Binary Options Trading Strategies
Strategies help traders to be consistently successful by enabling them to profit regardless of the market environments. Some strategies are straight forward, while other strategies are more complex.
Strategies can be divided into two main categories – those based on fundamental market analysis and those based on technical analysis. The most successful traders approach trading with an eye for the technical and a nose for the fundamental.
The following are specific trading strategies that may apply in certain circumstances as described below.
Asset prices often follow a trend for a set period moving only in one direction. When the trends of price and volume move in the same direction, it is an indication of a healthy underlying market direction. However, when price trend is rising but the trend in volume is falling, it warns of a potential price trend reversal. When a reversal is indicated, a trader might buy an option that is in the opposite direction to previous movements. He might, for example, purchase a Call option if the price has been falling and is now expected to rise, or a Put option if the price is due to fall after an increase.
A trend reversal may be indicated by a diamond pattern on a price chart and, although it may be not as common as other reversal patterns, it can be a useful indicator. This type of pattern comes in two forms — the diamond top and the diamond bottom — with both types having the shape of a diamond lying on its side. A diamond top forms at an up trend’s peak, occurring when the rise ends and the price remains flat for a while. This can result in a series of waves that become taller and then revert to a lower level. At this point, you should expect the price to break out to the downside. This is a signal to change the direction of your trades.
A diamond bottom is the reverse effect, with the same reverse pattern but at the bottom of a downward trend. As the waves begin to flatten out, a change of direction is indicated and a breakout to the upside is due. Any binary options trader who has been finishing in the money with Put options should therefore change to Call options in order to take advantage of the trend reversal.
This strategy is based on the concept that if an asset suddenly moves in one direction, it is unlikely to remain at that peak but will move back towards its original position, if not all the way. So, an investor should buy an option, Call or Put depending on whether the price has risen or fallen suddenly, on the assumption that it will soon return and stabilize. Of course, no one knows when an asset has reached its peak. So close monitoring of the asset and researching why it peaked is vital to deduce the likelihood and timing of its return.
The Straddle is more a complicated strategy, because it involves buying both a Call and Put option on the same asset. The investor straddles the asset at a low point as well as a high point, and therefore the area in between the two options can be twice as successful. This is a particularly useful strategy to protect oneself in volatile markets. If the price at expiry is somewhere between the two levels, the trader finishes in-the-money on both and maximizes profit. In a worse case scenario, at least one prediction will be correct and the trader minimizes losses.
Although the setup itself can be difficult, the straddle is one of the best strategies in binary options trading. The trader is looking to place a Put as high as possible on the asset and then when the market drops, place a Call in the opposite direction as it returns back up. This means the trader always has at least one trade expiring in the money and he will either take a minimal loss or gain a huge reward for landing both trades for a large sum. The Call and Put options do not have to be bought at the same time. Rather an initial option can be bought with a longer expiry and the second purchased once the asset’s direction is more established. Note that the straddle in binary option trading is different from vanilla options since the purchase price and exercise rights differ between the two.
This is perhaps the most logical of all strategies, and is based on the concept that a move on one option will have a knock-on effect on another. For example, the price of a stock may affect the price of the index in which it is traded or if a country heavily relies on a particular asset, then a change in that commodity’s price may affect the country’s exchange rate. For example, a company might announce a major new product launch or a development breakthrough that causes its share price to rise but also drives down the value of the company’s competitors. In this case, a trader would buy a Call option on the company and Put options on all of its main rivals. The key is to understand the interrelationships between assets and to correctly anticipate price movements.