Binary Options Trading Requires Very Little Experience
The common misconception is that binary options trading and forex trading can only be done by one that has a certain amount of experience in the area. There is no requirement to have any previous experience in financial trading and with a little time, any skill level can grasp the concept of binary options trading.
The basic requirement is to predict the direction in which the price of an asset will take. The price will either increase (call) or fall (put). Successful binary options traders often gain great success utilizing simple methods and strategies as well as using reliable brokers such as IQ Option or 24Option.
From this page you will find all the relevant strategies for binary options trading.
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General Risk Warning:
Binary options trading carries a high level of risk and can result in the loss of all your funds
Binary and digital options are prohibited in EEA
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose.
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How to minimize the risks
Our goal is to provide you with effective strategies that will help you to capitalize on your returns. These are simple techniques that will help to identify certain signals in the market that guide you make the proper moves in binary options trading. Risk minimizing is important for every trader and there are a few important principles that aim to help in this area. Binary options trading can present several risks but to decrease them, take the following into consideration.
• Never invest the entirety of your capital at once • Review the dynamics of your trading asset prior to investing • Exercise the strategy by investing only 5 to 10 percent of your equity per placement
Reasons for Having a Binary Options Strategy
You don’t need a strategy to trade binary options. You could simply go with your gut, making decisions in the moment and on instinct. However, you won’t make any money with this approach. In fact, you will probably lose a lot. So, while it is not essential to have a strategy in order to trade binary options, to be successful and profitable you must have a binary options strategy.
To be more precise, you need three different types of strategy. Below is an introduction to each.
Trading Strategies – What They Are and Why You Need One
There are two main reasons for having a trading strategy and sticking to it. The first is that it removes the possibility of you making emotional or irrational decisions. Instead, decisions are based on pre-defined parameters that are developed with clear thinking. The second reason for having a trading strategy is that it makes it possible to benefit from repetition. Without this type of strategy, you probably won’t know what worked or why. Even if you did, it would be hard to repeat it.
In other words, a trading strategy ensures your trades are based on clear and logical thinking while also ensuring there is a pattern that can be repeated, analyzed, tweaked, and adjusted.
For example, you can analyze your strategy after a set number of trades or a set time period. Is it making you money? Is it making you enough money? Maybe it is making you money but not as much as you hoped. In this situation you may decide to let it continue knowing it will be profitable in the long term. Or you might decide to make carefully considered and structured changes to improve profitability. This is all possible, but only if you have a trading strategy in the first place.
The alternative is haphazard and impossible to optimize. Imagine you looked at your performance after a set number of trades or a set period of time but did not have a trading strategy to judge it against. What would you do if you lost money? All you could really do is hope you make better decisions in the future. However, you would have nothing concrete to base your adjustments on. The same applies if you were making money but not as much as you had hoped. In fact, the same also applies if you did make money – you would have no way of knowing for sure that you could replicate the performance again, as each transaction is a standalone trade and is not part of an overall strategy.
It is a completely impractical way of trading. Look at a scenario where you don’t use a trading strategy. In the scenario, you make a 50 percent profit one month and then a 50 percent loss the next month. How would you ever know why one month was successful and the other wasn’t? How would you know what to change, if anything?
You simply wouldn’t. The best you can probably hope for is break even, and that is no use to anyone. In reality, you will probably lose money because you have to win more than you lose. Without a trading strategy, that is almost impossible.
Money Management Strategies – What They Are and Why You Need One
Many people make the mistake of only developing a trading strategy – i.e., a strategy that determines the type of asset they want to trade and the level of risk they want to be exposed to. Little thought is given to the money management strategy. That is a mistake because a money management strategy will help you manage your balance so you can get through bad patches and maximize winning streaks.
To illustrate this further, let’s look at an example of someone who doesn’t have a money management strategy. Because of this they invest 10 percent of their balance on a single trade. If that trade loses, they will need a 20 percent gain on their account balance just to break even. If they lose three trades in a row, they will need a 30 percent gain on their account balance just to break even. You can see how this can easily creep up – a common losing streak of three in a row could see the account balance of that trader drop by 30 percent. When you consider the fact that many losing streaks are much longer than three-in-a-row, you will appreciate how important a money management strategy is.
Without one, your account balance is at risk of hitting zero, even if you have a good trading strategy in place. Losing streaks and unprofitable trades are a part of life, so you must have a strategy in place that deals with these inevitabilities. This means managing your money to maximize profits, limit losses, and, crucially, get back to a profitable position after a bad patch.
Analysis and Improvement Strategies – What They Are and Why You Need One
There is no such thing as the holy grail of binary options trading strategies. Markets change, and every successful trader constantly works to improve, update, enhance, and make better. Even traders with many years of experience and large profits in their bank accounts still work hard to analyze and improve how they trade. It applies even more to new traders and those with minimal experience.
An analysis and improvement strategy gives you a structured way of maximizing the good parts of your trading and money management strategies while simultaneously fixing or removing the parts of your strategies that are not working. This helps you become more profitable in the long term, and it helps you adjust to changing market conditions.
Without an analysis and improvement strategy, you will plod along. If you have good strategies in place you might make money, but nothing is guaranteed. In addition, you might not be making as much money as you could. Why leave these profits behind when there is a way of getting them? That way is through analysis and improvement.
Types of Binary Options Strategy
Binary options strategies are all different, but they have three common elements:
Creation of a binary option signal and getting an indication of how to trade this signal
How much you should trade
Improving your strategy
The precise strategy can vary on each step, so there are a huge number of possibilities. The most important part of developing a successful strategy is understanding as much as possible about each element. This will be covered in the next section, starting with the creation of signals.
Step 1 – Creation of Signals
A signal is basically an indication that the price of an asset is about to move in a particular direction. Of course, prices of assets move all the time. What you need is something that predicts that move before it happens. That is what a signal does.
There are two ways that signals are created. The first is to use news events, and the second is to use technical analysis.
Generating signals from news events is probably the most common approach, particularly for new or inexperienced binary options traders. It involves looking at what is happening in the news, such as an announcement by a company, an industry announcement, and the release of government inflation figures. In many simple cases, positive news means prices are likely to rise while negative news is likely to lead to a fall in prices.
The starting point for making this strategy work is knowing what news events to expect and when. This is why you will find economic calendars on most good binary options trading platforms. If you know that a company’s earnings report is due in two days’ time you can plan your analysis and trading activities around this.
The best platforms will also tell you what to expect from the news event. For example, it is helpful to know that a company’s earnings report is due in two days’ time, but it is even more helpful if you also know what the market expects to see in that report. You can then make decisions in advance of the report in an attempt to predict its contents and the subsequent market movements. You can also make decisions after it is published based on market expectations and reactions.
There are positives to a news events approach to trading. In particular, it is easy to understand and learn. There are disadvantages to the approach too. The biggest problem is unpredictable markets. For example, a company might release an earnings statement that shows an increase in profits. This is a positive news event that you would expect on first reading to cause the market to react positively. However, within the report there might be additional information that spooks the market, such as profits not being as high as expected. This could mean the market moves less than you anticipated and, in some cases, can even move in the wrong direction – prices falling even though the news event is categorized as positive.
It is also difficult to predict how long a movement will last and how far it will go. If you go back to the example of the company earnings report, it is a positive report so prices in the company’s shares are likely to rise; but how long will the rising price situation last and when will the price max out? These questions are unknowns.
Trading based on technical analysis offers an alternative. It is a strategy that seeks to predict the movement of asset prices regardless of what is happening in the wider market.
Essentially, the process involves looking at how the price of a particular asset moved in the past. From this, it is possible to establish patterns that can be used to predict price movements in the future.
It sounds complicated, but our brains are used to doing this on a daily basis. A good example is when you meet a new person. If that person greets you warmly, you are likely to predict positive things for the relationship. On the other hand, if the person is standoffish or unfriendly, you might anticipate difficulties in the relationship. You come to these conclusions based on your experiences in the past of meeting people and forming relationships.
Technical analysis does something similar. It looks at the current conditions of an asset and decides, based on past experience, if the price will remain largely unchanged or if it will rise or fall.
Once you get into the technical concepts and terms, it does, of course, get a bit more complicated. However, the overall concept is the same as the day-to-day task of making a prediction on future outcomes based on past events.
Now for the big question – should you use a news event approach to trading or a technical analysis approach? This comes down to a number of factors, and the answer will be different for everyone. The best advice is to try both to see which you are most comfortable with and which generates the most profits. Of course, you are probably not in a position to test strategies with your hard-earned money. Luckily there is another option – using a demo account. Most of the reputable binary options trading platforms on the market offer a demo account facility. This allows you to trade binary options with virtual money rather than real money. You can’t make any profits with a demo account, but you will not lose any real money either. What you can do is test strategies and trading styles without any risk.
One final point to remember when looking at signals and strategies is to focus on the short-term. There are investment strategies that aim to predict the price movement of an asset over a long period of time, such as 10 years. This type of information is of no use in binary options trading. Instead, you need to know if a price is going to move over the next couple of minutes, the next hour, the next day. A prediction of the price in 10 years’ time is not relevant.
To achieve that you need short-term signals and short-term strategies.
Step 2 – How Much You Should Trade
This is essentially a money management strategy. They vary in complexity and level of success, starting with a strategy that involves investing the same amount on each trade. Two other common strategies are the Martingale strategy and the percentage-based strategy. For long term success, the latter is the best option.
Investing the same amount of money on each trade is just like having no strategy at all. It is the riskiest strategy, as it does not take into account either your overall level of profitability or the amount of money you have in your account. Both of these are essential factors, and ignoring them can result in quickly depleted balances.
Let’s look at the other two common strategies now, starting with the Martingale money management strategy.
The core concept of the Martingale strategy is to recover losses as soon as possible. This means investing larger amounts of money in trades following a losing trade. For example, you could have a set value of money that you trade, which you then double when you have a loss. If that trade wins, then you are back in profit again rather than being somewhere around break even.
Problems with this strategy occur when you go on a losing streak with multiple losing trades in a row. Each losing trade in a Martingale strategy involves an increase in the investment on the following trade. This quickly adds up. For example, imagine you went on a 10-trade losing streak. That is a lot, but it is not an unrealistic or unreasonable situation. On a 10-trade losing streak, your 11th trade would have to be 1,024 times the value of your original trade in order to stay with the Martingale system. There are not many budgets that could withstand that sort of increase, even if the value of the original trade was low.
The question comes down to how accurate your predictions are and whether you can prevent or minimize losing streaks. It is always important to remember that nothing in binary options trading is a sure thing. Even trades that you are certain will be successful can end up as losses. Losing streaks are inevitable, regardless of how good a trader you are. It is simply impossible to be right enough times to prevent them. Therefore, for most people, a Martingale money management system is a risky option.
A percentage-based system is less risky, so it is usually the preferred choice for most traders, particularly those who are new to binary options trading. The concept is fairly simple – the amount invested on a trade is based on your account balance. If you lose a trade, your account balance will fall, so the amount of money invested on the next trade decreases. If, on the other hand, you win a trade, the amount of money invested on the next trade increases because your account balance has increased.
This strategy helps to keep your balance intact so you can realize steady profits over time.
The question then comes down to what percentage of your balance do you want to invest. As a guide, a trader who is comfortable with risk might choose a number somewhere around five percent, whereas a trader who doesn’t like risk would select a value somewhere around two percent.
Let’s look at an example, assuming you invest five percent of your balance. If your account balance was $500, your trades would be $25. If your balance decreased to $300, your trades would decrease too – each investment would be $15. If, on the other hand, your balance increased to $800, your trades would each be $40.
This is a strategy that helps you only invest an amount that you can afford. It is a strategy that lets you increase your profits while also protecting your account balance during difficult periods and losing streaks.
Step 3 – Improving Your Strategy
One of the best ways to improve your trading strategy is to analyze your performance using a diary. This is a simple but highly effective concept. It involves keeping a diary where you note down every trade that you make. You can then look for patterns and trends to see what is working and what isn’t.
This is a particularly effective approach if you are a new trader and are still trying to establish a profitable strategy. A common approach in this scenario is to place trades using both technical analysis signals and news events signals. A diary will help you keep those trades separate so you can judge which performed better. For example, you might find you are getting double the profits from trades you make based on technical analysis. However, you know from experience that you spend more time on news event signals than you do on technical analysis. The information in your diary would indicate that you should consider a change of approach.
Basically, it is all about knowing what trades are working and which ones are not. The only way to do that is by keeping a record, so a trading diary is a highly effective tool.
A trading diary also lets you focus on the details to fine tune your overall trading strategy. After all, you will get to a point where you are seeking a one or two percentage point increase in your profitability. This is simply not possible to do in a sustained way if you don’t keep good records. On the other hand, doing it successfully could result in hundreds or even thousands in additional profits.
Remember to use your trading diary to check all parts of your trading approach, not just the trading strategy. This includes how you manage money and how you decide on the value of each trade. It also includes looking at the best assets for your trading approach and style.
You can then go into even deeper detail. For example, you can look at the best days of the week or the best times of the day. This information might lead you to adjust your approach. You can also look at things like which brokers work best for you and much more.
There are many things that a trading diary will tell you. One of the problems is trying to work on too many of them at the same time. If you do that you won’t know which changes are having a positive effect and which are not. The easy way to fix this is by focussing on single changes, analyzing their impact, and then moving on. Again, your trading diary is crucial to this process.
If you don’t keep a trading diary at the moment, start as soon as possible. It will become an indispensable tool.
Trading Strategy Examples
Let’s now look in more detail at some specific trading strategies. The strategies below are among the most common, but there are others you can use as well. Also, many traders adapt, alter, or combine strategies to suit their objectives, attitude to risk, and trading goals. There has to be a starting point somewhere, and the strategies below are a good place to start your learning about binary options trading strategies.
Before going on, it is important to remember that none of them will be effective if you don’t also combine them with a money management and improvement strategy, as explained above.
Trading Strategy Example 1 – Trading the Trends
The price of an asset generally moves according to a trend, i.e. it moves up in price for a period of time or it moves down in price. These price movements are never linear. Instead, they zig-zag, sometimes moving up in price and sometimes moving down, but overall moving in one general direction. As these zig-zag movements are predictable in particular situations, they present an opportunity for binary options trades.
In simple terms, you have two main options: you can trade the overall trend or you can trade each swing. Trading the overall trend means ignoring the minute-by-minute up and down movements in price to instead focus on the overall trend direction for a period of time. This gives you multiple opportunities to profit from the trend, particularly given the fact that most trends persist for medium to long periods of time, i.e. they are well within the boundaries of the short term trading style required to be successful in binary options trading.
Trading each swing involves placing more trades. It involves more risk as a result, but there is also the potential for greater rewards. This approach is based on thinking about the highs and lows in either an upward or a downward trend:
Upward trend – New highs and new lows will generally be higher than previous highs and lows in an upward trend.
Downward trend – New highs and new lows will generally be lower than previous highs and lows in a downward trend.
Remember the point made at the start of this section though – there is no reason why you can’t combine both so you use both approaches at the same time. They are not mutually exclusive.
The most common way to trade trends is by using High / Low options. All binary options trading platforms offer this type of trade. Basically, you trade on whether an asset’s price is going to be higher than it is now after a set period of time (a high option) or lower than it is now (a low option).
A riskier but potentially more lucrative option is to go for a one-touch option. This is another popular binary options trading selection. Instead of simply predicting whether a price will finish higher or lower, you predict whether or not the price will reach a certain point. This is called the target price.
Again, you can use a combination of both to diversify your risk while increasing your chance of making higher profits.
Trading Strategy Example 2 – Trading Based on News Events
Trading on assets based on events in the news is one of the more popular styles of trading. The theory is fairly simple. Good news, such as a company reporting profit information that was above analyst expectations, would see the price of that asset go up. Similarly, profit information that was disappointing would see that company’s share price go down. You can make profitable binary options trades in these conditions.
It is not an exact science, however. Other styles of trading, such as technical analysis, produce parameters that are precise. Trading based on news events leaves a lot to chance, as there is no sure way of knowing how much an asset’s price will increase or decrease or how long the price movement will last.
You can adopt specific strategies and approaches to help increase your chances for success. Here are three you can work into your overall binary options strategy:
Boundary options – This is the strategy to use when you know an asset’s price is going to move, but you are not sure which direction it will go. A good example of a situation where this is suitable is before a major news event, as you won’t know if it is going to be positive news or negative news. With a boundary option, two target prices are defined – one above the current price and one below. The difference between these two numbers is known as the price channel. If the price of the asset hits either of these two price targets, you win. If it stays within the channel, you lose. As you can see, it is a strategy that works best when you expect significant movement in the price of an asset.
Trading the breakout – The breakout is the period of time immediately following the release of news that impacts the market. In binary options trading, this is a very short period of time – anything from 30 seconds to a few minutes. The theory behind the strategy is that the most significant movements in the price of the asset will occur during this breakout period as traders seek to adjust their positions to take make a profit or limit their exposure to risk. The type of binary options trade you would use in this scenario is a simple High / Low option, but you select a very short expiration time. This is sometimes known as a 60-second option.
Intelligent High / Low trades – In simple terms, positive news means prices will rise, and negative news means prices will fall. As already explained, the market does not always react according to this rule. Sometimes news that is positive on the surface – falling unemployment figures, profit reports by a company, or inflation numbers that are within government targets for example – cause markets to react in a negative way. This comes down to expectation, i.e. the market expected the unemployment numbers, profit announcement, or inflation figures to be better and had already made adjustments before the news was released in anticipation. When the news isn’t as good as the market expects, it adjusts in the other direction, prompting prices to fall even though the news is generally positive. If you can predict when these events will happen, you can make good profits using High / Low trades.
Trading Strategy Example 3 – Using Candlestick Formations
For new traders, this might be the most difficult of the strategies to explain, but it is the easiest to implement and make money from once you understand it.
When you look at an asset’s price chart over time, it is typically a line chart showing the price at each point in time. For example, looking at the price over a month is likely to show you the price the asset closed at on each day. However, this is only one piece of price data. Candlesticks give you much more.
Candlesticks are represented on an asset’s chart over time, just like a line graph, but they are designed to give you much more information. The bottom of the candlestick represents the low price it reached during the specific time period, and the upper part of the candlestick represents the high price it achieved. In between, you will also see both the opening and closing price. In other words, a candlestick lets you see, at a glance, the price range that a particular asset fluctuated between during that specific period of time.
Using candlesticks as a trading strategy involves recognizing various candlestick formations that you can use to predict an asset’s price movement.
A Candlestick with a gap is one example. This occurs when the price of an asset moves from one price to another that is significantly higher or lower. The difference between these prices is the gap. It is an unusual occurrence because price movements are typically much more gradual, with the asset hitting all or most of the price points as it moves through the range.
So, what can you learn about an asset when you spot a gap in a candlestick, and how can you use this information to make a prediction?
A gap that occurs during times when there isn’t much trading volume can be an indicator that a quick correction is likely to occur. One of the situations where this might happen is shortly before a market closes for the day when there are not many traders left placing trades. Large trades in these situations can produce the gap, but that is not necessarily reflective of the strength of the asset, i.e. if the trade had taken place when the market was more active, the gap would not have occurred. You can therefore predict the gap in the price of this asset and base your trades accordingly.
Gaps that appear during periods of high trading activity but where the price is not generally moving very much can be an indication of a new breakout, i.e. that the asset’s price will start moving in that direction. You can use this information to predict the price and make a trade.
If there is already a trend in a particular direction and the volume of trading is normal, the gap might indicate an acceleration of the trend. In other words, the movement of the price in a particular direction is likely to accelerate. You can use this information to base your next trade.
A candlestick formation with a gap is just one of many. However, knowing and having confidence in several will greatly improve your binary options strategy.
Developing a Binary Options Strategy Without Risking Money
As explained in detail throughout this article, a binary options strategy is essential if you want to trade profitably. It gives structure to your trading, removes emotion-led decision making, and lets you analyze and improve.
How do you test a strategy without risking your money? After all, how can you find out that a strategy doesn’t work without trying it? If you try a strategy that doesn’t work using your own money, you will lose it. That could result in you going through your available funds before the testing phase ends, leaving you with nothing to trade with.
There is a solution – a binary options demo account. All reputable and good quality brokers and trading platforms offer demo accounts. They let you test the platform, but, crucially, they also let you test your trading strategies using real market conditions. The testing is done using virtual money instead of your own, so there is no real money at risk. Of course, you can’t make any money either, but that is not the point. The point of a demo account is to solidify a binary options strategy that is profitable.
There are several assets to select from in binary options trading. However, the oldest and most effective approach to minimize risks is to focus on a single asset. Trade on those assets that are most familiar to you such as euro-dollar exchange rates. Consistently trading on it will help you to gain familiarity with it and the prediction of the direction of value will become easier. There are two types of strategies explained below that can be of great benefit in binary options trading.
1. Trend Strategy
A basic strategy most adopted by beginners as well as experienced traders. This strategy is often referred to as the bull bear strategy and focuses on monitoring, rising, declining and the flat trend line of the traded asset. If there is a flat trend line and a prediction that the asset price will go up, the No Touch Option is recommended.
If the trend line shows that the asset is going to rise, choose CALL.
If the trend line shows a decline in the price of the asset, choose PUT.
This method works the same as the CALL/PUT option except in this case, you select the price at which the asset must not reach before the selected period. For example, Google’s share price is $540 and the trading platform is on the No Touch price of $570 with percentage returns of 77%. If the price doesn’t reach $570 after the specified time, then there is a gain.
2. Pinocchio strategy
This strategy is utilized when the asset price is expected to rise or fall drastically in the opposite direction. If the value is expected to go up, select CALL and if it’s expected to drop, select PUT. This is best practiced on a free demo account from one of the brokers.
3. Straddle Strategy
This strategy is best applied during market volatility and just before the break of important news related to specific stock or when predictions of analysts seem to be afloat. This is a highly regarded strategy utilized throughout the global community of trading. This is a strategy best known for presenting an ability to the trader to avoid the CALL and PUT option selection, but instead putting both on a selected asset.
The overall idea is to utilize PUT when the value of the asset is increased, but there is an indication or belief that it will being to drop soon. Once the decline sets in, place the CALL option on it, expecting it to actually bounce back soon. This can also be done in the reverse direction, by placing CALL on a those assets priced low and PUT on the rising asset value. This greatly increases chances of success in at least one of the trade options by producing an “in the money” result. The straddle strategy is greatly admired by traders when the market is up and down or when a particular asset has a volatile value.
4. Risk Reversal Strategy
This is indeed one of the most highly regarded strategies among experienced binary options traders across the globe. It aims to lower the risk factor associated with trading and increase the chances of a successful outcome that results in positive profit gains. This strategy is executed by placing CALL and PUT options simultaneously on an individual underlying asset. This is especially beneficial when trading on assets with fluctuating values. Naturally, binary options can experience two possible outcomes and trading on a two for two opposite’s predictions over an individual asset at once, guarantees that at least one will generate a positive outcome.
5. Hedging Strategy
This strategy is commonly known as Pairing and most often used along with corporations in binary options traders, investors and traditional stock-exchanges, as a means of protection and to minimize the associated risks. This strategy is executed by placing both Call and Puts on the same asset at the same time. This assures that regardless of the direction of the asset value, the trade will generate a successful outcome. This provides the investor with profits of an “in the money” outcome. This is a great means of protecting yourself as an investor in whichever scenario is produced. It’s sort of an insurance method that prepares you for any scenario.
6. Fundamental Analysis
This strategy is mostly utilized during stock trading and primarily by traders to helm gain a better understanding of their selected asset. This increases their chances of accuracy in the prediction of future price changes. This approach involves conducting an in-depth review of all of the financial regards of the company. This info should include earnings reports, market share and financial statements.
This review helps the trader to better understand the previous activity of the asset and its reaction to certain financial or economic changes. This review helps the trader to make a strong prediction under familiar circumstances in future trading strategies. Keep in mind, that using a good binary trading robot can help you to skip these steps completely.
The best way to practice is to open a free demo account from one of the brokers.
Binary Options Strategy
Welcome to our binary options strategy section. Here you will find a beginners guide to strategies, leading on to more advanced information about things like money management, and articles on specific strategies.
Basic Strategy For Successful Trading
Strategy is one of the most important factors in successful binary options trading. It is the framework from which you base your trade decisions, including your money management rules, and how you go about making money from the market. There is no one Holy Grail unfortunately, if there were then we’d all be using it!
The two most very basic categories of strategy are:
Fundamental strategies focus on the underlying health of companies, indices, markets and economies and while important to understand, is not as important to binary options as the technical aspect of trading.
Technical trading, or technical analysis, is the measurement of charts and price action, looking for patterns and making educated guesses, speculations, from those measurements and patterns.
Strategy simplifies your trading, takes guesswork out of choosing entry and reduces overall risk.
The text book definition reads like this; a plan of action designed to achieve a goal or overall aim, the art of planning and directing operations in order to achieve victory. When it comes to trading the goal is to 1) make money and 2) not lose money.
The number one method of achieving this goal is to use a rules based approach to choosing entries that relies on ages old, tried and true technical analysis indicators. There are dozens, possibly hundreds if not thousands, of ways to trade the market, all strategies. They can be categorized in terms of the tools used, the time frames intended, the amount of risk associated with and many other ways, these being the primary.
Price Action/Scalping Strategies – Price action strategies rely on the movement of the market to time entry. These can be trend following or not, long or short term and utilize bullish or bearish positions.
Trend Following/Directional Strategies – Trend following strategies target assets that are trending strongly to pinpoint a series of profitable entries with a high rate of success.
Range Bound/Short Term Strategies – 99% of the time the market, or an individual asset, is not trending but trading in a range within a high and low mark. These strategies focus on support and resistance levels, reversals within the range and short term trends as asset prices move up or down from support to resistance and vice versa.
Long Term/Momentum Strategies – These are the less risky of the strategies as they target stronger signals and longer term time frames. These signals have a higher chance of success but take longer to develop and longer to unfold than other types of signals.
A technical analysis indicator is, most often, a mathematical formula which converts price action into an easy to read visual format. Common types of indicators include but are not limited to moving averages, trend lines, support and resistance, oscillators and Japanese Candlesticks.
Strategy is 1 of the 2 pillars of risk management, the other is money management. You control risk by targeting only good signals, weeding out obviously bad signals, and never putting so much money on one trade that it will wipe out your account.
Money management is the control of your overall trading fund. It should clarify trade size, and long term financial management – leaving you to focus only on trading. A well thought out money management structure should simplify:
A trader with a clear financial plan should not need to be concerned with whether they can trade tomorrow, or if their trade size is correct or how they might grow investments in line with their progress. All those decisions are controlled by managing their overall capital with a clear plan.
This is the most common method of viewing price charts. The candlesticks give an easy to read view of prices, open high low and close, that jumps off the charts in way that no other charting style can do. They are the basis of most price action strategies and can be used to give signals as well as to confirm other indicators.
Support And Resistance
These are areas of price action on the asset chart that are likely to stop prices when they are reached. Support is found when prices stop falling, this happens when buyers step into the market and are said to be “supporting prices”. Resistance is found when prices stop rising, this happens when sellers enter the market (or buyers disappear) and are said to be “resisting higher prices”. These areas, often represented by horizontal lines, are good targets for entries and possible areas where price action may reverse.
These lines connect highs and lows formed by asset price as it moves up down and sideways. A series of higher lows and higher highs is considered to be an uptrend and a sign that prices are likely to move higher, a series of lower highs and lower lows is considered to be a downtrend and a sign that prices are likely to move lower. The trend line can be used as a target for support and resistance, as well as a an entry point for trend following strategies.
Moving averages take an average of an assets prices over X number of days and then plots those values as a line on the price chart. Moving averages come in many forms and are often used to determine trend, provide targets for support and resistance and to indicate entries. There are dozens of methods of deriving moving averages, the most common include Simple Moving Averages, Exponential Moving Averages, volume weighted moving averages and many more. They can be used in any time frame, and set to any time frame, for multiple time frame analysis and to give crossover signals.
Oscillators may be the single largest division of indicators used for technical analysis. They include tools like MACD, stochastic, RSI and many, many others. These tools, in general, use price action and moving averages in a combination of ways to determine market health. They are displayed as a stand alone tool, usually as a line that ranges between two extremes or above and below a mid point, that can help determine trend, direction, support/resistance, market strength, momentum and entry signals.
With any form of trading, psychology can play a big part. A lack of confidence can mean missed trades, or investing too little capital in winnings trades. At the other end of the spectrum, over-confidence can lead to over trading, or increased risk – either of which could wipe an account very quickly.
So the trading psychology of the trader is very important. It can also be actively controlled or managed (at the very least, acknowledged). It is another often overlooked area of trading skill, but one well worth spending time to consider.
Read more on trading psychology and learning from experience.
A Basic Binary Options Strategy
Here is an example of some basic rules for a binary options strategy.
The trend is your friend, only take trend following entries.
In an uptrend only enter when prices are near support, in a downtrend only enter when prices are near resistance.
When prices are near support/resistance wait for a confirming candlestick signal.
When the candlestick signal appears wait for stochastic and/or MACD to confirm, a bullish crossover in an uptrend or a bearish crossover in a downtrend.
When rules 1 through 4 are met, enter the trade, only use 3% of account on each trade.
When choosing expiry use 2XCandle length. IE, if you are using 1 minute candles then 2 minute expiry, if 1 hour candles then 2 hour expiry.
If the trade fails examine why it did not work, make adjustment if necessary and move on to the next trade. If the trade works move on to the next trade.
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Strategies for Different Markets
Choosing a Trading Strategy
Developing a trading strategy for the binary options market requires a key understanding of how the market operates in terms of the trade contracts available, the various expiry times, and the understanding of the behaviour of the individual assets.
Unlike the forex market where the asset has to move in one direction or the other by an appreciable number of pips to the trader’s favour before profits are made, the binary options market is peculiar. Apart from the Up/Down trade which is based on direction and mimics the requirements of the trades in other markets (except the pip movements), other trade types in the binary option market operate in totally different ways. There are different trade contracts for different platforms. Some binary options contracts do not even require the trader to get the direction of the asset correct. For instance, trading the OUT contract will need the asset to hit one price boundary or the other for profit to be made. So it takes the trader being able to identify a suitable trade contract to be able to fashion a suitable strategy. What is used to trade the Up/Down contract is not the same as will be used for the In/Out contract. The contract type will determine the strategy.
For instance, trading the Up/Down contract will require a strategy that can determine if the asset will make a bullish or bearish movement. Trading the In/Out contract will require either a range trading strategy or a breakout trading strategy to identify a time when the asset stays in a range or breaks out of that range. If you are looking to develop a trading strategy for the In/Out trade, this is how your mind should be working.
In developing a strategy based on the binary options trade types to be traded, there are tools that can assist the trader. This is where chart patterns, signals services, candlesticks and technical indicators will come in. A simple tool like the pivot point calculator can be used as part of a TOUCH trade strategy with very effective results. Using tools like these will take us to the next part of choosing a strategy, which is how to understand and set expiry times.
Understanding Expiry Times
Expiry times are very important to binary options, because all trades in this market have time limits. However, not all binary options trades require time limits to be successful. Trades such as the Up/Down trades must reach expiry before the trade outcome is known. In contrast, trades such as the OUT component of the boundary trade or the TOUCH component of the High Yield Touch or Touch/No Touch trade contract must not necessarily reach maturity before the outcome of the trade is known. If a trader bets on a TOUCH outcome and the asset touches the strike price well before expiry, the trade outcome is already known and the trade is terminated as a profitable one.
So if the trader is not very good at setting expiry times/dates (and really, no trader in the market can boast of getting his expiry settings right all the time here), the binary options trading strategy will have to be tailored towards trade contracts which are not totally expiry-dependent.
Now when you identify and separate trades that are not so dependent on expiries from those that are, you can better understand what kind of strategy you would be looking at.
Understanding Asset Behaviour
The binary options market combines assets from different asset classes into one market. These assets do not behave alike. Some assets are very volatile with large intraday movements. A very clear example is gold. Some binary options assets are not traded round the clock but only at specific times e.g. the stock indices. The factors that may trigger a massive move in a stock index would obviously not be the same for a commodity or a currency. Even within the same asset class, no two instruments are exactly the same or behave alike.
An understanding of asset behaviour is therefore key to being able to develop a trading strategy for the market. It is up to the trader to study the behaviour of assets, understand the technical and fundamental indicators that will influence the behaviour and price movement of that asset, and then create a trading strategy that will work for that asset.
In this section, we will demonstrate the application of all the parameters we have mentioned above using a simple but effective trade strategy.
– The strategy we will use determines price bullishness/bearishness, so we will trade a Call/Put contract.
– We will trade the strategy on a one hour chart, so it will be have an expiry of one hour. We do this using our understanding that the effect we want to trade on the hourly chart, will happen in an hour.
– We want to use this on an asset that is liquid and responds to the strategy. So we will use the EURUSD.
The strategy has been used to create a colour-coded indicator, which shows a green arrow on bullish signals and a red arrow for bearish signals. It aims to trade the EURUSD because this currency responds very well to price stimuli during the London/New York overlap in the forex time zone, and the response can be delivered in an hour.
As soon as the red arrow appeared (as shown above), the signal was to trade a PUT option on the Call/Put digital option. Using this signal, the trade was executed on the binary options platform. The price of the asset (EURUSD) fell in one hour from the time the signal was generated to the expiry, producing a trade result in our favour.
This strategy (a custom strategy) fulfilled all our conditions:
a) It was suited to a trade contract on the binary options market.
b) It was a strategy that was suited to help the trader use a suitable expiry.
c) It was suited to the behaviour of the asset and above all, THE STRATEGY WAS A PROFITABLE ONE.
What is a Trend?
All those who have ever dealt with any sort of trading will be familiar with the notion of “trend” and just how important it is.
Yet, if there are South Africans who are only now venturing into financial trading via binary options, in this strategy article we will attempt to explain the key factors concerning trend and also offer the explanation of what is a trend.
In short, trend is among the most important elements which every binary options trader has to take into consideration before they begin to trade with any underlying asset. Actually, it is possible to view it as a helpful trading tool.
In fact, the importance of trend is so relevant to the point that no matter the strategy or approach being used in the binary options trading process, most of them will also take into consideration the current trend to try and make their estimation of the market situation as exact as possible.
So, one might simply say the definition of the trend is the prevailing direction of the price of the underlying asset. The trend is usually set across several time periods in which short and term trends frequently occur and play their part in much larger trends. The trend can run in a time span which might be days, weeks or even stretch to months or years.
To use the information provided by the current market trend, traders have to monitor the trend during the duration of their trading process and are advised to always take into account the larger trend rather than short term-one.
Yet, for those South African traders who want to use trend to spur their trading success, the deeper knowledge and understanding of several important components connected to trend are an absolute must.
Bearish Vs. Bullish Trend
Terms bearish and bullish are often applied when describing a market trend.
Bearish Trend – the downward trend in which traders are aiming to buy the “put” options.
Bullish Trend – the upward trend in which traders are aiming to buy the “call” options.
Majority of traders monitor the trend by following the trend line which aids traders when it comes to making a decision concerning their trading process. The trend is put in a more powerful position via corrective waves while impulsive moves marked by various fluctuations bring about a solid base for trending.
However, what prospective South African traders need to keep in mind is that most markets spend considerable amount of time in in the so called consolidation areas rather than in trend-friendly conditions.
Yet, what sustains traders in during those prolonged consolidation periods is the ability to spot and identify a strong trend and profit from it.
Elliott Wave Trend in Binary Options South Africa
The Elliot Waves trend can be described in terms of impulsive moves which is, essentially, when the market is moving in a certain direction.
The key is to successfully interpret those moves and the principal market movement in order to use the information to their benefit.
For the impulsive mode to be formed five waves are necessary, or at least a five-wave structure containing the minimum of three impulsive waves. The other two waves in the structure are the corrective ones which makes this instance the right moment to start the buying spree.
So, it is possible to say that the theory behind the Elliot Wave trend claims that various levels exist during which traders ought to select the call option and that is dependent on the market wave formation.
Another useful trading tool South African traders can utilize is the Fibonacci tool.
This tool is most effective during the period when one wave on the market just ended and a next one started. The key is to measure the length of the first wave since that will tell the traders if the trend was bullish or bearish.
In the first instance, South African traders should go for the call option, and in the second one the traders are advised to rather opt for the put options instead.
Utilizing the Trend Strategy
One of the most important skills when it comes to utilizing the trend strategy is knowing when and how to change the trading strategy according to different market situations.
And to develop that skill, traders have to invest time, patience and will to learn and develop their approach to trading binary options constantly.
It makes little sense to study the trends in a five-minute chart in, say North America, if that session is nearing its end and the session in about the begin in Asia.
Hence, to spot the perfect moment to buy or sell an option is the key ingredient of successful binary options trading. By selecting the favorable striking price and by combining that with the right expiration date the successful binary options trading takes place.
In taking time to study and understand what is a trend and how to use it properly, that goal could be attainable for South Africans looking to have a positive binary options trading experience.
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