Binary Option Strategy Basics

The main appeal of binary options resides in their accessibility and relative simplicity. One does not need to be a market expert or a mathematics genius to trade binaries, although to say that it’s easy to make money in this field, would be a lie. Binary options are tricky in the sense that while their mechanics are simple to understand, they can be quite difficult to beat in the long run. Learn more about the best binary option strategy you can apply.

The best binary option strategy

Going into binary options without a plan is essentially gambling, with the odds hugely stacked in favor of the house. Any such undertaking is doomed to fail. Here’s why: return rates in binary option trading are always below 100%. What that means in layman terms is that you will be risking $100 to win $70, $80 or $90, depending on the payout offered by your broker on that particular trade. Even in the case of a theoretical 100% return, you would still only be flipping coins. What all this means is that without a plan, your odds for success on each trade are 50-50, while your payout will be less. This way, you’re guaranteed to lose your entire bankroll over time.

Since the return rate is a constant in the binary option equation, your only hope for long-term success is to alter the odds on the trade in your favor. You will need to alter them quite radically too, in order to overcome the massive handicap in the return rate.

Capital management

Even if you manage to get this part right, and you successfully alter your odds through strategy, you will still have to find a way to deal with variance. While not particularly scary in and of itself, variance is the arch enemy of the small bankroll. Capital management is the way to deal with this problem, which essentially means that you should never invest more than ~5% of your entire balance on any single trade.

In this article, we’re looking to shed some light on the actual strategies that you can use to better your odds, and not so much on money management.

There are a handful of basic strategies that every binary option trader should know about and use if/when possible.

Trend-following

Regardless of the underlying asset you pick, you will find that the market is quite streaky/trendy. It rarely floats about in a more or less straight line. It features downtrends and up-trends, and within the larger trends, smaller up and down movements. A downtrend is defined as a period during which the highs of the asset price become lower and lower, as do its lows. An up-trend on the other hand features higher and higher highs and higher and higher lows too.

Trading the trend is the simplest possible strategy for the Put/Call option. Through this strategy, one will either predict that the ongoing trend will continue, or that it will reverse. Thus, in the case of an uptrend, one will place a Call trade if he thinks the trend will continue, and a Put one, if he believes a trend-reversal is impending.

The One Touch option can also be used to trade the trends. If you believe the asset-price – which is in an uptrend – will reach a certain price-point before it reverses, you place one of these Touch trades. The same goes for the No Touch option, which is to be used when you do not believe the asset-price will reach a certain price-point within a given time-frame.

As a matter of fact, many of the advanced technical indicators are based on the spotting of a point where a trend-reversal is likely.

Trading the news

“Trading the news” is essentially another way of saying “trading the fundamentals”. This strategy is based on fundamental analysis. Because it isn’t actually mathematics-based, fundamental analysis may seem more attractive and accessible to certain traders than technical analysis. That same feature is also a problem though when it comes to auto trading, as fundamental analysis cannot really be automated.

An example in this respect would be the trading of the Non-farm Payrolls report. Because it’s such a good indicator of the overall economic situation of the country, this report always has a massive impact on the markets, one way or another. It also has a direct impact on the USD, and its exchange rate will all the currencies out there. A positive NFP report may send the EUR/USD tumbling for instance…so massive variance ending in the formation of a downtrend is likely here.

Trading candlestick formations

Candlesticks are the best aggregators of market movements over a given period of time. They display vital information like opening price, closing price, the entire price-range as well as the high and the low of the period.

As such, all traders need to do is to locate special, well-defined candlestick formations, which point to potential trend-reversals in the price of the traded asset. Once such a pattern is located, the actual placing of the trade is but a walk in the park.

 

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