To be successful with binary options trading, you have to know some strategies. In this article we will help you to get an overview of what most traders do and which binary options trading strategy is worth trying.
Table of Contents
01. What is binary options trading?
02. Trading strategy A – no short-term expiries
03. Trading strategy B – split your portfolio
04. Trading strategy C – trade with a perspective in mind
05. Trade your plan
Recent years saw the binary options brokerages spreading around the world and gaining popularity as more and more traders are attracted by what it seems to be easy money to be made in a very short period of time. In some cases, in less than sixty seconds one can make a 70% return on the initial investment! What can go wrong? The right answer is everything!
The problem with binary options trading is not that it is impossible to make money out of it, but the fact that it is perceived as being very simple to do that. This is not a trader’s fault, though. The whole concept of binary trading is being advertised in such a way that making money trading binary options is a piece of cake.
If a trader starts trading in general, not necessarily binary options trading, with such a perspective, then he/she is doomed to fail and before you know it, funds deposited are gone.
The idea of this article is to bring together the optimal things to do when trading binary options in order to be profitable and all of them together should be part of a strategy or set of strategies to be used when trading on a long-term basis. Binary options trading signals provider are also worth considering.
1. What is binary options trading?
A very short description and understanding of binary trading are needed first. Trading binary options implies choosing a financial product (mostly currency pairs, but also commodities, indices, individual stocks, etc.) and, based on the type of the option chosen to be traded, investing an amount in a specific direction.
If the trader thinks that the product to be traded will move to the upside, then, on a high/low option, he/she should buy a call option. If the direction is considered to be to the downside, then a put option should be bought.
Noticed something strange? A high/low binary option can only be bought, no matter if one is thinking that the price of the underlying security is actually going to move to the downside.
So far this is so similar to forex trading that the right question will be: why would anyone want to trade a binary option on a currency pair if things are so similar? Well, so similar doesn’t mean exactly the same, as something else comes into the equation. This is the most difficult thing to consider when trading in general, not only when trading binary options: the time element.
- In the case of binary options trading, not only that a trader needs to know the direction of the market, but he/she must put the time element near that forecast in order for the option to be traded.
“When” is as good a question as “where”. In binary options trading, both of them are of equal importance.
- Price and time have long been considered to be part of the holy grail in trading, no matter the market. Knowing where price is going is one thing, but to be able to say when that move is going to come makes you a pretty darn good trader.
- Ladies and gentlemen welcome to binary options trading: easy advertised, hard to be profitable. Is it impossible to make money trading binary options? The right answer is no if you haven`t the right strategy.
This article is not claiming to know the right way to do this, but what follows are things that can make up a trading strategy or be part of a set of strategies one is using.
2. Trading strategy A – no short-term expiries
The first thing to do is to totally avoid trading short-term expiration dates. If the prospect of winning 70% or more in sixty seconds still appeals to your senses, consider this: a yearly interest rate on a bank account is less than 2% these days. Per year!
Why would anyone give you 70% or more in sixty seconds? Hint: because chances are favoring you’re going to lose if you consistently trade this kind of options.
Due to the nature of the binary options market and the fact that the products offered are so strongly interconnected, there are a lot of fake moves out there. You may see a spike higher on a specific news, only for a few seconds to be completely retraced without any fundamental logic.
Trading these days is governed by High-Frequency Trading (HFT) algorithms and this is the reason why these spikes are so powerful.
The forex market is the most liquid one in the world, with more than five trillion dollars changing hands every day and it is not possible for the market to move that easy.
It is not possible for human traders to go and buy at the very same second in such big volumes so that a currency pair is moving. Trading algorithms can do that, and this is why short-term expiration dates when trading binary options are to be avoided.
Let’s try to put some expiration dates in this category: sixty seconds and below, five minutes, and even hourly. One may argue here saying that hourly expiration dates are good enough if one is taking a trading setup from the five-minute chart.
I totally agree with that. The problem is that the worse enemy in being successful when trading is the trader, not the market. Human nature will make a trader question the validity of his/her entries and from that moment on the trader will be subject to errors. Five-minute charts are easy to be reversed.
3. Trading strategy B – split your portfolio
This is part of the money management plan any trader should follow. Let’s assume one is funding his/her trading account with $1000. It will be a bad move to trade all that money on one single binary option. Diversification is key and this diversification should be made in time as well.
Setting financial goals is key, and if someone, for whatever the reason, is willing to pay 70% rate of return for a binary option, then we ought to have a sound trading plan to grasp that reward.
Therefore, offer yourself multiple chances to make it, and this doesn’t mean to make multiple deposits as this way only the binary options broker will benefit. The idea is to split your portfolio into equal parts and to trade each part in one week’s time.
On a $1000 deposit, split the portfolio in ten weeks, so the amount to be invested each and every week is $100. Not a buck more, not a buck less!
Already you have a competitive advantage over other market participants as from this moment you have a plan and in order to lose all your funds in your trading account, you have to have ten straight losing weeks. This is highly unlikely, especially if you consider everything we’re going to cover in this article.
4. Trading strategy C – trade with a daily, weekly and monthly perspective in mind
Now that the portfolio is split into ten equal parts, it is time to actually trade. It should all starts over the weekend with a look at the economic calendar for the week ahead. Check what are the important events, when they are going to be released, and what are the currencies to be impacted the most.
As a rule of thumb, all that matters for currencies is related to what central banks are going to do with the interest rate at their next meeting. Therefore, central banks meetings, central banker’s speeches, inflation data, and this kind of events that are marked with the red color on the economic calendar are the ones that matter the most.
Based on that and on your technical analysis setup (no matter what this is, you must have a logic for taking a trade, either from a moving averages perspective, or an oscillator is diverging from price, etc.), choose the currency pairs that you want to trade the following week.
In a trading week, the most important trading days are Thursday and Friday, make sure you understand that. Thursdays are important as regular options market has a lot of expiries and rollovers that day and Friday is the last trading day of the week and a lot of traders are forced to close their positions, no matter if in profit or loss.
Therefore, most of the times, the first three days of the week are only preparation for the most important ones, Thursday and Friday.
The way to go is to trade end of day expiration dates Monday and Tuesday. Again, the same principle as the one mentioned above applies: it doesn’t make any sense to trade one $100 option with the end of day expiration date. First of all, you’ll risk all your money on one single trade, not to mention you have only one entry.
Split the $100 in another ten different parts and just like that, we have ten different options to deploy on Monday. All of them with the end of day expiration date.
If your analysis over the weekend resulted in trading two currency pairs, split the ten options in five trades per each currency pair. Remember what we discussed earlier? Diversification is key, and the idea here is to diversify as much as possible in order to make losing less probable.
Trading with the end of day expiration day doesn’t mean one has to wait for an entire day until the option expires. Out of those five options on a currency pair, some of them may be taken only a few hours until the expiration date, so the waiting time is not 24 hours. Let’s assume after the first trading day, five options expired in the money and five out of the money. You’ll have a $15 loss, so the amount to trade the next day is $85. Do not add to it, as the plan is to invest only $100/week.
Tuesday should follow the same path: divide the $85 into ten parts and trade with the end of day expiration date.
As of Wednesday, the focus shifts towards the end of week expiration date. These expiration dates are tricky as binary options brokers are offering them around fixing times when the market is really volatile. This is why we want to position for them as early as possible.
The same principle applies here as well: whatever the amount is available Wednesday morning, we split it in ten end trade with the end of week expiration date Wednesday and Thursday. Friday we’re doing nothing, just watching how the options are doing and waiting to see the outcome.
If the time during the binary options trading month is closed to the end of the month, then trading end of month expiration dates are recommended as well.
5. Trade your plan
Long story short, now that there’s a plan in place, the thing to do is to follow it. This set of strategies will give you no less than ten weeks, the time you have until the account is depleted, assuming ALL your options are going to expire out of the money.
Even from a statistical point of view, this is not possible, so just like that, you’re probably in for a longer chance to survive these markets.
During all this time, the experience starts to kick in, as you’ll notice some things that are repeating over and over again, like patterns and price action surrounding specific economic events, and trading becomes easier.
You’ll also find out why brokers are offering expiration dates at the end of the day (when liquidity is so thin and spreads widen so that it is difficult for short term expirations to end up in the money) or end of the week right into the fixing times when quotations go wild.
On top of all that, perhaps the most important thing is that following this plan chances to lose your money are dropping significantly with each and every trading week that passes. And then, who knows? You’re becoming so good at this that you really deserve that 70% or more rate of return on your investment.
And you should grab it, as following such a plan is no easy task. The great enemy is you, the trader, as you are human and emotions are more difficult to control than logic.