With the start of the new year, it seems fitting to include the third instalment of the top Binary Option strategies. In case you have not being following our series on the top strategies you can read them here and here. Most of these previous strategies were reasonably well known in the Binary Option trading community.
In this post, we will cover some of the more technical strategies that have been used by professional traders to arbitrage market opportunities. These strategies have also been successfully used trading forex pairs.
Scalping with Bollinger Bands
Traditional forex trading using scalping is when investors enter and exit a currency pair usually within a very short period of time. The objective for the trade is to make a quick profit on a number of consecutive trades. The goal of the trader is to accumulate a large profit over the long term.
In order to know the best time to enter the trade, a scalper has to decide on the best indicators to monitor. This is where the Bollinger bands come in.
Bollinger bands are a technical indicator that combine moving averages as well as standard deviations. Essentially, they give an indication of the moving average of the standard deviation around the mean which is the asset price. In order to implement this trading strategy, we will use the Bollinger band with the standard deviation of 2 and a moving average of 20. Our second Bollinger band will have the same moving average but with a standard deviation of 3.
In order to identify the prevailing mean trend, the trader should also plot the 200 day exponential moving average (MA). The main objective with the strategy is to identify periods when the price touches the boundaries created by the two standard deviations in the Bollinger bands. This indicates important entry points and exit points.
In order to determine whether the trader should go long or short, the MA is used. If the price of the asset is above the MA, then this is an indication that the trader should look for opportunities to enter a long position. The same can be said for the price being below the MA.
This strategy also requires an analysis of the individual candles. For example, if the candle closes inside the boundary between the two bands then this is an indicator that there could be a reversal. In order for the theory to be confirmed, the next candle should be closing in the opposite direction.
Taking a look at the below example, we have a chart of AUD/USD for the 5 minute interval. One can see that the price is above the 200 EMA in blue. We can also see that one of the 5 minute candles closed down and between the boundaries of the two Bollinger band indicators. This is usually a good indicator that one should go long the pair ready for a reversal. However, in order to confirm the trade, the trader should examine the next candle. Given that the next 5 minute candle has indeed reversed the trader can now enter the trade and profit. In this case, the Binary Options trader would enter a CALL option on the stock with a 4 hour expiry. Given that the downside is limited to the cost of the option the investor knows the maximum loss possible.
Trend Trading with the Parabolic SAR
As we discussed in our previous examples of Binary Option strategies, trend trading is one of the most traded strategies. However, deciding the best times at which to enter the trade can be a nuanced exercise. That is where the Parabolic SAR comes in.
The parabolic SAR was developed by Welles Wilder and is a price and time based trading system. The indicator is below the prices when they are falling and above prices when they are rising.
For this example trade, we will use the (0.02, 0.02, 0.4) Parabolic SAR and the (12, 22, 9) MACD in order to place our signals. As with the Scalping example above, we will use a moving average indicator of 200 days.
Take a look at the price in relation to the moving average. If the price is above the MA then the trader should look for opportunities to enter a long position.
Then, the trader should take a look for buy or sell signals from either the MACD or the Parabolic SAR. Once you have spotted your first signal from either of these, you use the other indicator to confirm your view. Given that the MACS and the Parabolic SAR usually will not provide the same signal at the same time. Hence, you will use the other signal to confirm the view that you initially observed with the other signal.
Let us take a look at an example. In the below chart we have plotted the EUR/USD with a scale of 5 minutes. We also have the MACD, the Parabolic SAR and the 200 EMA. As one can see, the current price is below the EMA. This is usually an indicator that one should short the pair. Looking at the Parabolic, we can also see a changing signal for the SAR. This is also confirmed by the MACD crossover. Hence, this pair would be ripe for shorting. The Binary Options trader will enter a PUT option on the pair with an expiry time of 1 hour. This will give the option adequate time to expire in the money and provide a positive payoff for the trader.
Scalping and Trend trading are well established trading disciplines. However, deciding when to enter a trade can be difficult without confirming indicators. This is where Bollinger bands and Parabolic SARs come in. Using these indicators will allow the trader to at least have various confirmations about his / her trading view before entering.