction. You can trade this reaction with a high/low option, one touch option, or ladder option, depending on your preference and tolerance of risk. This strategy works well as a 5-minute strategy because longer expiries face the threat of other events influencing the market and causing a price change. For the next 5 minutes after the release of important news, however, you can be sure that the news will dominate the market.
The rainbow strategy for binary options combines sophisticated predictions with simple signals. It is ideal for traders who want to increase their profits by using a proven, successful strategy.
What Is A Rainbow Strategy?
A rainbow strategy is a three moving averages crossover strategy. Most traders use a different colour for every moving average, hence the name ͚rainbow͛ strategy. The idea behind the rainbow strategy is simple. Moving averages that use many periods for their calculation take longer to react to price changes than moving averages that use fewer periods.
During a strong movement, multiple moving averages should, therefore, be stocked from slowest to fastest in the direction of the current market price.
- The fastest moving average should be the closest to the current market price.
- The second fastest moving average should be the second closest to the current market price, and so on.
When you see multiple moving averages stacked in the right way you know that the market has a strong sense of direction and that now is a good time to invest. This is the basic logic of the rainbow strategy. Theoretically, you could use as many moving averages as you like for this strategy, but the rainbow strategy use three. Three is a good sweet spot because it keeps things accurate yet simple enough to handle.
Adding more indicators would create no significant increase in accuracy, but using only two moving averages would be much less accurate without simplifying things. These three moving averages determine when you invest.
- When the shortest moving average is above the medium moving average which is above the longest moving average, you invest in rising prices.
- When the shortest moving average is below the medium moving average which is below the longest moving average, you invest in falling prices.
You could use any number of periods for each moving average. There are two rules of thumb you should at least consider, though:
- Double the number of periods for each moving average.If your fastest moving average uses 5 periods, use 10 and 20 for the slower ones, for example. This ratio guarantees that the moving averages are different enough to create meaningful signals yet similar enough to create some signals at all.
- Use popular values. A trading week has five days, which is why using multiples of five is a good idea for this strategy. These values help you see the same trading opportunities as other traders, which increases the supply and demand that others will create to your advantage.
How to trade a rainbow strategy with digital options
To trade the rainbow strategy with binary options, you have to wait for your moving averages to be stacked in the right order. When that happens, you have three options for when to invest:
- Invest right away. Some traders invest immediately when the final moving average positions itself in the right order. This way of trading the rainbow strategy creates the most signals, which is why it offers the most potential but also the highest risk.
- Wait a period. Some traders wait if the moving averages remain in the order until the next period is over. If it does, you have lost little time but gained a lot of security because you know that the signal was more than the result of a sideways movement.
- Wait for two or more periods. Some traders wait until two or more periods have confirmed the signal. Waiting for too long, however, reduces the accuracy of your signal because the market might have already started to turn. We recommend to wait no longer than three periods or ignore the signal. You can trade this strategy with high/low options, one touch options, or ladder options. High/low options are the safest way; ladder options have the highest potential. Decide which binary options types is right for you based on your personality, especially your risk tolerance.
Rainbow Strategy Video From IQ Option
End Of Day Strategy
An end of day strategy for binary options can find you profitable trading opportunities while only requiring a very limited time investment.
End Of Day Strategy Explained
The end of day strategy is less of a strategy that tells you which signals to use and more of a strategy that tells you when to look for signals. The strategy assumes that the best time of the day to trade is at the end of the day.
The end of the trading day shows some unique characteristics. This is mostly due to the fact that day traders stop their trading when a stock exchange is about to close.
Day traders are traders that never hold overnight positions. They invest for the short run and argue that a lot can happen overnight, which is why it would be unwise to hold a position during this time.
Since there are a lot of day traders out there, their absence significantly reduces the trading volume. The market is a bit slower and does things it is unlikely to do at any other time of the day. Traders with an end of day strategy wait for this environment, arguing that signals are clearer and trading opportunities better.
Trading End Of Day Options
While you can theoretically trade any trading strategy at the end of a trading day, there are a few strategies that work especially well during this time. Let’s take a look at the most profitable of them: trading closing gaps.
Closing gaps are especially likely during times with low volume, which is why the end of the trading day is the best time of the day to trade them. The accurate predictions of closing gaps make them especially attractive to traders of binary options types with a higher payout such as one touch options.
A gap is a jump in price action. For example, if an asset traded at £100 and jumped to £100.1 without covering the range in between (without trading for £100.01, £100.02, and so on), it creates a gap of £0.1.
Depending on how this gap was created, it can mean different things. A gap that was accompanied by a high volume likely is the result of significant news reaching the market, which probably starts a strong new movement. Near the end of the trading day, however, such gaps almost never happen.
What we find instead are gaps that are likely to close.
Near the end of the trading day, there are so few traders left in the market that a few traders, possibly even a single trader, are enough to make the market jump. The resulting gaps are weak because they are the result of a single person’s decision. Most other traders will consider the advance unjustified and invest in the opposite direction:
- If the gap points upwards, most traders will consider the new price too high. They will sell their assets.
- If the gap points downwards, most traders will consider the new price too low. They will buy new assets.
Because of both reasons, gaps that happen near the end of the day are likely to close.
This knowledge allows you to trade a one touch option. When your broker offers you a one touch option with a target price inside the reach of the gap, you know that the market will likely reach this target price. If the expiry is reasonable, too, invest.
Alternatively, you can also trade a high/low option that predicts a closing gap.
Base Line Expiry
I learned a long time ago how to judge the duration of a given signal. Well before I began trading binary options. Here I will explain how to develop an expiry strategy.The first thing to do is to identify what your signal is.Is it a:
- trend line bounce
- stochastic crossover
- shift in momentum
- candlestick pattern
- or a combination
Once done, you go back over your charts for a given period and identify all the signals. The time frame is not important at this point, this technique works in all. Mark the strong signals and weak signals. Now count how many bars or candles it takes for each signal to move into the money.
Once that is done you can take an average of the number of bars needed. Both for the strong and for the weak signals to move into the money. These averages are now your base line expiry for the signal. If you are using a chart of hourly prices and your signal takes an average of 3.7 candles to move into the money, you will want to use an expiry that coincides with that time. This could be a mid day, end of day, 4 hour or other option. Whatever expiry matches your signal horizon. If the signals takes 3.7 candles and you are using a daily chart that means 3.7 days. If using the hourly chart, it means 3.7 hours, and so on.
Study the chart below. I am going to use a basic moving average strategy to demonstrate. I will use the 30 bar exponential moving average. It hugs prices closer than a simple moving average and will give us more signals to count.
Also, in order to weed out bad signals and to improve results, I am only choosing the bullish trend following signals. So, there are 15 total signals. 6 weaker signals and 9 stronger signals. On average, it takes 4.2 bars for these signals to move into the money and reach a peak.
That means, since this is an hourly chart, that each signal will move into profitability and reach the peak of that movement in about 4 hours. So for expiry I would want to choose the closest expiry to 4 hours that is available. If a good choice is not available then no trade can be comfortably made. Do not try and force trades where they do not fit.
Breaking it down a little, the weak signals peak out in about 2.6 hours versus the stronger signals. Stronger signals take about 5.3 hours. Putting this knowledge in perspective, a weaker signal might be one that is close to resistance. A stronger signal might be one that is not close to resistance. Also, a stronger signal might be one where price action makes a long white candle and definitive move above or from the moving average whereas a weaker one might only create small candles and spinning tops.
Additional Tips For Choosing Binary Options Expiry
Choosing an expiry is one of the most important factors in making a trade. The other key factor being direction. All too often I get asked questions about why a trade went bad in the final moments. One of the most common areas of error I find is in choosing expiry.
Of course there can also be errors in analysis, trends or random events. But the focus of this discussion is expiry. It is obvious that you don’t want to use 60 second expiry when trading on weekly charts. Just as clearly, you won’t want to use end of day expiry when trading off the 60 second charts. So how do you determine what the best expiry will be?
One question you must ask yourself is: if you are trading with or against the trend.
When trading against the trend I would suggest a shorter expiry than a longer one. Simply because there is less chance of an extended move counter to the trend. Your expiry must be more precise. When you trade with the trend your expiry can be a little farther out.
A trend following trade has a higher likelihood of closing in the money so does not need to be as precise. A signal that follows the trend is a lot more likely to be in the money rather than one that goes against the trend.
Another factor that can have a big impact on which expiry is best for a given trade is support and resistance. The relative level of prices to a support or resistance line is a factor in how likely a trade is to move in a given direction.
If prices are near a S/R line and moving away there is much more chance of your option closing in the money than if prices are near a S/R line and moving toward it. When prices are moving toward one of these lines, the chances of the movement being halted and/or reversed is much higher than when prices are moving away from one.
So, how does this apply to expiry? If you are taking a signal that has a higher chance of being halted or reversed then you would want to choose a shorter expiry than if the same signal were not faced with a S/R level. I purposefully did not say call or put, or bullish or bearish, because this applies to both bullish and bearish trading. Also, keep in mind that support and resistance can be in the form of lines drawn at areas of interesting price action or peaks, moving averages, Fibonacci’s, envelopes and bands.
Binary options can make you a profit of 70 percent or more within only 1 hour. Compare that to stocks, and you understand why binary options are so successful. To trade 1-hour strategy with binary options, there are a few things you have to know. This article explains them.
In detail, you will learn the three crucial steps to trading a 1-hour strategy with binary options, which are:
- Step 1: Finding the right indicators
- Step 2: Finding the right time frame
- Step 3: Finding the right binary options type
With these three steps, you will immediately be able to create and trade a successful 1-hour strategy with binary options.
Step 1: Finding The Right Indicators
The first step to trading a 1-hour strategy with binary options is deciding which type of indicator you want to use to create your signals.
To find the right indicator for you, there are a few things you have to consider:
- Your skills. Some strategies are ideal for traders with great pattern matching skills; others are ideal for traders who are great with numbers. To create a successful strategy, you have to match your strategy to your skills.
- Your character. Some indicators create many but risky signals; others create reliable but few signals. Depending on your risk tolerance, you should pick the type of indicator that helps you sleep at night and not get bored.
- Your daily schedule. Some indicators require you to trade during a specific time of the day. Traders of closing gaps, for example, can find the best signals during the slow market environment of the ending trading day. Additionally, some indicators require more time to analyse than others. Make sure to choose an indicator for which you have enough time, and that fits your schedule.
With these criteria clearly defined, let’s take a look at a few indicators for each type of trader. To keep things simple, we will focus on strategies that you can trade during the entire day. We will later mention a few strategies that you can only trade during special times.
As our main criteria, we will divide strategies into pattern-matching and numerical strategies.
- Pattern-matching strategies require you to find certain patterns in the movements of an asset’s price,
- Numerical strategies require you to interpret numerical values.
Additionally, we will distinguish strategies into high-reward and low/risk strategies, and into quick and detailed strategies.
- High-reward strategies are risky but have a lot of potential, low-risk strategies are safe but have a limited potential.
- Quick strategies require less time, but you have to blindly trust your indicators, detailed strategies leave more work to you, but it will be easier for you to trust your signals.
Let’s see how different strategies match these criteria.
|Pattern matching strategy||Numerical strategy|
|High-reward, quick||Simple candlestick analysis. This strategy trades special formations that consist of only one to three candlesticks. Finding these formations is quick and easy, but they lack the reliability of more complex signals. Because there are so many candlesticks, however, executing this strategy well will win you more trades than with other strategies.||Trading extreme areas of the MFI. The Money Flow Index (MFI) creates a value between 0 and 100 that indicates the strength of a movement. Values over 80 indicate that the market has little room left to rise, values under 20 indicate that the market has little room left to fall. All you have to do to trade these predictions is invest in a low option when the market reaches a value over 80 and a high option when the market reaches a value under 20. This strategy can create many signals, but since it is based on a single technical indicator, it is also risky.|
|High-reward, detailed||Swing trading. During trends, the market alternates upwards and downwards movements. Swing traders try to take advantage of each of these movements. This strategy will provide you with many trading opportunities during a trend, but trading a single swing is always riskier than trading the trend as a whole.||Trading the ATR & the ADX with boundary options. The ATR calculates the average range of past movements, the ADX its strength of direction. With both values, you can predict whether the market has enough energy to reach one of the target prices. This strategy can create many signals and create a high payout, but is also risky.|
|Low-risk, quick||Three moving average crossovers. Combining three moving averages can create highly secure signals. You have to do almost nothing to execute the strategy. Simply sit back and wait for your software to create a signal. On the downside, this strategy will create few signals, which limits its potential.||Trading MFI divergences. When the MFI’s movement fails to mirror the market, the current trend is deep trouble. For example, when the market creates a new high during an uptrend but the MFI fails to create a new high, too, the market will soon turn downwards. You can take advantage of this prediction by investing in a low option. This strategy can create secure signals with little time investment.|
|Low-risk, detailed||Continuation & reversal patterns. Continuation patterns are large price formations that allow for accurate predictions. These patterns are rare, but you can win a high percentage of your trades.||Combining multiple technical indicators. On their own, all technical indicators are unreliable. But when you combine multiple indicators, you can filter out bad signals and create a more reliable strategy. For example, it makes sense to combine the MFI with the RSI or the ADX. These strategies will create fewer signals because you filter some of them out.|
Step 2: Finding The Right Time Frame
Once you have found the right indicator, you have to think about which time frame to use. We are creating a strategy with an expiry of 1 hours, which gives you the first indication. Depending on which indicator you are using, however, you should trade a very different time frame.
The time frame of your chart defines the amount of time that is aggregated in one candlestick. When you are looking at a chart with a time frame of 15 minutes, for example, each candlestick in your chart represents 15 minutes of market movements. When you are looking at a chart with a time frame of 1 hour, each candlestick represents a 1 hour of market movements.
When you create your signals in a chart with a time frame of 15 minutes, you create different signals than in a chart with a time frame of 1 hour. To trade a successful 1-hour strategy, you have to find the type of signals that is perfect for your indicator.
For a 1 hour strategy, every indicator requires a specific time frame that matches the expiry to the time for which the indicator’s predictions are valid. Let’s look at our pattern-matching examples:
- Simple candlesticks work best with a time frame of 1 hour. Simple candlesticks consist of only one to three candlesticks, which is why their predictions only apply to the next candlestick. After that, other influences are likely to override the candlestick, and it loses its predictive power. Therefore, you have to make sure that you only trade predictions that expire within the next candlestick. With a 1 hour expiry, this means using a 1-hour time frame.
- For swing trading, keep your time frame around 5 to 10 minutes. Swings need some time to develop. When you trade a chart with a time frame of 5 minutes and an expiry of 1 hour, you give the swing 12 candlesticks to develop. This is a good value for most trends. If you find that your timing is a little off, you can try a 10-minute chart, too.
- Three moving average crossovers work best with a time frame of 1 to 5 minutes. When you trade three moving average crossovers, you are looking for a movement that contains many candlesticks. It is probably best to trade three moving averages on a 5-minute time frame, too, but if you want to give your movements more time, you can also switch to a 1-minute chart. Everything else would be too long or too short, respectively.
- Reversal and continuation patterns provide plenty of opportunities. You can trade continuation and reverse patterns by trading the long movement they indicate or by trading the short breakout that occurs after the completion of the pattern. In the first case, you should use a time frame of 5 to 10 minutes to give the movement enough time to develop. In the second case, you should trade a time frame of 4 hours or even 1 day to make sure that you are truly trading the breakout and not a lot more.
As you can see from this list, the type of indicator predetermines the time frame you have to use for a 1-hour expiry. Some indicators predict where the next candlestick will go, in which case you need a long expiry to adjust the length of one candlestick to your expiry. Other indicators predict long movements, in which case you have to trade a shorter time frame to give the market enough time to develop an entire movement.
This rule also applies to the numerical strategies:
- Trading the MFI’s extreme areas works best with a time frame of 5 to 10 minutes. This strategy allows for two trading styles. Some traders like to invest when the MFI enters an extreme area; some invest when it leaves the extreme. The first type has to use a shorter time frame to give the market more time, ideally 5 minutes. The second type can trade a longer time frame, ideally 10 minutes.
- For MFI divergences, use a 1-minute or 5-minute time frame. When the MFI diverges from the market, it can take a few periods until the market catches up. To create these signals in an environment that is ideal for a 1-hour strategy, keep the time frame short. 1-minute or 5-minutes charts provide the ideal environment for this strategy.
- For multiple technical indicators, use a 15-minute chart. When you combine multiple technical indicators, you create signals short to medium signals. These work best with a time frame of 15 minutes. Of course, your ideal time frame depends on your final strategy and the technical indicators you use. If necessary, adjust your time frame.
These recommendations are a good place to start for each strategy. Please remember, though, that they are only recommendations. Every trader is different, and if you should find that you can achieve better results with a different time frame than our recommendation, use whatever works. There is no right and wrong aside from what makes you money or loses you money.
Step 3: Finding The Right Trade Type
After you have matched your indicator to a time frame, you have to match it to a binary options type. Binary options offer many different types, and each type has its unique relationship of risk and reward.
To explain how binary options types relate to your strategy, let’s take a closer look at the different option types. You will see that it is difficult to give general recommendations, but some binary options fit some strategies better than others.
- High/low options are the classic option type with which you can predict whether the market will rise or fall over a period, in our case 1 hour. Because high/low options can win you a trade with the smallest possible movement in the right direction, they are the low-risk way of trading that works for all of these strategies. Executed well, each strategy should win you a high enough percentage to make a profit.
- One touch options define a target price, and you win your option when the market reaches this target price. The market does not have to remain at this target price, which is a great advantage, but you need a stronger movement because the target price is further away. One touch options are a good fit for trading the breakout of continuation and reversal patterns and those simple candlesticks that predict strong movements, for example the big candle. The might also
- Ladder options define multiple target prices and allow you to define whether the market will close above or below each target price. They allow for risky predictions that can create the highest payouts of all binary options and for secure predictions that allow a high winning percentage. Especially traders of pattern-matching strategies might be able to profit from this premise disproportionally.
- Boundary options are one touch options with two target prices, one above the current market price and one below it. Obviously, boundary options are ideal for trading the ATR and the ADX. Boundary options are the only options type with which you should trade this strategy. For all other strategies, boundary options are a bad fit. These strategies all provide clear predictions for where the market will go. Boundary options do not require you to predict a direction, which means that you waste a part of your prediction. If you traded a one touch option, you would get a higher payout and win just as many trades.
1-Hour Strategies That Require Special Trading Times
The beauty of all strategies in this post is that they work well in any market environment and at any time. Consequently, any trader can use them. However, there are also strategies that specialize in a specific trading environment or a specific time. These strategies might be a better fit for traders who plan on trading these environments anyway.
The most prominent example of this type of strategy is trading closing gaps. Gaps are jumps in market price when the market jumps from one price level to a much higher or much lower price level.
- When gaps are accompanied by a high trading volume, they can indicate the beginning of a new movement or the strengthening of an existing one. Many traders back the gap, and there is enough momentum keep pushing the price into the direction of the gap.
- When gaps are accompanied by a low trading volume, they are likely to close. Few traders back the gap, and most traders are likely to consider it an unjustified advance. They will invest in the opposite direction, and the gap will close.
The beauty of closing gaps is that they provide you with one of the most accurate predictions that you can find with binary options. The gap will likely close within the next period, which gives you an exact expiry, and the gap’s size gives you a clear target price.
Alternative Trade Types
With this information, you can trade a one touch option or even a ladder option. You get a high payout and you should be able to win a high percentage of your trades, which means that you have a powerful strategy at your hands.
The downside of this strategy is that gaps that are accompanied by a low volume are difficult to find during most trading times. There are simply too many traders in the market to create a gap with a low volume. Therefore, low-volume gaps mostly occur near the end of the trading day.
Many traders are day traders. They close their position at the end of the day and never hold a position overnight. These traders will stop trading when the market is about to close because there is not enough time to make another trade.
When day traders have left the market, the trading will drop off significantly. Now you can find closing gaps. Monitor all time frames from 15 minutes to 1 hour, and trade any gaps you find with a one touch option with an expiry of 1 hour that predicts a closing gap.
Traders who work during the day and can only trade after work can use this strategy to make a profit despite their work.
The important point here is that you can trade successfully, even if your time is limited. If you have to trade during your lunch break, you can find successful strategies for this limitation, too.
As with anything in life, success means making the most of your limitations. With binary options, your limitations might help you to trade more successful than if you had none.
1 Hour Strategy Overview
A 1-hour strategy is one of the most popular types of trading strategies. It combines an expiry that seems natural to us with a wide array of possible indicators and binary options types, which means that every trader can create a strategy that is ideal for them.
Whether you prefer a pattern matching or a numerical strategy, a high-potential or a low-risk approach, and a simple or a complex prediction, you can create a 1-hour strategy based on any combination of these attributes.
Unless you are trading boundary options with the ATR and the ADX, we recommend starting with high/low options – they are the easiest type for newcomers.
Double Red Strategy
The double red strategy is a simple to execute strategy that allows binary options traders to find many trading opportunities. Here’s how you execute it.
What Is The Double Red Strategy?
The double red strategy is a trading strategy that wants to identify markets that feature falling prices. The ͞double red͟ in the name refers to the fact that the strategy waits for two periods with falling prices in a row before it creates a trading signal – periods with falling periods are often coloured red in trading charts.
The logic is simple: at significant price levels, the market often takes some time to sort itself out. After it has sorted itself out, however, the falling price movement is often stronger and more linear than an upwards movement, which is why it is a great investment opportunity.
For example, assume that there is a resistance. When the market approaches this resistance, it will never turn around immediately. It will edge itself closer and closer, test the resistance a few times, and eventually turn around. While the turnaround would be a great trading opportunity, finding the right timing is difficult. During the process of edging closer and closer to the resistance, the market will already create a few periods with falling prices that will fail to lead to a turnaround. You have to avoid investing in these periods.
To find the right timing, the double red strategy waits for a second consecutive period of falling prices that confirms the turnaround. When such a period occurs, the market has obviously stopped moving around the resistance and has started to move away from it again. Double red traders would invest now.
How To Execute The Double Red Strategy
To execute the double red strategy with binary options, here’s what you do:
- Choose a short period for your chart. Binary options are short-term investments, and your chart’s period should reflect that. Choose a period somewhere between 5 minutes and 1 hour.
- Find a resistance level. Sometimes, you will find a resistance level directly in the chart. If the price itself offers no resistance levels, you can add technical indicators. Bollinger Bands and technical indicators with significant numbers of periods (20, 50, 100, 200, for example) usually offer great resistance levels that will influence the market.
- Invest when you find two red periods in a row. Once the market approaches the resistance, monitor price movements closely. Once you see two periods in a row, predict falling prices. Most traders use low options for this strategy.
If you add another indicator (the Average True Range, for example) and like to a take a little more risk, you can also use one touch options or ladder options.
Keep your expiry short. The double red strategy creates signals based on two candlesticks, which means that its predictions are only valid for very few candlesticks, too. Ideally, you would limit your expiry to one or two candlesticks. For example, on a 15-minute chart, you would use an expiry of 15 to 30 minutes.
Strategies For Beginners
We have the three best strategies for beginners, from high-potential to risk-averse
- What do beginners need to know?
- A risk-averse strategy: following trends
- A high-potential strategy: trading swings
- An intermediate strategy: trading gaps
With this information, you can find the best strategy to start trading binary options as complete newcomer.
What Do Beginners Need To Know?
Binary options strategies for newcomers must fulfil some special criteria. They must be simple but effective, quick to understand but profitable. There are many complicated strategies that can make money if a trader executes them perfectly.
Beginners, however, will be overwhelmed, make mistakes, and lose money. The goal of a good strategy for newcomers to create similarly positive results while simplifying the strategy.
Let’s take a look at a few strategies that can fulfil these criteria. We will present a risk-averse strategy for those traders who want to play it safe, a riskier strategy for those who want to maximise their earnings, and an intermediate version.
Risk-Averse Beginners Method: Following Trends
Following trends is a secure, simple strategy that even newcomers can execute. Trends are long lasting movements that take the markets to new highs and lows.
- Movements that take the market to new highs are called uptrend,
- Movements that take the market to new lows are called downtrends.
The trick with trends is understanding that they never move in a straight line. An asset’s price is determined by the relationship of supply and demand, and there is no perfect movement where supply always exceeds demand or vice versa. It is simply possible for all traders to keep buying or selling continuously. There must always be brief periods during which the market gathers new momentum.
These periods are called consolidations. During a consolidation, the market turns around or moves sideways, until enough traders are willing to invest in the main trend direction.
The alternation of movement and consolidation creates a zig zag line in a particular direction. This is a trend.
- An uptrend takes the market two steps up, then one step down, and then two steps up again. And so on.
- A downtrend takes the market two steps down, then one step up, and then two steps down again. And so on.
When you look at the price charts of stocks, currencies, or commodities that have risen or fallen for long periods, you will find trends behind all of them. Trends can last for years, but the more you zoom into a price chart, the more you will find that every movement that appeared to be a straight line when you looked at it in a daily chart becomes a trend on a 1-hour chart. What seems to be a straight movement in a 1-hour chart becomes a trend on a 10-minute chart, and so on.
There are many levels of trends. Regardless of which time frame you want to trade, there is always a trend you can find.
To follow a trend once you have identified it, you have a few different options:
- Invest in a high/low option: This is the simplest strategy. When you recognise an uptrend, invest in a high option; when you find a downtrend, invest in a low option. Choose your expiry about as long as a full cycle. If an uptrend takes 30 minutes to create a new high and low, choose an expiry of 30 minutes. Then, the market should definitely be higher than now. If you want, you can also use an expiry twice or three times as long as a cycle. Just stay with a multiple of the typical cycle length. Once you are comfortable with this strategy, you can think about monitoring failure swings with the Money Flow Index (MFI) and Relative Strength Index (RSI) to evaluate the remaining strength of a trend or adding a moving average to your strategy.
- Invest in a one touch option: Once you have found a trend, you can predict the speed with which the market will rise or fall. For example, if you know that a trend has increased an asset’s price by £0.1 every 15 minutes, you can calculate the trend’s trajectory and invest in a one touch option. When your broker offers you a one touch option with a target price £0.15 away from the current market price and an expiry of 30 minutes, you know that there is a high chance that the market will reach this target price. Find a trend, check your broker’s one touch options, and if you find one within reach, invest.
- Combine both strategies: You can also combine both strategies. When you find a trend, invest in a high/low option in trend direction and calculate whether it makes sense to invest in a one touch option. If so, invest in both options; if not, stick with the high/low option alone.
Since these are relatively safe strategies, you can afford to invest a little more on each trade. We recommend somewhere between 3 and 5 percent of your overall account balance.
High-Potential Beginners Strategy: Trading Swings
Trading swings is a variation of our first strategy, following trends. A swing is a single movement in a trend, either from high to low or vice versa. Every cycle of a trend consists of two swings: one upswing and one downswing.
Instead of trading a trend as a whole (like trend followers), swing traders want to trade each swing in a trend individually.
The advantage of this strategy is that every trend provides them with multiple trading opportunities, not just one.
More trading opportunities mean more potential winning trades, and more winning trades mean more money.
The downside of this strategy is that trading a swing is riskier than trading a trend as a whole. You are trading a higher potential for a higher risk – if that is a good idea depends on your personality.
- Some traders lose interest if they trade only one option in a trend. They are in danger of straying from their strategy and making bad decisions. These traders would do better with a swing-trading strategy.
- Some trades will get nervous when they follow the third or fourth consecutive swing in a trend. Afraid that the trend will end soon, they will stray from their strategy and make bad decisions. These traders can do better by following the trend as a whole.
If you decide to become a swing trader, we recommend using a low to medium investment per trade, ideally between 2 and 3.5 percent of your overall account balance. Only traders who like to take risks should invest more, but never more than 5 percent of their overall account balance.
Choose your expiry according to the length of a typical swing. If you expect an upswing and a typical upswing takes about 30 minutes, use an expiry of 30 minutes. Choosing the right expiry is no exact science, and you will need a little experience to find the perfect timing.
To identify ending swings, you can use technical indicators. Momentum indicators such as the Relative Strength Index (RSI) or the Money Flow Index (MFI) are popular choices, just like moving averages.
The Intermediate Beginners Strategy: Trading Gaps
Trading gaps combines an intermediate risk with a good chance for high profits. The strategy is simple enough for beginners to learn it within a few hours.
Gaps are price jumps in the market. At the end of one period, something influenced the market strongly, and the price jumped to a higher or lower level with the opening price of the next period. Candlestick charts are ideal to find gaps because they clearly visualize the gap between one period’s closing price and the next period’s opening price.
The most common gap is the overnight gap. When the stock market opens in the morning, all the new orders that were placed overnight flood in. If traders were optimistic or pessimistic, there is a good chance that most of these orders point in the same direction. The market opens significantly higher or lower, and there is a gap between yesterday’s last price and today’s first price.
Such a gap is a significant event because the same assets are suddenly much more expensive. The market can react shocked, some traders might take their profits; or the market can push forward, providing the sense that this is the beginning of a strong movement.
To know how you can profit from gaps, you have to know these three types of gaps:
- Breakaway gaps. Breakaway gaps happen during sideways movements. In these periods, the market is unsure about where it wants to go and builds up momentum for the next movement. When prices jump up or down and this jump is accompanied by a high volume, the market has created enough momentum to start a new movement.
You can profit from this knowledge and invest in a high option in the direction of the gap. Since you are expecting a longer movement, choose your expiry longer than one period of your chart. If you are trading a 15-minute chart, for example, use an expiry of at least 15 minutes.
- Acceleration gaps. Acceleration gaps occur during a trend. While the asset was already trending up or down, something must have happened that intensified this momentum. The market jumps in the direction of the trend and creates. In an uptrend, acceleration gaps always occur in an upwards direction; in a downtrend, acceleration gaps always occur in a downward direction.
Like breakaway gaps, acceleration gaps are accompanied by a high volume. Use a similar expiry as with breakaway gaps. Acceleration gaps also allow you to invest in a one touch option because, after the gap, the trend will move faster than before the gap. If your broker offers you a one touch option that would have been just out of the reach of the previous trend, you know that there is a good chance that the accelerated trend will reach it. This might be a good opportunity.
- Exhaustion gaps. Exhaustion gaps are very different from the first two gap types because they signal an impending reversal. Exhaustion gaps occur during a strong movement in the direction of the movement – just like acceleration gaps. The difference between both gap types is that exhaustion gaps are accompanied by a low volume and that the market already begins to reverse during the period. After an exhaustion gap, the market is likely to close the preceding gap, which provides you with a great opportunity to trade a one touch option or a high/low option.
- Common gaps. Common gaps happen during sideways movements. They are accompanied by a normal volume and represent random movements with little long-term significance. Since common gaps are likely to close, you can invest in a one touch option or a high/low option.
The basic principle of all four gaps is the same. Gaps are significant price jumps, which is why many traders now have an incentive to take their profits or enter the market. Both forces push in the opposite direction of the gap and are likely to close it. For a gap to remain open and create a new movement, the gap has to be accompanied by a high volume. This high volume indicates that many traders support the gap, and that there are few people who will take their profits or invest in the opposite direction immediately after the gap.
Beginners Strategy – Conclusions
Even complete novices and beginners can find a simple but effective strategy that could make them money.
- Risk-averse traders can follow trends as a whole.
- Traders who are willing to take risks if it increases their potential can trade swings.
- Traders who want a good mix of risk and potential can trade gaps.
With Binary Options A zero-risk strategy is the dream of any financial investor. While it is impossible with any investment, binary options can get you closer than anything else.
Is A Zero-risk Strategy Possible?
When you invest, there is always some risk. Despite all efforts to predict what the market will do next, nobody has yet found a strategy that is always right. Sometimes, the market moves in unpredictable ways and does things that seem irrational.
In hindsight, we often find good explanations for these events. As a trader, you have to avoid letting this hindsight bias confuse you. When a trading day is over, it is easy to say that this event moved the market the strongest. But when a trading day begins, it is often almost impossible to predict which of the many events of the day will have the strongest impact on the market and how it will influence the market. Even beyond the stock market, financial investments always include some risk.
- When you invest in securities with a fixed interest rate, there is always the chance that the bank that emitted them has to file for bankruptcy. Many countries protect your money up to a certain amount, but beyond that, the risk is yours.
- When you buy government bonds, there is always the chance that the government goes bankrupt. Since bonds have long expiries of up to 30 years, a lot can happen over this time.
Simply put: a zero-risk strategy is impossible with any asset. But binary options offer a few tools that allow you to get relatively close to zero risk. Let’s see how you can do that.
How To Get Close To A Zero-risk Strategy
Most binary options brokers offer a great tool: a demo account. Demo accounts work just like regular accounts but allow you to trade with play money instead of real money. In the risk-free environment of a demo account, you can learn how to trade.
You can try different strategies, find the one that suits you the best, and perfect it. You can wait until you switch to real-money trading until you have a solid strategy that you know will make you money by the end of the month. While many stock brokers offer a demo account, too, binary options have one great advantage: binary options work on a shorter time scale, which means that you learn faster and better.
- When you buy a stock, you have to wait for months or years until you know whether you made the right decision. In the meantime, many unique things happen, which is why you will eventually conclude that the situation is unrepeatable and you have learned nothing.
- When you trade a binary option, you know within a few minutes whether you have made the right decision. In the meantime, there are no events that distort your result. When your option expiries, you get a clear result. You know whether what you did worked or not. Because binary options work on such short time scales, they allow you to create and test a strategy much better than any other type of investments.
Once you have traded a strategy with a demo account and turned a profit for a few months in a row, you know that there is a very high chance that you will make a profit when you start trading real money, too. There will still be some risk, but binary options have helped you to eliminate as much risk as possible.
For those still looking for zero risk trades, Arbitrage is another option.
The breakout strategy utilizes one of the strongest and most predictable events of technical analysis: the breakout.
What Is A Breakout?
Breakouts occur whenever the market completes a chart formation. These completions indicate significant changes in the market environment. The market will pick up a strong upwards or downwards momentum, which means that many traders have to react to the change.
- Some traders will close their positions because the event negates their predictions. When a trader predicted rising prices but an event indicates prices will fall, this trader will close their position before they lose money.
- Some traders will open new positions that point in the direction of the new trend.
- Many traders will do both. When a trader can predict where the market will go, there is no reason why they should not trade this prediction. Traders that realize that their original prediction was wrong will likely invest in the opposite direction.
All of these three possibilities create a strong momentum in the same direction.
- When the market completes a downwards formation, some traders will short sell the asset; some will sell their long positions. Both actions create downwards momentum.
- When the market completes an upwards formation, some traders will buy the asset; some will close their short positions. Both actions create upwards momentum.
Since most traders anticipate the payout, they will place orders that automatically get triggered when the market reaches the price level that completes the price formation. These orders intensify the momentum even more.
How Can I Trade The Breakout With A Strategy?
Digital options offer a number of strategies to trade the breakout. Here are the three most popular strategies:
1.Trading the breakout with high/low options. When you anticipate a breakout, wait until the market breaks out. Once it happens, invest in a high/low option in the direction of the breakout. If the breakout happens in an upwards direction, invest in a high option; if the breakout happens in a downwards direction, invest in a low option. Use an expiry equivalent to the length of one period. This is the low-risk/low-reward way of trading the breakout.
2.Trading the breakout with one touch options. Breakouts are strong movements, which is why they are perfect for trading a one touch option. One touch options define a target price, and you win your trade when the market touches this target price. Once you see the market break out, invest in a one touch option in the direction of the breakout. This is the medium-risk/medium-reward way of trading the breakout.
3.Trading the breakout with ladder options. When an asset breaks out, invest in a ladder option in the direction of the breakout. Choose a target price with which you feel comfortable but that still provides you with a high payout. This is the high-risk/high-reward way of trading the breakout. All of these three strategies can work. Choose the one that best matches your personality.
Three Strategies For Bollinger Bands
There are hundreds of strategies that use Bollinger Bands. Regardless of which strategy you use, there is almost no downside to adding Bollinger Bands to your chart. Even if you do nor trade them directly, having three additional lines will not confuse you. On the contrary, it will subconsciously influence to make better decisions.
Nonetheless, we will now present three strategies that not only feature Bollinger Bands but use them as their main component. Understand these strategies, and you will also be able to use Bollinger Bands in your strategy.
Strategy 1: Trading Outer Bollinger Bands With High/Low Options
This is the simplest strategy, and the one with the least risk. It can be explained in two simple steps:
- Compare the current market price to the price range of the Bollinger Bands.
- If the market is near the upper end of the Bollinger Bands, invest in falling prices with a low option. If the market is near the lower end of the Bollinger Bands, invest in rising prices with a high option.
That’s it. Even newcomers can immediately execute this strategy.
There is one thing you should know, though. Since every new period moves the Bollinger Bands, what is the upper range of the current Bollinger Bands might not be the upper range of the next periods. A quickly rising market will push the Bollinger Bands upwards, too; and a quickly falling market will take the Bollinger Bands down with it.
Because of this limitation, the strategy works best if you keep the expiry of your binary option shorter than the time until your chart creates a new period. If there are 30 minutes left in your current period and the market approaches the upper end of the Bollinger Bands, it makes sense to invest in a low option with an expiry of 30 minutes or less.
If you want, you can also double-check your prediction on a shorter period. Switch to a chart with a period of 15 minutes, and if the market is near the upper range of the Bollinger Bands, too, you know that there is a good chance that it will fall soon. If it is in the middle of this trading range, however, you might consider passing on this trade.
You might also consider upgrading this strategy to trade binary options types with a higher payout. By adding a momentum indicator, you can invest in option types that require a strong movement. To understand how to add this indicator, consider the example of our next strategy.
Strategy 2: Trading The Middle Bollinger Band With One Touch Options
The middle Bollinger Band has special characteristics. While it offers a resistance or support level, the market can break through it. When it does, the Band changes its meaning.
- When the market trades above the middle Bollinger band, the band works as a support. If the market breaks through this support, the middle band becomes a resistance. The market was trapped between the upper and middle bands and is now trapped between the middle and the lower bands.
- When the market trades below the middle Bollinger band, the band works as a resistance. If the market breaks through this resistance, the middle band becomes a support. The market was trapped between the lower and the middle bands, and is now trapped between the middle and the upper bands.
Both events change the entire market environment. When the market breaks through the middle band, it suddenly receives enough room to move to the outer band. This means you know the direction in which the market is likely to move and the distance, which is a great basis for trading a high-payout binary option.
Here’s what you do:
- Wait until the market breaks through the middle Bollinger Band.
- When the market breaks through the middle Bollinger Band, invest in a one touch option in the direction of the next Bollinger Band. When the market breaks through the middle Bollinger Band in an upwards direction, invest in a high one touch option. When the market breaks through the middle Bollinger Band in a downwards direction, invest in a low one touch option.
The most important aspect of this strategy is choosing the right expiry.
- Long expiries move the target price of your one touch option further away.
- Short expiries keep the target price of your one touch option close.
For this strategy to make sense, you have to use a one touch option with a target price that is within the Bollinger Bands. On the other hand, the expiry has to be long enough to give the market enough time to reach the expiry. Finding the right mix of closeness and enough time can take some experience. You can also use momentum indicators such as the Average True Range (ATR) to provide a mathematical basis for your estimate.
Strategy 3: Trading Outer Bollinger Bands With Low-Risk Ladder Options
The market is highly likely to move beyond the outer Bollinger Bands. This knowledge is a great basis for trading low-risk ladder options.
Ladder options define a number of different target prices, usually five or six. Some of these prices are above the current market price; some are below it; some are close, some are far away. As a result of these characteristics, some target prices will be inside the Bollinger Bands’ price channel; some will be outside of it.
Since the market is highly unlikely to move outside the Bollinger Bands, it is highly unlikely to reach target prices that are outside the Bollinger Bands’ price channel. Ladder options allow you to make this prediction and win a simple trade.
To execute this strategy, here’s what you do:
- Set the period of your chart to the expiry of your ladder option.
- Compare the target prices of your broker’s ladder option to the Bollinger price channel.
- Pick the target price with the highest payout that is still outside the Bollinger Bands. Predict that the market will be unable to reach this target price.
- If the target price is below the Bollinger Bands, predict that the market will trade above the target price when your ladder option expires.
- If the target price is above the Bollinger Bands, predict that the market will trade below the target price when your ladder option expires.
- Repeat the process for all expiries of ladder options that your broker offers.
To execute this strategy well, make sure that the period of your chart matches your expiry. Bollinger Bands change with every new period, and a target price that is outside the reach of the Bollinger Bands during the current period might be well within their reach during the next period.
When you trade a ladder option with an expiry of one hour based on a price chart with a period of 5 minutes, so many things can change before your option expires that the Bollinger Bands become almost meaningless. By matching the period of your chart to your expiry, you guarantee that the Bollinger Bands stay the same until your option expires.
The volume is one of the most under-appreciated indicators. Combined with binary options, a volume strategy can create great results.
What is a volume strategy?
The trading volume is a simple yet important indicator. The volume indicates how many assets very traded during a period. The direction of these trades is unimportant to the volume.
- A period in which ten stocks swapped hands will have a volume of ten, regardless of whether the period featured rising or falling prices.
- A period in which 20 stocks swapped hands will have a volume of 20, regardless of whether the period featured rising or falling prices.
The trading volume is so important because it helps you interpret market movements:
- High volume adds significance. When a period has a high volume, many traders backed the price movements of this period, which means that the market is likely to continue in the same direction.
- Low volume questions significance. When a period has a low volume, few traders backed the price movements of this period, which means that many traders will question the period’s movements and likely invest in the opposite direction to profit from they consider a wrong movement.
As you can see from these examples, the volume only makes sense in relation to preceding periods. A volume of 300 says nothing until you know whether the preceding periods featured a higher, lower, or similar volume.
A volume strategy uses the volume of each period to create predictions about future price movements:
- When a period has a high volume, a volume strategy predicts that the market will continue to move in the same direction.
- When a period has a low volume, a volume strategy predicts that the market will reverse.
- When a period has an average volume, a volume strategy will ignore it.
How To Execute A Volume Strategy
To execute a volume strategy with binary options, follow these steps:
- Look for significant periods. Look for gaps, periods with strong movements, or dojis (periods where opening and closing price are almost identical).
- Analyze the volume of these periods. If the trading volume was high during the period, predict that the market will continue to move in the same direction; if the trading volume was low, predict that the market will reverse; if the volume was average, ignore the period.
- Invest accordingly. Trade rising prices with high options, falling prices with low options, and stagnating prices with ladder options that predict little movement. Keep your expiries short with this strategy. Ideally, limit them to the next period. In a 30-minute price chart, you would use an expiry of 30 minutes, for example.
Binary options are primarily short-term investments. But if you want to invest for the long term, binary options have a lot to offer for you, too.
How to trade a long-term strategy
While binary options are mostly short-term investments with expiries of a few minutes to a few hours, most brokers have also started to offer long-term options that allow you to make predictions for the next months and the next year.
These strategies are high/low options with a longer expiry. You predict whether the market will trade higher or lower than the current market price when your option expiries.
A long-term binary options strategy should be based on trends. Over the course of a year, long-term trends dominate the market and dictate what will happen next. Identify these trends, and predict that they will continue. To avoid weakening trends, you can use technical indicators such as the Money Flow Index (MFI), which allow you to identify trends that are running out of momentum.
Why Trading A Long-Term Strategy Can Be Profitable
When you trade a long-term prediction with regular assets, you can average a profit of about 10 percent a year. That is a great result, but binary options can do better. Assume that you have found a stock of which you are almost completely sure that it will trade higher one year from now. Take a look at the current price charts of Google, Amazon, or Tesla. Such stocks would offer the ideal basis for such an investment.
When you predict that these stocks will rise with binary options, you can get a payout of about 75 to 90 percent – in one year. Regardless of how well these stocks do, when you buy them directly on the stock market, you will never make a profit that rivals this return.
Now, of course, you have to account for risk. When you lose your trade – however unlikely you think that this event may be – you lose all the money you invested. This is why it is a bad idea to invest all your money in a single trade. Spread your money over multiple stocks, currencies, markets, and commodities, and never invest more than 5 percent of your overall account balance in a single trade. Also, never invest all your money. With this strategy, you should still be able to make a return that is higher than what you would make with stocks, but you reduce your risk.
With digital options, the straddle strategy is easier and more profitable than with other types of financial assets.
Here’s how you execute it…
What Is A Straddle Strategy?
A straddle strategy follows a simple goal: it wants to make you money regardless of the direction in which the market moves. With conventional assets, this strategy was difficult to execute. Traders had to buy short and long assets at the same time and hope that the profit from the successful investment outweighs the losses from the unsuccessful one.
With stocks, for example, traders would be a stock and short it at the same time. They would then set up stop-losses for both trades.
- If the market moves upwards, they would lose the short trade and hope that the long investment makes enough money to make up for these losses.
- If the market moves downwards, they would lose the long trade and hope that the short investment makes enough money to make up for these losses.
With conventional assets, this strategy was a mess. There were fees on every trade that complicated things, and it was impossible to make two investments simultaneously. The resulting time delay meant that a straddle was never perfect. Finally, the profit from the winning investment was often insufficient to outweigh the losses from the losing trade.
Luckily, binary options can simplify the straddle and make it more profitable.
How To Trade The Straddle Strategy
Binaries have taken the straddle and packed it into one asset – boundary options. Instead of having to invest in two assets at the same time (which is impossible), boundary options allow you to create a straddle with a single click. Boundary options define a price channel around the current market price.
- If the market leaves this price channel, you win your option;
- If the market fails to leave the price, you lose your option.
Both target prices of the price channel are equally far from the current market price, which means that you automatically create a perfect straddle. Many binary options brokers offer two types of boundary options:
- One type of boundary options uses two nearby target prices and offers a payout of 70 to 75 percent.
- One type of boundary options uses two faraway target prices and offers a payout of up to 300 percent (or higher).
Choose the type of boundary option that you like best, and you can easily trade the straddle strategy with binary options.
To execute a binary options strategy well, you have to ban all emotions from your trading and do the same thing over and over again like a robot. Some traders took the next logical step and let a robot do all of their trading.
Here’s how you execute a robot strategy.
What Is A Robot Strategy?
When you trade binary options, you have two basic choices:
1.You trade for yourself,
2.You let someone else trade for you.
A robot falls into the second category. Robots are computer programs. These computer programs are trained to execute a trading strategy and invest on behalf of a human trader.
In detail, robots do three things:
1.Robots monitor the market,
2.Robots find profitable trading opportunities, and
3.Robots invest in these opportunities.
When you use a robot, you outsource your entire trading process to a computer program. You can step away and literally make money while you sleep.
Why Use A Robot?
Robots have significant advantages compared to human traders:
1.Robots never miss an opportunity. Humans need sleep and have chores to do; robots do not. They can spend the entire day trading, which means that they can take advantage of every opportunity. With a profitable strategy, more trades mean more money, which is great for you.
2.Robots do not make mistakes. Humans get exhausted; robots do not. They can execute a strategy for years without making a single mistake.
3.Robots can monitor hundreds of assets simultaneously. Humans can only focus on one thing at a time; robots can focus on millions of things. This is why robots can monitor hundreds of assets. Monitoring more assets leads to more trades, and more trades, with a winning strategy, lead to more money.
Combined, these three advantages can make you a lot more money than if you traded for yourself. It does increase risk however. If a strategy starts to fail, a robot will not pause and allow time to make adjustments 0 it will continue making trades that fit the criteria. Performance must be manually checked too.
How Can I Get A Robot?
These ‘bots’ are generally provided as a service. Read about specific providers on our robots and auto trading page.
Boundary Or Range Options
An innovative trading styles introduced by brokers is ‘boundary‘ trading. The same trading style may be termed as ‘range‘ options by some binary firms but it means essentially the same.
What Are Boundary Options?
Boundary options deal with a range of price levels of an asset. Instead of predicting if the price of an asset will rise or fall, the traders need to predict whether the price of an asset will stay within certain limits (‘boundaries’) or not.
In boundary options, predefined upper and lower price levels will be specified by your binary options broker. You are free to select the expiry period. If you select a larger expiry period, the range of the asset will expand i.e. the upper price level will increase and the lower price level will decrease. As a trader you have to select from the two options: ‘In’ or ‘Out’.
Upper And Lower Range Or Boundary
If you feel that the price level of the asset will stay within the specified limit, you should select ‘In’. On the other hand, if you feel that the price level of the asset will end beyond the specified price levels select ‘Out’. The ‘Out’ option would be applicable for two cases. One where the price is expected to go higher than the upper price limit and the other case where the price level is expected to end less than the lower price limit.
One aspect to be aware of is that brokers may set different upper and lower limits for the ‘in’ and ‘out’ choices. For example the upper level for the ‘In’ choice might be set nearer the current price – for example at 100 where the current price is 90. The upper value when selecting ‘Out’ might be 110. Not all brokers apply this extra ‘margin’, but some do, so it is worth being aware of. It is a method by which a broker can add to their own margins and protect themselves during particularly volatile periods, or from one-sided trading sentiment.
A percentage figure will be specified by your binary options broker which indicates the payout. If your prediction is correct you will make a profit equal to the predefined percentage of the amount invested. The profit is credited to your trading balance immediately after the result of the trade is decided. However, in case your prediction turns out to be incorrect, you will lose the money invested in the trade. The profit percentage depends on the broker and you may find different binary options brokers offering different payouts for the same asset.
Boundary Trading Strategy
By now you you should have established that boundary or range options trading is based on the volatility of an asset. It is different from the traditional High or Low trading because in that case the upwards or downwards price movement matters. No binary options signal provider offers boundary options signals and you will have to use your own knowledge and analysis.
If you want to trade boundary options, the first thing to do is to gather information about the asset you want to trade. Suppose you want to trade Apple’s stocks via boundary options. First of all you should study how the price of the asset has been moving for the last few days. You should have an overall idea if the asset is volatile or stable.
Next you must be aware of all the news related to the company. This can drastically improve your winning ratio. For example, let us assume that Apple is launching the next version of its flagship mobile phone today. Now if the launch is successful and consumers like it, the stock price would go up. If the product fails to impress the audience, the stocks may take a dip. There is a small chance that despite such a major event the stock prices stay stable.
It would be an ideal time to trade Apple via boundary options by selecting the ‘Out’ option. But if you are not aware of the launch of the new product by the company, you will miss out on the opportunity to make money. It is therefore, highly recommended to stay updated with all the news like quarterly report, hierarchy reshuffle, product launch etc. related to the asset you wish to trade.
Touch / No Touch Options Strategy
As binary options markets have grown, so too have the demands and requirements of traders. Experienced clients were requesting options that were similar to traditional Rise/Fall binary options, but allowed trading on volume and market volatility. Brokers were also keen to offer a product that could be traded in both flat and highly volatile markets. From here the “Touch / No Touch” options were born, which enable limited risk trades on volume and volatility.
Touch options explained
The ‘binary’ element of the One Touch option remains, as does the limited risk. In order for a “Touch” option to finish in the money; the asset value must touch, or go beyond, the barrier (or ‘target’) level at least once prior to the expiry of the option.
A “No Touch” option represents the opposite – the asset value will not touch the barrier (or ‘target’) level at any point before the expiry.
In most cases, the barrier level is set by the broker. At certain brokers however, the trader can set the barrier. It could be higher than the current asset value, or it could be lower. The distance between the current asset value and the target price will generally dictate the payout structure. These images represent successful Touch and No Touch trades;
One significant difference with the Touch option, is that it can finish “in the money”, before the expiry time. If the Touch target is met, the option pays out immediately, regardless of what happens to the asset value afterwards.
Traders looking to utilise Touch options need to pay particular attention to their choice of trader. Firstly, some brokers do not offer them at all. Touch options at certain other brokers are not particularly flexible. Nor are the target levels. There are however, some brokers which offer a huge amount of flexibility. Here, traders can set their own target levels (payouts adjust accordingly). This offers tremendous opportunity to use advanced trading techniques. Setting Touch options at a range of intervals in order to control risk and return can ensure a trading edge. Traders can also set targets above and below the current value, creating “tunnel” options.
When to use Touch options
Advanced traders will be able to use One Touch options successfully throughout their trading day, others may specialise. For example, volume and market volatility might be expected to change significantly after a particular data release or event. Likewise a market may run flat for a period running up to an announcement – and be volatile after. If a trader feels that trading volume will be particularly low, or particularly high, then the Touch option allows them to take a position on that view.
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.
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.
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