In this article you will get our top 10 tips for developing a binary options trading strategy.
ForexTraders doesn’t recommend trading binary options. See our recommended and regulated brokers that can help traders with their portfolios legally approved, legitimate ways.
If you have completed your educational phase for trading binary options, then it is now time to concentrate on how to win with this popular new investment genre. As you have already learned, much of the effort has been removed by the nature of this medium. Quick material gains, as well as losses, are part of the draw, but as with any other trading arena, your goal will be to approach the market in a disciplined fashion, and, more importantly, you will want to find ways to move the odds in your favor to produce consistent “net” gains over time.
Top 10 Tips to Consider When Developing a Binary Options Trading Strategy
A simple search of the Internet will deliver a host of articles related to winning strategies when trading binary options. The “newness” of all of these suggestions conveys one simple truth – none of these have been thoroughly tested over lengthy time periods. The jury is still out, so to speak. Do not be fooled by claims of “90% accuracy”, especially if the party requires a hefty deposit to access his “magic formula”. There are a few basic ideas to follow, but first, let’s review ten tips to keep in mind before getting into specific strategies:
- Never risk any funds that you cannot afford to lose. This genre is high risk. Even seasoned veterans run into a bad streak at some point. Capital devoted to binary options should never be more than a small percentage of your entire portfolio. Remember the benefits of diversification;
- Prudent money management principles still apply. Trading involves losses and gains, but markets range within tight spreads for the majority of the time. The opportunity for a large gain comes when the market trends dramatically in one direction or another. You have to “keep your powder dry”. The general rule is to limit your positions to 2% to 3% of your account, never exceeding more than 2 to 3 positions at any one time;
- Always start with small amounts until you gain a level of confidence with the asset class that you have chosen. When the odds move in your favor, you will want to increase your chances for winning. Patience is crucial;
- Do not force a trade. In other words, you do not have to be in the market at all times. You may be itching to jump in, but until your charts or other support mechanisms make a prediction seem highly probable, the best strategy is to wait. Do not allow emotions to govern your entries;
- Always be aware of the calendar of events for the day, from important data releases, to central bank announcements, or to any other event that is significant enough to be on the radar screen.
- Many releases occur in the morning. If you notice the market go flat for an extended period, it is usually pausing before an expected announcement;
- For currencies, the opportunity to gain is highest when liquidity is highest, which happens when both London and New York markets are open;
- Keep a journal to record each trade and why you bought the option. Review and learn from your winners, as well as from your losers. Experience is key when acquiring the skills you will need for consistency in this market;
- If you hit a losing streak, walk away from your trading desk. Many traders follow the “3-Loss” rule – if you have three consecutive losing trades, it is best to walk away and re-think your approach. The market is always shifting and changing its personality. What may work on one day, may not hold water on another. Adapt, and move on;
- Never get discouraged if you missed a big move or had several losses. Veteran traders understand that losses are part of the game, and, more importantly, that there is always another opportunity around the corner.
What Are Some Common Strategies to Employ with Binary options?
Depending on how complex or analytically inclined you want to be, there are an incredible number of complicated ways to play the binary options trading market. Do not be swayed by marketing claims, unless you prefer to pay good money for someone else’s idea. Whatever strategy path you go down, there are generally three basic themes that govern how they work:
1) Trending Strategies: This strategy involves predicting a direction that will prevail over the period of your option. Traders understand that markets are heavily correlated. If Gold is moving up for some reason, then it is a good bet that the Australian Dollar will go up as well. The same is true for Oil and the Canadian Dollar. If fundamentals are moving the S&P 500 index in the northerly direction, then the Euro will surely follow most of the time. Every trader uses his own method for tracking these correlations or technical patterns that “hint” at potential movements. Some choose special indicators or signal providers to assist in the task, but more on that later;
2) Ranging Strategies: Markets tend to get stuck in ranges for the majority of the trading day. There are special binary options designed for this situation, or you can form your own “straddle” by buying “one-touch” “put” and a “call” options that set boundaries around a price that you expect to be broken over time as the price “vibrates” within a tight range. A “two-barrier” option is best employed before a significant market announcement, when you expect the news to jerk the market one way or another, but are unsure of which one;
3) Hedging Strategies: Hedging strategies tend to be more complicated, since they involve two different asset purchases. “Hedging” in actuality is like insurance. You pay a premium to limit your risk. There are ways to buy one asset at a specific price (assume for the moment that you expect it to appreciate) and then buy a “put” binary option that establishes a “floor”, in this example, in case the market price of the asset falls. You have to follow each item closely so that the math works in your favor, but if you are adept and quick, you can lock in profits and minimize losses. Leave these strategies to later when you have a better feel for how the market can operate.
Can Signal Service Providers Help in This Genre?
As an active individual trader, you often must have eyes in the back of your head to keep track of every move in the market. The task becomes easier if you only focus on one specific item within a broad asset class, like the Aussie Dollar in the forex world. Finding high-potential market signals involves pattern recognition and a plethora of technical techniques to discern when the odds might favor your personal strategy. These issues do not go away with binary options.
Is there a better way? Traders quickly tire of having to stare at two to three different screen shots, or even more, for an entire trading session. Some throw their hands up in frustration and move to longer timeframes, graduating from the day-trading scene to become a “swing” or longer-termed trader. Binary options, however, are primarily focused on 15 minutes, an hour, or end-of-day deadlines. Sensing a market opportunity, a host of independent signal providers have emerged to support binary options trading. Their proprietary software analyzes mountains of market data and then delivers in the range of 25 signals a week directly to your desktop for instant application.
These services, however, are not free. Many run the gamut of pricing scenarios, but the market seems to be consolidating around a figure between $30 and $100 a month. Many also have 60-day trial periods, promising a full refund if you are not satisfied. As with any investment advisory service, no one has a “crystal ball” that produces 100% satisfaction. There are good signal providers, and there are bad ones. The best way to see if this “back-office assistant” will provide the “eyes-and-ears” you need to out-guess the market is to give one a try, especially one that will refund your initial fee.
Signals and alerts for binary options are in their infancy stage of development. There are review sites that rank many providers, but perform your own due diligence before selecting one firm for further testing.
Trading binary options can be easier than the more traditional route for an asset class, but predicting future outcomes remains the primary objective. Develop a specific trading strategy and test it for consistency on your practice “demo” system. If you feel you need additional “back-office” support, then experiment with a highly recommended signal provider in the industry to see if your results improve over time.
Good Luck with your trading!
Forextraders' Broker of the Month
ForexTime (FXTM) is an award-winning platform that certainly has the feeling of being set up by people who know what they are doing. The firm demonstrates an understanding of what helps traders make better returns, and its success can be measured by the fact that it's doubled the number of clients it supports in recent years. The fact that the broker has grown to have more than two million accounts suggests it is getting things right for clients.