Binary options trading Strategy

Binary Option strategy

Trading strategies are a key element of long term successful binary options trading. A successful binary options strategy can be defined as a strategy which consistently makes a profit.

When trading binary options, this generally requires a method that wins more trades that it loses, and crucially, at a payout that more than covers the losses. Binary trades generally payout at less than 100% on the investment amount – so simply winning more trades than are lost may not necessarily be enough to turn a long term profit.

The art of trading binaries profitably shares some similarities with the sports betting world. The important trait that links both enterprises is that of expectancy. Long term profit trading binaries can only be derived where the expectancy (the theoretical profit within any trade) results in a positive expectation from that trade.

Binary options trading strategies are therefore used to identify repeatable trends and circumstances, where a trade can be made with a positive (profitable) expectancy. It may be as simple as;

  • If asset ‘X’ falls in value for three sessions in a row, open a call option for the duration of the next session.

The above is an extremely simple example of a trading ‘strategy’. Strategies do not need to be hugely complex (though they can be), sometimes the simplest strategies work best.

Types of trading strategy

There are a range of techniques that can be used to identify a binary options strategy. New investors may like to explore all of them – each has the ability to be profitable when used correctly.

In addition to the type of basic, or traditional, trading strategy highlighted above, there are also alternative methods;

  • Charting and technical analysis charting (the analysis of graphs and other technical indicators) is often considered first when discussing strategy. Much has been written about the trends and patterns that are regularly seen within the pricing charts, and many of these can translate directly into trading strategies. Retaining a simple strategy whilst trying to drill into technical analysis is not always easy, but does provide a route to some insight that may not be immediately obvious elsewhere.
  • Fundamentals – Analysis of the fundamentals is almost a prerequisite for most types of investment or trading. With binary options trading however, the time scales are often too short for the fundamentals to shift the price in the expected direction. There are still some binary options trades that can be gleaned from study of the fundamentals though, and it is another potential route for a successful strategy. Particularly longer term options. Some brokers now offer expiry times of one and two months ahead making this form of strategy much more realistic.

The benefits of a good binary options strategy

A good binary trading strategy will simplify much of the decision making about where and when to trade. With timing the key to everything where trading is concerned, the less guess work there is around entry and exit points, the better. Particularly for less experienced traders.

A repeatable strategy will always highlight the trading opportunities, where otherwise, the majority of those openings would be missed. Strategies encourage discipline, aid money management and provide the clearest predictor for positive expectation. While it is possible for traders to profit from binary options without a strategy, it will be exponentially harder.

Novice traders will also benefit simply from trying to build their own binary options trading strategy. Once some time has been spent analysing different methods and building a strategy from scratch. It is much easier to appraise strategies offered by others. Without that initial grounding in the art of trading strategies, it would be very easy to become intoxicated by the promise of untold riches using someone else’s trading strategy or expensive software.

Demo accounts can be a good place to start experimenting with binary options trading strategies without risking any capital. Read our full list of demo account brokers here.

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Specific Strategy Examples:

Basic 60 Second Strategy

This basic strategy aimed at 60-second (Listed as 1 minute options at some brokers) goes as follows:

1. Find support and resistance levels in the market where short-term bounces can be had. Pivot points and Fibonacci retracement levels can be particularly useful, just as they are on other timeframes while trading longer-term instruments.

2. Take trade set-ups on the first touch of the level. When you are trading assets that have a high level of ‘noise’.  I believe that taking a higher volume of trades can actually play to your advantage. 60 second / 1 minute trades certainly fall into this category.

For those who are not familiar with this form of analysis on longer term expiries: The advice is to look for an initial rejection of a price level already marked ahead of trading. So marking support and resistance is a vital. If it does reject the level, this helps to further validate the robustness of the price level. Trade on any subsequent touch. This will lead to a lower volume of trades taken in exchange for higher accuracy trades. The first touch is not traded, but used to validate following trades. So less trades, but more accurate.

60 Second Trades Lead To Higher Trade Volume

Since the inherent noise in each 60-second trade is so large to begin with, I believe trading more often can actually work to the trader’s gain. In that it helps to even out the accuracy fluctuations that come when trading such short-term expiry times.

Overall accuracy of ‘in the money’ trades will drop. This means lower expected value from each trade. Higher volume however, can compensate.

For example, 100 trades with an expected profit of 1.25 would return 125 (Profit of 25). But 200 trades with a lower value, say 1.18, would net 236 (Profit of 36). So a lower strike rate does not always mean lower profit if more trades can be found over the same period.

Let us take a different view. If you’re trading 60-second options, and only taking 1-2 trades in a 4+-hour session (i.e., being super conservative). It is very likely that you are going to be waiting a long time before your true trading skill level becomes clear.

I could be that you are not profitable using 60 second options. It is better to find that out sooner, rather than later.

3. Don’t blindly trade all touches of support and resistance. Continue to consider price action (e.g., candlestick types and formations), trend direction, and momentum. Also be open to ‘gut feel’. Your trading experience will continue to grow, and your ‘feel’ for the markets will improve. On occasion, those instincts can over-ride any other signal. But bear in mind many trading lessons are learnt the hard way – with losing trades.

Expiry Strategy

Base Line Expiry

I learned a long time ago how to judge the duration of a given signal. Well before I began trading binary options. Here I will explain how to develop an expiry strategy.

The first thing to do is to identify what your signal is.

Is it a:

  • trend line bounce
  • stochastic crossover
  • shift in momentum
  • candlestick pattern
  • or a combination

Once done, you go back over your charts for a given period and identify all the signals. The time frame is not important at this point, this technique works in all. Mark the strong signals and weak signals. Now count how many bars or candles it takes for each signal to move into the money.

Once that is done you can take an average of the number of bars needed. Both for the strong and for the weak signals to move into the money. These averages are now your base line expiry for the signal. If you are using a chart of hourly prices and your signal takes an average of 3.7 candles to move into the money, you will want to use an expiry that coincides with that time. This could be a mid day, end of day, 4 hour or other option. Whatever expiry matches your signal horizon. If the signals takes 3.7 candles and you are using a daily chart that means 3.7 days. If using the hourly chart, it means 3.7 hours, and so on.

Study the chart below. I am going to use a basic moving average strategy to demonstrate. I will use the 30 bar exponential moving average. It hugs prices closer than a simple moving average and will give us more signals to count.

expiry strategy

Also, in order to weed out bad signals and to improve results, I am only choosing the bullish trend following signals. So, there are 15 total signals. 6 weaker signals and 9 stronger signals. On average, it takes 4.2 bars for these signals to move into the money and reach a peak.

That means, since this is an hourly chart, that each signal will move into profitability and reach the peak of that movement in about 4 hours. So for expiry I would want to choose the closest expiry to 4 hours that is available. If a good choice is not available then no trade can be comfortably made. Do not try and force trades where they do not fit.

Breaking it down a little, the weak signals peak out in about 2.6 hours versus the stronger signals. Stronger signals take about 5.3 hours. Putting this knowledge in perspective, a weaker signal might be one that is close to resistance. A stronger signal might be one that is not close to resistance. Also, a stronger signal might be one where price action makes a long white candle and definitive move above or from the moving average whereas a weaker one might only create small candles and spinning tops.

Additional Tips For Choosing Binary Options Expiry

Choosing an expiry is one of the most important factors in making a trade. The other key factor being direction. All too often I get asked questions about why a trade went bad in the final moments. One of the most common areas of error I find is in choosing expiry.

Of course there can also be errors in analysis, trends or random events. But the focus of this discussion is expiry. It is obvious that you don’t want to use 60 second expiry when trading on weekly charts. Just as clearly, you won’t want to use end of day expiry when trading off the 60 second charts. So how do you determine what the best expiry will be?

One question you must ask yourself is: if you are trading with or against the trend.

When trading against the trend I would suggest a shorter expiry than a longer one. Simply because there is less chance of an extended move counter to the trend. Your expiry must be more precise. When you trade with the trend your expiry can be a little farther out.

A trend following trade has a higher likelihood of closing in the money so does not need to be as precise. A signal that follows the trend is a lot more likely to be in the money rather than one that goes against the trend.

Another factor that can have a big impact on which expiry is best for a given trade is support and resistance. The relative level of prices to a support or resistance line is a factor in how likely a trade is to move in a given direction.

If prices are near a S/R line and moving away there is much more chance of your option closing in the money than if prices are near a S/R line and moving toward it. When prices are moving toward one of these lines, the chances of the movement being halted and/or reversed is much higher than when prices are moving away from one.

So, how does this apply to expiry? If you are taking a signal that has a higher chance of being halted or reversed then you would want to choose a shorter expiry than if the same signal were not faced with a S/R level. I purposefully did not say call or put, or bullish or bearish, because this applies to both bullish and bearish trading. Also, keep in mind that support and resistance can be in the form of lines drawn at areas of interesting price action or peaks, moving averages, Fibonacci’s, envelopes and bands.