Binary options strategies
Successful binary options traders approach the market with three key tools: Some great Binary options strategies, a money management strategy and the use of signals one way or another.
These tools are absolute necessities for any trader looking to be successful. Here on Binary Options Guru, we will provide you with all the information necessary to create your own trading strategy and your own money management strategy.
This article will explain the basic of these three binary options strategies, and provide you with links to all relevant fields. It is the perfect starting point for you to create your own binary options strategy.
The binary options strategies
1. Trading strategy
Binary options are short term investments. Therefore, timing is just as important to your success as correctly predicting the direction of the market. Your binary options strategies for trading should clearly define the signal you want to trade, and when you want to enter the market when the signal occurs. Based on technical analysis, there are a number of possibilities:
- Trading the breakout: You can trade the market breaking out of a continuation or a reversal pattern. More accurately, you have to define whether your will invest in a binary option in anticipation of the breakout, in reaction to the breakout, or in reaction to the pullback. Which option you chose depends entirely on your preferences. Of course, you can also combine these events and trade all three of them, if you like.
- Trading trend lines: Trend lines can be traded the same way as support and resistance levels. You can invest in the impending turnaround when a trend approaches a trend line, and you can invest the price breaking through a trend line.
- Trading percentage retracements: In a trend, retracements usually end at a percentage of 40 to 60 percent of the prior advance. Investing in a turnaround in price direction around these levels of a retracement can provide you with good trading opportunities.
- Trading the gap: Sometimes prices take a big jump in either direction. The created gap is likely to close again. You can invest in the closing of the gap with a binary option.
- Trading technical indicators: Technical indicators can provide you with great insight to what the market is doing. Applied the right way, technical indicators can also generate signals you can trade with binary options.
- Trading candlestick formations: Candlestick formation can provide you with short term indications about future price movements. By being able to recognize and interpret candlestick formations, you can find many attractive trading opportunities.
- Trading a combination of these techniques: Only the most risk-tolerant traders should base their trading strategy on only one signal or technique. Usually, the results of your strategy can be improved by combining techniques. For example, you could trade candlestick formations in the direction of the main trend around percentage retracements. A strategy like this should help you win a higher percentage of your trades than trading any of these techniques by itself.
2. Money management strategy
Without a good money management even the best trading / binary options strategy will ruin you eventually. In binary options, you will inevitably lose some trades. Therefore, the main goal of your trading approach cannot be to win all trades, but to win enough trades to end up with a net profit in the end. Money management is the tool that will help you achieve that.
Good money management consists of a number of rules, most importantly that you should only invest a fixed small percentage of your overall capital in one trade. This percentage should not be higher than 5 percent. By this logic, if your total capital is $1,000, you should never invest more than $50 per trade. A rigorous money management such as this will help you survive losing streaks and make a constant profit.
3. Trading on signals strategy
Many binary options strategies depend on technical analysis where you look for certain patterns in the way the price of an asset moves, and try to make predictions about future price movements based on these patterns.
This is a great methodology. It enables you to gain a deep understanding of the markets, and use this knowledge to make money. There is one other way to use the same method that is far less labor intensive than crunching the numbers and reading all the charts. That is to rely on signals.
How to base your binary options strategies on signals
Signals are simply recommended trades. They are generated by very sophisticated pieces of software. These programs absorb and process enormous amounts of market data – much more than any human brain is capable of – and uses advanced algorithms to identify good trading possibilities. This might sound almost like cheating, after all computers are tremendously good at this sort of thing, but there’s no need to worry. Pretty much all professional traders use trading software of one sort or another to steer their investments. This is just another helpful tool made available to us by technology.
There are essentially two different binary options strategies that you can use that are both based on signals. The first is to subscribe to a signals provider. This is a company that has as its only function to identify promising trades. They use their own computer algorithms to do this, often in combination with personal expertise and market knowledge.
By subscribing to a signal provider you receive a certain amount of signals in return for a monthly fee. The cost is in most cases around $100 per month. There are a lot of signals providers out there. Not all are as good we would have liked. Take care when choosing a provider. Make sure they provide signals with a strike rate in the region of 70% – 85%. Any less, and you will struggle to make a long term profits by following the signals. Any more, and you might be dealing with a “too good to be true” scenario.
How to base your binary options strategies on robots
The second strategy you can use that is based on signals, is employing a robot. A robot is a software that is even more advanced than the ones used by signal providers. A binary robot also processes huge amounts of data and uses algorithms to identify promising trades. It also does one more things: it executes trades on your behalf.
This means that by using a robot you are effectively outsourcing all your trading. An automated system will scan the markets, do the analysis and even take care of the decision making process. This offers a number of advantages. For example, emotions and feelings will no longer influence your trading, nor will tiredness, hunger or any other human frailties.
Many robots exist, but there is no doubt which one is the best. That is BinaryOptionRobot. If you would like you go with a robot-based strategy, we recommend you sign up with this provider.
Further reading and references
1.Dynamic hedging portfolios for derivative securities in the presence of large transaction costs (A Marco, PS Antonio 1994)
2. Paul Wilmott on quantitative finance (Paul Wilmott 2013)
3. Mathematical modeling and methods of option pricing (L Jiang, C Li – 2005)
4. Quantile hedging (H Föllmer, P Leukert – Finance and Stochastics, 1999)
5. Hedging by sequential regression: An introduction to the mathematics of option trading (H Föllmer, M Schweizer – Astin Bulletin, 1989)
6. Robust hedging of barrier options (H Brown, D Hobson, LCG Rogers 2001)
7. Trading Binary Options (A Nekritin 2012)
8. Options trading volume and stock price response to earnings announcements (C Truong, C Corrado 2014)
9. User-interactive financial vehicle performance prediction, trading and training system and methods (Peter Hancock, Jeffrey Saltz, Andrew Abrahams, Sanay Hikmet 2008)
10. To pay or be paid? The impact of taker fees and order flow inducements on trading costs in US options markets (RH Battalio, A Shkilko, RA Van Ness 2011)
11. System and method for creating and trading credit rating derivative investment instruments (D O’Callahan, D Salvino, C Shalen 2005)
12. Static hedging of exotic options (P Carr, K Ellis, V Gupta 1998)
13. Method of creating and trading derivative investment products based on a volume weighted average price of an underlying asset (Dennis O’Callahan, Catherine Shalen 2006)
14. Currency derivatives: Pricing theory, exotic options, and hedging applications (DF DeRosa 1998)
15. Understanding the implied volatility surface for options on a diversified index (D Heath, E Platen 2004)
16. Derivatives: principles and practice (RK Sundaram, SR Das 2011)
17. Event-driven trade link between trading and clearing systems ( Baecker, J Buddendiek, K Carnahan 2008)
18. On pricing barrier options (P Ritchken 1998)
19. Derivative securities and system for trading same (Bradley J. McGill, Evan J. Winston)
20. One-touch double barrier binary option values (CH Hui 1996)