Trading new events with binary options
Events trading can be a highly effective trading style – if you know a few tricks. Things are a little more complicated than they seem on the surface, but they are much simpler than you might think. This article takes a look at the challenges, solutions, and strategies for events trading.
In detail, you will learn:
With this information, you will be able to use the next big news event to trade a binary option.
News trading is based on a simple idea: In reaction to events about an asset, the market often develops strong movements. Events traders want to anticipate these movements and invest in a binary option based on the predictions they allow.
In an ideal world, this trading strategy is simple and effective:
If this sounds too good to be true, you are right. The issue with news trading is that traders also invest in anticipation of an event. For example, when a company publishes its earnings or the government new unemployment data, investors have certain expectations.
As a result, the market’s expectations are already priced into an asset when the news reach the market.
Whether the market rises or falls depends solely on the relationship of supply and demand. To predict whether news will lead to falling or rising prices, it is therefore not enough to simply analyse whether the news is good or bad, you have to understand whether the news is better or worse than what the market expected.
This is a tough call to make. When millions of traders from all over the world can buy or sell an asset, it is impossible to know what they are all thinking. Some of them might expect crazy things, and who knows what they will do when they find out what is really going on.
Because of these dynamics, the market often falls in reaction to good news and rises in reaction to bad news. Analysts will later say that traders apparently expected better or worse, but none of them would have been able to predict this reaction in advance. Completely logical news trading only works in hindsight.
Despite the limitations of news trading, it can be a profitable strategy – if you follow a few rules. Traders have worked long and hard to develop strategies that can deal with the challenges of illogical reactions to the news, and they have found several ideas on how to make news trading work. Here’s what they learned:
Let’s take a closer look at how you can use binary options for effective news trading.
We will now present three strategies that allow you to trade the news with binary options. Of course, there are much more possible strategies. We want to provide you with three examples of strategies that trade the news in different ways. With these three examples, you know the bandwidth of possibilities and can pick the approach you like best. There is enough time to fine tune it later.
This is the simple and direct approach. You trade the news directly:
You can fine tune this strategy with the help of your broker. Many brokers publish economic calendars that list all relevant events and the broker’s best guess for what the market would consider a good or bad result. When the news come out, you can compare the actual results to what your broker predicted:
Depending on your preference, you could trade these predictions with high/low options or one touch options. One touch options might not even be the riskier alternative in this case, as they win you your option as soon as the market reaches the target price. Some traders will also consider using ladder options, but this is the high-risk alternative. We advise against it.
Whether you invest on your broker’s prediction or your own gut feeling for what news are good and which are bad, this strategy can help you to win enough trades to make a profit by the end of the month. You will, however, also lose some of your trades. Manage your money well, and this will not be a problem. We recommend investing between 2 and 5 percent of your overall account balance on every trade. Follow this rule, and you will have applied the first lesson traders learned about trading the news: you don’t know what will happen. Trade accordingly.
The straddle strategy has been popular with traders long before binary options. Binary options, however, have made the straddle easier and more profitable than any previous type of investment.
A straddle strategy has a simple goal: it wants to make you money regardless of the direction in which the price moves. Traditionally, traders traded the one asset in both directions at the same time, hoping that the profit from one investment will outweigh the other. Of course, there were situations in which this strategy failed, and both investments resulted in losses or the profit of one failed to outweigh the loss of the other.
With binary options, this problem has been solved. Boundary options offer traders two target prices in equal distance from the current market price – one to the top, one to the bottom. You win your option when the market touches either price, even if it is just for a split second.
Boundary options replace the straddle but offer more security and eliminate the uncertainty. You know your payout and your risk, which allows you to create a winning strategy.
News events provide you with a great opportunity to trade a boundary option. Even though you are unable to predict what will happen, you know that something big will happen. When the government releases its unemployment data at 2 PM, you know that there will be a strong movement starting a few seconds after 2 PM. To benefit from this movement, you can invest in a boundary option at 1.58 PM. Regardless of whether the market will react positively or negatively, just by reacting it, it will win you your option.
This strategy is simple; it can win you a high percentage of your trades, and get you high payouts – a great combination.
With this strategy, you apply the second lesson traders learned about trading the news: news events are significant. It would be a shame to waste them
If you still feel uncomfortable with the uncertainty of trading the news, there is still a way in which you can benefit from news events – the news allows you to trade binary options types with a higher payout.
There are many binary options types. Those with higher payouts require stronger movements. Additionally, most brokers offer one or more options types in a low yield and high yield version, with the high yield version providing a higher payout but requiring a stronger movement. With one touch options, for example, the low yield version might require a movement of 1 percent and provides a 75 percent payout. The high yield version could provide a payout of 250 percent but require a movement of 3 percent.
Of course, any trader would want to trade binary options types with a high payout. Their faraway target prices make this type of strategy difficult to execute under normal conditions. The challenge is to find market environments in which you can anticipate the strong movements that allow you to win options with a high payout.
News events provide precisely this environment. You can never be sure how the market will react, but you know that it will react strongly. This strong reaction allows you to adapt a strategy that would otherwise limit you to high/low options with a payout of around 75 percent to one touch options or ladder options, which can get you payouts of up to 300 percent or even 1,500 percent, respectively.
With this trading style, you would do the same thing as you did before, but you would do it shortly after big news hit the market. Traders of simply candlestick formations, for example, would still search for simply candlesticks, but they would search them in assets with breaking news. In this environment, you are more likely to find the big candle that allows you to invest in a one touch option than when you are monitoring an average low-momentum period.
This is a general trading approach and a guide to picking your spots – which is an important part of your strategy. Just like gold diggers can improve their returns by digging in the right place, you have to find the trading environments that allow you to maximize your profits. For many strategies, the strong movements after news are the ideal opportunity.
News trading is not as straightforward as it might seem to newcomers. But it is also not as complicated as you might think.
The biggest challenge of events trading is that there is no direct connection between news and what the market does. Everything is filtered through the eyes of millions of traders that react to the news. This process is neither logical nor predictable, but if you do it right, you can use the advantages of the fast-paced environment after news events to trade simple but effective strategies and maximize your profits.
If you are still looking for the right broker with which to execute these strategies, take a look at our top list. We have tested all relevant binary options brokers and have some great recommendations for you.