All Binary options strategies may be different, but they all have following few common elements:
- Binary option signal creation and receiving an indication of how to trade the signal
- The quantum of trade you should do
- Strategy improvement
Strategy can vary on every stage so there are many possibilities available. The most important part of developing a good strategy is to understand as much as possible about every element.
Step 1 – Signal Creation
A signal is an indication that the price of an asset is about to move in a specific direction. This depends on numerous factors, which will be highlighted in the forthcoming paragraphs. If you closely follow the price changes of an asset during a day, you will find that the price changes frequently, sometimes by the minute or even second. However, what’s more important is to predict such movements before they happen. That’s where signals play a critical role.
Signals are created in two ways, using news events based signalling and using fundamental and technical analysis based signalling.
News events based signalling is the most commonly used approach, and this is particularly useful for fresh or inexperienced traders. In this approach, a trader searches for news-based triggers to predict the movement of the price of an asset or security. News events can be an important announcement by the company, an industry-wide announcement, or release of inflation figures or financial analysis by the government. In general, the rule of thumb is positive news will lead to a rise in prices, while negative news will lead to a fall.
It is important to put this strategy to work, and involves keenly anticipating these news events. Knowledge of what to expect and when it plays a critical role in such a strategy. To that extent, many binary options trading platforms offer you economic calendars, which provide you information regarding impending economic analysis, such as the company’s AGM report, or the government’s financial and economic analysis, or new reforms to existing tax structures or regimes.
Step 2 – How Much to Trade
Investing the same amount of money on each trade is like having no strategy. This may be the riskiest strategy, since it hardly takes into account your overall profitability level or the amount of money you have. Both these are important factors, and ignoring them can result into balance drains.
Step 3 – How to Improve Your Strategy
The best way to improve your trading strategy is to use a diary, record and analyse the performance of an asset or security. This is a simple but effective strategy. One thing you’ll need to keenly observe and look out for is trends and patterns to understand what works and what doesn’t.
This approach is very effective, especially when you are a new trader, and you are still trying to create a strategy to become profitable. The right approach to become profitable in such situations is to place your options using signals, which include news events based signals and technical analysis based signals.
Example of Trading Strategy
Let’s understand some trading strategies in detail so we can get further insights on this topic. These strategies are very common, but there may be other strategies you can use as well. Many traders change, familiarise or combine various strategies to suit their needs, risk attitude and trading goals. Of course, everyone has a starting point, and some of the strategies that are given below are the right starting points for you to learn about these binary options trading strategies.
But before we move ahead, it is necessary to remember that none of these will be effective if you don’t combine them with money management and improvement strategies.
An asset’s price moves based on a trend. The price either moves up for some time, or moves down at other times. Thus, price movements are never linear, and are rather zig-zag. Moving up and down within a month, week, day or even hour. But, the movements will move in one direction. Such zig-zag movements are generally predictable in specific situations, and presenting an opportunity to trade in binary options.
When there is an upward trend – When there is an upward trend in the movement of prices of a security or asset, the new highs or lows will be higher than the earlier highs and lows.
When the trend is downward – When there is a downward trend in the movement of prices of a security or asset, the new highs or lows will be lesser than the previous highs and lows.
So, essentially, when you are trading in binary options, you study the price movements in both directions, and many traders study both trends simultaneously. Therefore, it can be said that they are not mutually exclusive.
Using High / Low options is the most common way to understand trends and trade in options. The various binary options trading platforms that you find in the market offer trading using High / Low options. The basic premise while trading depends upon whether the asset’s price will be high (or the high option) or low than it is now (a low option) at a specific time.
There is also a one-touch option that is riskier but potentially more attractive option as compared to the high / low option. In this type of trading in binary options, rather than predicting whether the price will be higher or lower, as in high / low option, you predict whether the price will reach a certain point or not. This point is called the target price.
To improve the opportunity to increase your profits, you use a combination of high / low and one-touch and reduce your risk.
News event based Trading
One of the most popular types of trading in assets is based on news events. The underlying theory in this kind of trading is very simple. News items, like companies declaring profit in their operation will see the prices of assets going up. Additionally, the analysis of experts also helps you prepare your investment strategy. On the contrary, if the results are disappointing, or not as per the expectations of the company, then prices can fall. Therefore, as a trader, you can make money based on the opportunities that these news-events based triggers provide you with.
This means, you must adopt specific strategies to increase your chances for succeeding in trading in binary options. We’ve identified three steps to help you work your overall binary options strategy.
Price Channel or Boundary Options – In this strategy you apply investment decisions when you know an asset’s price is going to move, but you are not sure in which direction it will move. Let’s say a company is about to release news about its financial performance. You are not sure whether it will be positive news or negative news. Therefore, what you will do is to set boundary options. One price is above the current price and other below the current price.
The difference between the higher and lower prices is called the price channel. If the price touches any of the two points, you make a profit. If the price stays within the price channel, you will end up losing money. This works best when the possibility of significant price movement is high.
Trading upon breakout – The breakout time is the period immediately following the release of news about a company’s annual performance. When you are trading in binary options, this time-period is very short, and ranges from 30 seconds to about a couple of minutes.
The underlying theory behind this strategy is that significant movements in the price of an asset will take place after the breakout of a news, when traders seek to adjust their positions, either to make a profit or reduce their risk. Therefore, this strategy utilises the simple High / Low option to trade the binary option, though the timeframe is highly limited. Such options are also known as the 60-second option.
Candlestick Formations and their Applications
Candlestick formations are a type of trading strategy which involves identifying candlestick formations that can be used to predict an assets price movement. Although this is difficult to understand and explain to new traders, implementation of these candlestick formations is very easy, and a trader can make a lot of money, once they understand them properly.
Without Risking Money Developing a Binary Options Strategy
Is there any possibility of developing and testing a strategy without risking money? Is it possible to find a strategy that will work without trying it? You may lose money if you try a strategy that doesn’t work. It may also be possible when you are developing a binary options strategy, you will exhaust the available funds before your testing period ends, and you are left with nothing to trade.
In this case the solution is a binary options demo account. Most reputed brokers and trading platforms offer you the facility of a demo account. You can test the platform, but, more importantly, they also let you test your trading strategies to stimulate real market conditions.
You test your strategies using virtual money, so there’s hardly any risk of losing money. Although you can’t make real money, the objective is to give you a real trading experience and add to your confidence in the industry. The objective of a demo account is to sharpen a binary options strategy that is profitable.
Types of Strategies
In binary option trading, there are several assets to select from. However, the most reliable and proven approach is to focus on a single asset that also minimises risk. It is worthwhile to trade in more familiar assets. Trading will help you gain familiarity and the prediction of the direction of a value will become a lot easier. There are few types of strategies explained below that can be of great benefit during binary options trading.
Strategy based upon Trends
It is a basic strategy adopted mostly by beginners and by experienced traders. The strategy is often called as the bull and bear strategy and focuses on monitoring whether the trend line of a traded asset is declining, rising, or ending flat. If there is a flat trend line and a prediction that the asset price will go up, the No Touch Option can be chosen.
When you believe that the price of an asset is expected to increase or decrease considerably, in the contrary direction, then you use the Pinocchio strategy. When you believe that the price is expected to increase, you select the Call Option. Else, you select the Put Option.
Strategy of Straddle
This strategy is best used when the market is volatile and just before very important news about a company’s stock is about to be broken to the market. You can also use this when an analyst’s prediction is not consistent.
Strategy of Risk Reversal
This strategy is executed when you place a Call and a Put Option concurrently on an individual security. This strategy is beneficial when assets being traded have fluctuating prices.
Strategy of Hedging
This strategy is popularly called Pairing and is very frequently used by brokers, traders, corporations, investors dealing in binary options and traditional stock in various exchanges. This is done to protect and minimise risks involved in investments. To execute this strategy, you place a Call and a Put Option on an asset simultaneously.
Fundamental Analysis involves undertaking an extensive review of a company’s financial statements. This requires considerable effort to collect financial information from many sources, including the company’s earnings statements, market capitalisation and share and financial and operational ratios.