In this two part post, I will run through some of the most profitable Binary Option strategies and how they impact on returns.
When it comes to trading Binary Options, there are a number of strategies that one can use that could work over an exteneded period of time. These strategies involve not only fundamental option analysis but also technical indicators.
Having mentioned this, there is a certain belief that Binary Option trading can only be done if one has considerable experience in the markets. This is not the case as most of these strategies are easy to learn and implement.
In essence, the main idea behind these strategies is to predict the direction of an underlying asset and then enter a Binary Option on that asset. Depending on the assumed direction of the asset, a trader may either enter a CALL (increase in price) or a PUT (decrease in price).
Setting your Risk Tolerances
Before you can begin implementing trading strategies with Binary Options, you have to be comfortable with your risk limits. One of the biggest mistakes that new investors make is that they do not set themselves any disciplined limits.
You have to examine the funds which are currently in your account and be fully comfortable with the trade before placing it. This means that you have to understand the asset which you are about to trade on and you must only trade a limited portion of your investment on one strategy.
Trend Trading Strategy
Trend trading is one of the most well known technical analysis trading strategies. The main assumption behind trend trading is that the value of the stock, currency or commodity is impacted by the value of the asset in prior periods. Essentially meaning that assets that are trending are expected to continue on the trend.
One of the best ways for a Binary Options trader to examine whether an asset is indeed trending is to take a look at the Moving Averages (MA). A moving average is the average of the asset price over a pre-defined previous time period.
A trader enters a CALL option on an asset that is on an increasing trend and will enter a PUT option on an asset that is on a downward trend. Assuming that the trend will continue during the life of the option, then the investor will end the period with a winning trade.
In the below example, we are looking at the chart of the Spot Gold price. The individual bars represent the price itself where the smoother lines are the Moving Averages (MA). The MAs allow the trader to easily spot the trend and position the trade that he views as appropriate. In this case, the trend is clearly declining. As we can see, all three MAs (20, 50 and 100 day) are pointing to a declining trend. The upward trend in Gold appears to have turned after the Fed's most recent speech. It is for this reason that entering a PUT option on gold over a reasonable time period appears to be a good strategy.
A straddle strategy works well just before a fundamental news event or at a time of extreme market volatility. In traditional options trading, it is known as a "volatility" trade. You as the trader are trying to take advantage of a movement either up or down in the underlying asset by entering both a CALL and a PUT option.
For example, assume that an asset has increased in value and there is an expectation that it may face a short term fall. In this scenario, the trader may enter a PUT option on the asset. Then, the moment that the stock begins to fall the trader enters a CALL option expecting the stock to return to it's original trend.
A straddle could also be entered immediately prior to an announcement that will have a large impact on the asset. This could be a macroeconomic event such as an announced interest rate increase which will impact on a currency pair or an index. It could also be a company earnings release which will result in uncertainty in the company's stock price.
By entering both a CALL and a PUT option, the trader has effectively increased his / her chances that at the expiry of the options, the position will end in-the-money.
In my next post, I will dig into some more technical Binary Option strategies that a number of traders swear by including Markov trading, pair trading and co-integration.
Janet is one of the founding members of the Binary Trading Club. Having worked in the city for a financial institution, she decided to take the step of trading on her own account. She has been trading Forex and Binary Options for almost 4 years. You can apply for membership at the Binary Trading Club and talk directly with Janet. The Club's main aim is to help it's community of traders to reach their individual trading goals.