Binary option trading is a dynamic and intriguing world that might seem chaotic for the outsider looking in.
However, trading successfully is a much simpler task than it is with vanilla options trading.
The following article is the first of a dual-part review of useful tips for binary option traders.
Integrating these tips into the way you trade can help you gain desired profits, reduce risks and increase your trading capital and your personal confidence in the binary options trading process.
In order to be a consistently successful trader, one needs to use a consistently successful system.
In fact, one of the classic traits of unsuccessful traders is that they trade based on hunches or gut instincts, which probably won’t work in the long run.
Having a system means having a defined, successful trading methodology – a clear set of proven rules for all aspects of your trading decisions.
For typical spot market trading, you would need rules to define the following:
- What conditions constitute a buy or sell signal.
- What percentage of your trading capital would you risk on a given trade
- How to determine where you place your stop loss.
- What conditions would cause you to increase or reduce your position.
- What conditions would cause you to exit your trade before hitting your preplanned stop loss or profit taking point.
With binary option trading, your task becomes much more clear and simple, as you just need the first two rules.
When adjusted to binary options trading, the rules would be defining a buy signal (buy a call option) or sell signal (buy a put option) and deciding how much to spend on the given option.
Defining a buy signal (buy a call) or sell signal (buy a put)
Many traders define these signals based on technical analysis.
If you choose this approach, you decide on your technical indicators by experimentation and simple back testing.
For example, let’s say you trade the EUR/USD on daily charts (each candle equals a day’s price action), and you want to use some statistical technical indicators in order to predict the start of an up-trend.
For this example we will use the following two indicators:
Exponential Moving Averages (EMAs) and Double Bollinger Bands.
As you scroll the chart back over time, you will notice that at the start of new up-trends, the following conditions occurred:
- The ten day Exponential Moving Average (EMA) crosses over the 20 day EMA.
- The EUR/USD was over its 50 day EMA.
- The EUR/USD entered the Double Bollinger Band Buy Zone (the area bounded by the upper 1 and 2 standard deviations).
From the technical analysis point of view, these conditions might then form, fully or partially, your “buy signal”.
In other words, you wouldn’t buy a call option until all three conditions were in place.
The same process can be applied for devising systems that predict down trends.
To experiment further, add or replace indicators one at a time, and repeat the process.
In order to minimize costs of this experimentation, you can first run simulations.
Then start with small positions using live accounts, and increase position size only when your system has a track record that you can trust.
Don’t worry if you don’t recognize these technical indicators, they are not restricted for pros only.
Simple online searching will provide you with plenty of useful information.
How can you determine which technical indicators to use?
As a rule of thumb, most traders watch between four to six indicators at a time.
The ones you prefer will depend on what works for you after some experimentation.
The only requirement is that your choices will provide information on:
- Trends: like single trend lines, channels or various combinations of moving averages.
- Momentum: Like RSI (Relative Strength Index), MACD (Moving Average Convergence/Divergence) or stochastic models.
- Price movement cycles: Like Fibonacci retracements or Elliot Waves.
- Indicators of important support and resistance price levels: note where price tends to halt or reverse. If one or more of the above three are found at a support or resistance point, they reinforce it.
Deciding how much to invest in the given option!
Deciding how much to invest is easy for binary options traders.
For spot market traders, the amount risked depends on how far the stop loss order is from the entry price.
Setting a stop loss is a complicated process, which must consider typical price volatility in addition to what you can afford to lose.
On the other hand, when trading binary options this decision is simple because of the fixed returns and refunds.
If your option expires in-the-money you earn a predetermined return of up to 81% and if your option is out-of-the-money you always receive a fixed refund which prevents you from losing your entire investment amount.
When you develop your system for binary option trading, you need to decide on an amount of money that you are willing to invest.
Once you’ve decided, you are safe knowing that no matter what happens in the markets, your money is protected from unexpected losses.
This cannot be guaranteed for regular spot trading.
Well, be sure to follow up on next part of this article, in which we will present the remaining top tips for binary options trading.
Happy Trading and enjoy….