If you’ve heard about binary options before, you probably know that they allow traders to profit from any market conditions. But if you want to use both flat and volatile markets to your advantage, you’ll need a solid strategy.
The more you trade, the easier it will be to decide which strategy to use in a given situation. Whichever analyses or indicators you plan to use to signal moves or no moves, you should first learn the basics of binary options strategies. As with any type of trading, you need to employ sensible risk and money management before actually placing trades. All of these topics will be covered in this article.
Fundamental vs. Technical Analysis
The two key paths to trading success are technical and fundamental analysis. These are both viable approaches, despite the fact that there are many differences between them. Fundamental analysis evaluates the intrinsic value of an asset and factors that influence its price.
In an effort to determine whether an asset would be a good investment or not, traders should consider the following qualitative fundamentals:
- Business model: What is the company’s plan for making a profit? Assess what products or services the business sells, its target market, and the expenses it anticipates
- Competitive advantage: What gives the entity an edge over its opponents? Make sure the underlying asset has a favorable position and is more profitable than its rivals.
- Management: Look at the resumes of a company’s top brass and board members, and see how those in charge handle the company.
Then, there are financial statements: the quantitative fundamentals which you should consider. Here is what the analysis should include:
- Balance sheet: This statement reports a company’s assets, liabilities, and shareholders’ equity. It’s fundamental for evaluating its capital structure.
- Income statement: With this, you can view the company’s revenues and expenses during a particular period. In most cases, quarterly and annual reports are available to the public.
- Statement of cash flows: Check a company’s cash from investing (CFI), cash from financing (CFF), and operating cash flow (OCF).
Technical analysis uses tools (charts, candle patterns, spreads, etc.) to identify patterns which can suggest future price movement. Using technical indicators, traders can take a binary option position based on spotting continued momentum or trend reversal patterns. Let’s look at some of the popular binary option technical indicators:
- Wilder’s Directional Movement Indicators (DMI)
- Average Directional Index (ADX)
- Pivot Point
- Commodity Channel Index (CCI)
- Stochastic Oscillator
- Bollinger Bands
- Relative Strength Index (RSI)
There is no need for disagreement over which one is better. The wisest decision is to take an open-minded approach, combining useful techniques from each indicator. If your decisions are informed by both fundamental and technical analysis, you’ll have a better idea of what to expect.
Trend Trading Strategy
An exchange rate on any asset tends to move in one direction in a given time period, thus causing a trend to occur. A series of high highs create an uptrend, and a series of low lows creates a downtrend. At times, the asset’s price moves so little in either direction that it moves sideways. With binary options, you can jump and make a profit in all these scenarios.
A trend strategy implies that a trader should disregard smaller swings and focus instead on overall trends. To assess the direction of where a trend is headed, they’ll need to use technical analysis techniques and indicators.
The simplest way to deal with trends is to go for the Call/Put method. If you think the asset price will go up, you’ll have to place a trade by selecting the Call option. This means you’ll gain a profit if you predict correctly – the price appreciation before the expiration time is up.
The Put option is the opposite. If you expect the price to go down after a set period of time, you will collect the predetermined payout if your prediction turns out to be accurate. Some people even combine both types in order to offset any risks.
Swing Trading Strategy
As opposed to trend trading, the swing strategy doesn’t focus on overall direction. Here, traders only look to predict price moves over shorter periods of time. They focus on price changes over periods of a few days to several weeks and then move on to the next opportunity.
Even though price patterns and proportions can be predicted, this strategy only suits savvy, experienced market participants. Over time, trends undergo various corrections, so each one represents an opportunity for profit. It requires you to increase your trading volumes and engage in more intense trading activity in general.
With numerous flag patterns appearing throughout the trading day, how do you decide which one to go for? Most often, traders tend to go for trades with high volume and momentum on upswings, and lower volume and momentum on downswings. Other factors to consider are:
- Trends coming off a strong earnings beat;
- Leading sectors that are outperforming the rest of the industry;
- Trend pullbacks and corrections.
For example, you could purchase a Call binary when you notice a downward swing in an overall uptrend, and anticipate that the general trend will go back to normal. Alternatively, you could place a Put binary during an upward swing in a bearish market.
Range and Range Breakout Trading Strategy
When the market is stagnating, asset values tend to stay in certain positions, leading to different levels of support and resistance. When the prices don’t plummet below a certain mark, you can identify the support level. When prices don’t often reach higher than a certain level, the level of resistance can be determined.
Firstly, you will need to analyze support and resistance levels in order to identify a breakout level. This can be tricky for beginners. But once you try it several times, you’ll find that it’s a proven way to get signals.
Once a trader is sure that the support or resistance level has been broken, they are ready to enter a position. So, you’ll need to carefully follow the charts and price fluctuations to spot the breakout in time and gain more profit.
Bear in mind that support and resistance levels are persistent, that not every asset experiences a “clean” breakout, and that there might be a reversal. You still need to hang around to see whether the breakout gets rejected. If, after two attempts, the price doesn’t get back to normal, it’s time to act. If the price breaks upwards, place a Call order, or for a downward bet, buy a Put order.
News Trading Strategy
This strategy, also known as event trading, mostly relies on fundamental analysis. As you already know, assets are heavily influenced by the internal and external environment. In an ideal world, a news trading strategy would look like this:
- Good news about an asset encourages traders to invest in rising prices. The market rises, and the investments pay off.
- The bad news about an asset encourages traders to invest in falling prices. In a similar way, the investments pay off.
However, the outcome following big news is affected by the relationship between supply and demand. Simply predicting whether an event will be good or bad is not enough. You should also trade based on whether an event is better or worse than what the market expected.
At first, when to buy and when to sell is a tough decision to make. Since millions of people participate in the market, there is no way to know what they’re all thinking. But there are certain tools you can use to assess the market dynamic for these situations.
Many brokers post economic calendars detailing expected news and events, as well as their best guess for the outcome. After these calendars are released, you can compare them and act:
- Invest in rising prices if the result is better than expected.
- Invest in falling prices if it’s worse.
- Stay out of the market if the news and outcomes turn out to be what they were expected to be.
Why Trade Binary Options?
Why are so many traders exploring the possibilities of binary options? There is a whole host of attractive benefits, so let’s highlight them in the list below:
- Simplicity – Binary options bets are straightforward, especially if you compare them to similar financial instruments. Whilst in other markets, you can’t do without a stop-loss, a binary options trade takes care of this through its expiration date. Once you learn how to read charts, there’ll be a smooth ride ahead.
- Greater control of trades – If a trader wants to buy a contract, they know in advance what they stand to gain. This market offers a great degree of certainty, which is not the case with other markets.
- Limited maximum risk – Your losses are capped. If the underlying market makes a big move against your position, you won’t lose more than you expected.
- Impressive profit potential – An option contract is structured to produce impressive profits. Some payouts can be as high as 90% on a single trade. Option buyers gravitate to this market, mainly thanks to this perk.
- Wide selection – Here, the constraints are different from those placed on stocks or cryptocurrency markets. It depends on whether you prefer currency, indices, bonds, or anything else. There are opportunities for you in all kinds of markets.
- Worldwide accessibility – You can make trades anytime and anywhere. So, for instance, you can choose to casually trade on the weekends or make it a regular gig. Just make sure the broker is registered and licensed in your country of residence, and you’re good to go.
What Are the Risks?
The nature of financial markets is that they all have some degree of risk, which is true even for the safest instrument. Let’s discuss the aspects in which binary options trading falls short:
- Reduced trading odds – In some cases, traders have to accept reduced payout odds: for example, if there is a very high expectation of the binary trade being successful. For better payouts, you’ll need to place trades even when expiry dates are some time away.
- Limited trading tools – Advanced charting and analysis capabilities might be hard to acquire. Brokers are actively working on extending their range of tools, but they still fall short in comparison to stock trading.
- Cost of losing trades – To offset your losses, you will need to win at least 55% of all your trades. If this number is any lower, you will not be able to break even.
- Risk management – The concept of risk management is one that every binary options trader should take very seriously. Only then can you ensure that trade losses do not wreck your trading account.
Risk and Money Management
Many of the risk management techniques for binary options are based on initial capital, and on technical and fundamental analysis for the time of entry. The aim is to maintain a manageable amount of trades with adequate budgets.
We won’t give you specific percentages and numbers when it comes to assessing risks since they vary from person to person. Everyone has their own style of trading: some prefer to act defensively, while others choose a more aggressive approach.
As for money management, this provides techniques, which you can employ to help you handle your overall trading fund. When you’re planning how to allocate your funds effectively, you’ll need to cover the following aspects:
- Trade size
- Risk management
- Future growth
Don’t leave these decisions to be made later. There should be no doubt about whether you have sufficient funds to trade the next day, or whether you can afford a certain trade size. These considerations should be made before you enter the market. Otherwise, you’ll be exposing yourself to rushed decisions and lots of unnecessary stress.
All trades and all traders are unique. We’ve outlined how strategies for different market conditions can be implemented and what advantages/disadvantages you should consider. Now it’s your turn to act and follow the perfect strategy for your own goals.
Remember that any binary investment should be made with the help of forward thinking, the ability to analyze and apply relevant information, and a robust broker platform. A combination of these elements will allow traders to make the best of every situation and grow as professionals.