Anyone who wants to trade successfully in binary options should take a few particular tips to heart. Successful trading requires the trader to follow a clearly defined strategy, without which, trading becomes closer to a form of gambling. The strategies that are described below can serve beginners as a good basis for their own trades.
Volatility strategy – good for highly variable markets
The trader should always have a clear understanding that there are not always clear trends where binary options are concerned. Market prices for currencies, shares, and commodities can vary extensively, and it is not always possible to identify a clear direction in price movements. Where this happens, the trend-following strategy (which we describe later) is not suitable.
In such volatile situations, the so-called volatility strategy is most effective. The basis for this strategy is earning a profit from significant movements in prices. The direction of those price movements does not matter at all, however, and precisely that indifference to the direction of movement distinguishes this from the trend-following strategy, which intentionally follows a particular kind of price evolution.
The success of the volatility strategy depends entirely on recognizing significant price movements. Using the example of a share price, a movement could occur when the enterprise publishes its financial results (which generally takes place on a quarterly basis), or upon the announcement of another important milestone. The advantage of this strategy is that the trader is not required to predict whether the event will lead to falling or rising prices. All that matters is the forecast that a significant price movement will occur at all.
In practice, volatility strategy is deployed by the trader purchasing both call and put options on the same basis price. This strategy only works in respect of one-touch options, as the potential profit needs to exceed 100% per option. At this stage, it should be noted that both options must have exactly the same duration: if, for instance, the price rises as a result of better-than-expected results, the put option (which anticipates falling prices) will incur a total loss. If, however, the call option generates a profit of 300% or even more, the loss on the put option is more than offset. By buying two options, the committed level of capital is obviously higher, and so is the corresponding risk of losses. Nevertheless, both options only incur a total loss in the event that only a small movement occurs. Accordingly, the volatility strategy can be highly effective when deployed correctly!
Trend following strategy – suitable for beginners and pros alike
Trend following strategy is one of the most widely used strategies in binary options trading, and that is why it is frequently recommended to beginners in particular. The trend-following strategy is based on adapting the trader’s own behavior to follow the general trend. Simply following the trend and behaving like other market participants is a highly promising strategy, because it is significantly more likely that a trend will continue, rather than reverse its course. The art of a successful trend-following strategy consists of recognizing a trend at the moment it has started to form, at least as far as it is possible to do so. The optimal entry point is always right at the start of a trend. The challenge for beginners is that trends are significantly easier to distinguish when they are already well-established and have been in existence for some time. Charts allow upward and downward trends to be recognized very easily. An upward trend generally shows higher highs, and more moderate lows, in succession. A downward trend shows the exact opposite, with deeper lows and more moderate highs appearing successively over time. Read more about following trends.
Countertrend strategy – trading against trends
Countertrend strategies are the opposite of trend strategies: the trader takes a position that goes against the prevailing trend. In some situations, even upward price trends can be affected by sudden price falls: in fact, this is highly likely. An overbought or overheated market, for example, can sometimes cause the trend line to change direction with little notice. Certain signals can provide an early warning of an upcoming change in the trend. Strategies that rely on countering prevailing trends suffer from a major disadvantage: a lower hit rate is not offset by greater profits when gains do occur.
Success with 60-second options requires the market to move decisively against the prevailing trend, but it is completely irrelevant whether the price movement is a change in the underlying trend, or simply a short-term correction. The probability that a movement will occur that goes against the prevailing trend is high when the market is quoting below a resistance level. The ideal scenario is known as a cross-resistance: this term refers to a particular trend channel configuration, whereby two trend channels overlap one another.
If the market breaks through its trend line, it becomes appropriate to trade against the trend. This short-term breakthrough is not technically equivalent, in chart terms, to a shift in the market. However, when the market on a particular day tends towards a shift, a price movement following that shift is highly likely. Similarly, when a market is overbought or overheated, a movement towards the lower band is likely.
Hedging strategies using binary options
Alongside the strategies mentioned above, a fourth strategy is often employed when trading in binary options: hedging. The fundamental point of hedging is the need to protect a mid or long-term position against losses. A hedging strategy is used to secure other trading positions, such as a forex investment.
As binary options are extremely flexible, they are highly suited to protecting other positions. This flexibility extends to the duration of the options, as there are binary options that have a validity of just a few minutes, and others that remain valid for an entire year. Our example involves currency trading, buying dollars for euros. We trade on the basis that the dollar will gain value in comparison to the euro; but of course, the opposite could happen. In order to protect the position from losses, a binary put option is purchased based on the dollar’s value. If the dollar actually loses value against the euro, the dollars purchased in the forex trade will suffer a loss. This can be offset through the use of a corresponding binary option: if the dollar falls in value, the option will show a profit.
Hedging can be used in a variety of different forms, and a distinction is made between conservative and aggressive hedging strategies. Conservative hedging primarily involves the use of binary call or put options in order to hedge against potential losses. This also allows for the preservation of previously earned, but as yet unrealized profits. Aggressive hedging, on the other hand, involves the use by traders of risky one-touch options, not to protect positions but with a view to earning large profits.
60-second options – targeting sudden price movements
Markets rise and fall continuously. Sixty-second options allow traders to take a position on whether the market will rise or fall over the next sixty seconds. Their short duration is part of what makes them so popular. Just a minute after purchasing the option, the trader knows whether he has won or lost on the trade. The size of the profit depends on the option and the market rate. Regular returns of up to 85 percent can be recorded for successful options.
In our example, the trader takes a position that the market will rise during the next minute and places 1,000 euro on a call option. The market actually rises several points upwards, causing 1,850 euros to be paid back.
Sixty-second trades only make sense if there is sufficient movement in the market. Otherwise, trading resembles a lottery, as when the market is moving sideways it’s almost impossible to predict whether or not the market level will be higher or lower than at the start after a minute. If that is the case, another strategy is preferable.
When using 60-second trades, it should be noted that losses are more likely than profits, and this difference is what funds the brokers. This means that a hit rate of 50 per cent is not enough; making profits on every other trade will still lead to losses overall.
A rule of thumb suggests that, out of every ten sixty-second option positions, at least six must be successful to make a profit. This means that trades should only be made when there are better than average chances of predicting the outcome successfully, or where there are higher than average returns to be made. As some brokers offer the ability to hedge losses through repayments, a lower success rate could lead to profits.
No matter what, a range of different assets should be monitored, striking only when the market developments are sufficiently promising. Good prospects exist where trends are well-established, with longstanding, upward movements, as the probability is high that the trend will sustain for another minute. Of course, there is no guarantee even here, because the trend can always reverse.