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.

See why price action is important.

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.

Strategies For Beginners

Leading Brokers:

Elements Of A Profitable Strategy

There are three types of binary strategy elements every trader must know. In this article, we present each type strategy and examples for beginners and advanced traders.

In detail, you will learn:

  • Which types of binary options strategies are there?
  • Why do I need a trading strategy?
  • Why do I need a money management strategy?
  • Why do I need an analysis and improvement strategy?
  • With this information, you will immediately be able to pick the right strategies for you and become a successful binary options trader.

Sub-Strategy Choices

To create a successful binary options strategy, you have to combine three sub-strategies:

  • A trading strategy
  • A money management strategy
  • An analysis and improvement strategy.

Each of these strategy does a very specific thing for you. To be successful, you need all three. If you lack one, the other two become useless.

Let’s take a look at each type of sub-strategy and see how you can find the right one.

Why Use A Strategy?

The trading strategy is the most famous type of sub-strategy for binary options. It is so famous that many traders make the mistake of thinking that it is the only strategy they need. But more on that later. For now, let’s focus on how you can find a good trading strategy.

A trading strategy helps you to find profitable investment opportunities. It defines which assets you analyze, how you analyze them, and how your create signals.

For example, a trading strategy could define that you trade only big currency pairs between 8 and 12 in the morning, that you use a 15 minute price chart, and that you invest when a 10 period moving average and the Money Flow Index (MFI) both indicate the same direction – for example, the moving average has to point up, and the MFI has to be in an oversold area, or vice versa.

The great advantage of such a definite strategy is that it makes your trading repeatable – you always make the same decisions in the same situations.

Value Investing

This way of trading is crucially important to your success because binary options are a numbers game. Financial investments, in general, include the risk of losing trades, but the short time frames of binary options are especially erratic. You can never be completely sure what will happen next. Even the best traders will win only 70 to 80 percent of their trades, those with high-payout strategies might even turn a profit with a winning percentage of 30 percent.

Successful trading does not mean to be always right. It means to be right often enough to turn a profit. Think of a coin flip. When you win 50 percent of your trades and get twice your investment on winning trades, you know that you would break even after 100 flips. If there were some way for you to increase your winning percentage to 60 percent, however, you knew that you would make money. The same applies if there were a way to increase your payout. Your trading strategy does exactly this for your binary options trading.

Strike Rate

When you trade high/low options, for example, you can expect an average payout of 70 to 75 percent. This means you need to win 60 percent of your trades to make money. A trading strategy helps you to identify situations in which you know that if you always invest according to your strategy, you will win at least 60 percent of your trades and make a profit.

Without a concrete trading strategy, you would never know if you would win enough trades to make a profit. On some days, you might get lucky and make a lot of money, but on others, you would lose half of your account balance. Sooner or later, you would have a bad day and lose all of your money.

With a trading strategy, you can avoid such a disaster. A trading strategy is a crucial cornerstone of long-term trading success.

Three Trading Strategies For Beginners

If you are an experienced trader, you already know a lot about trading strategies. But if you are new to the trade, you are probably aching for a few real-world examples. To help you get started, here are three simple trading strategies even newcomers can execute:

  • The low-risk alternative: trading trends. When the market is rising or falling, it never moves in a straight line. Its movements resemble zig-zag lines that take two steps forward and one step back. These movements are called trends. Trends often endure for long periods of time, which is why they offer great investment opportunities. Find a trend and predict that it will continue, and you are likely to win your option. You can secure your predictions with additional indicators, for example the Money Flow Index (MFI) or the Relative Strength Index (RSI). These indicators help you predict whether a trend has still some energy left or is about to end soon.
  • The high-risk alternative: trading simple candlestick formations. Candlesticks are a special way of displaying market movements. Instead of a line, they use many figuress that look like candles. Each candle aggregates the market movements of a period from 30 seconds to one day. The thick body of the candlestick represents the movement between opening and closing price, the small wick at each end the high and the low. Where line charts like you see them in the newspaper use only one price per period for their line, candlesticks provide four times as much information. This advantage allows you to predict market movements by learning a few common candlesticks and their predictions. This strategy provides you with an almost endless amount of trading opportunities, but also very risky investments, as they are based on the predictions of a single candlestick.
  • The intermediate risk version: trading resistance and support levels. Resistance and support levels are psychological price barriers that the market is unable to break – at least for now. Sometimes they are psychologically important numbers, for example round numbers, sometimes they are generated from past price movements, for example the all-time high or a price barrier the asset has failed to break before. When the market nears such a barrier again, it is likely to turn around. You can trade this prediction with a high/low option.

These are three simply trading strategies. Even newcomers can learn them quickly.

Why Use Money Management?

A money management strategy is the second cornerstone of your trading success. To understand its purpose, let’s get back to the example of the coin flip. Even if you have a strategy that gets the odds in your favor, for example by guaranteeing that you will win 60 percent of the flips, this strategy will lead to disaster if you always bet all your money on every flip. You might win the first one, but you will soon lose a flip, and all your money will be gone.

To prevent bankruptcy, you have to limit your investments. This is the first purpose of a money management strategy.
The second purpose is to help you adjust your investment according to your capabilities. Let’s get back to the coin flip with a strategy that wins you 60 percent of your trades and look at a number of possible money management strategies that would fail:

  • Always invest the same amount. If you start with £100 and invest £1 on every single trade, you would make a nice profit in the beginning. You would also have enough room to survive a streak of bad luck. As your account balance increases, however, your investment would soon get too small. Once you reach the £1,000 mark, for example, winning a £1 trade will hardly make a difference. The problem with this type of money management is that it fails to grow with you.
  • Invest the way you feel. Some traders vary their investments based on their intuition. When they feel or have won their last trades, they invest more. This strategy is dangerous because losses weigh heavier than wins. When these traders lose a few trades in a row and have invested a little more on these trades, they have lost a large percentage of their overall account balance. They have to significantly reduce their investment, which makes it difficult for them to make it back. Step by step, they lose more and more money. The holes they dig for themselves will always be bigger than your ability to get out of them.
  • Invest more after a loss. Some traders increase their investment after a loss, for example by doubling their investment. They hope to eventually win a trade, make a profit, and start the cycle anew. Such strategies work great – until they fail. Even if you choose a very small starting investment, binary options enable you to make so many trades that you will be broke within a year.

Lessons In Managing A Bankroll

What can we learn from these examples of failing strategies? There are three lessons:

  1. You need to adjust your investment to your overall account balance.
  2. You have to have a precise definition of how much you invest and increase your investment in proportion to your overall account balance.
  3. You must reduce your investment after a losing trade and increase it after a winning trade.

To fulfill all three of these criteria, a good money management strategy always invests a small percentage of your overall account balance, ideally 2 to 5 percent. For example, if you decide to invest 2 percent per trade, you would invest £2 with an account balance of £100. If your account balance increases to £200, you would invest £4 per trade and so on.

Whether you should invest 2 percent or 5 percent on every trade depends on your risk tolerance and your strategy. Investing more can make you more money, but losing streaks will be more expensive. We recommend using a demo account to find the right setting for you.

Analysis And Improvement Strategy

An analysis and improvement strategy is the most overlooked sub-strategy you need. It helps you to find the weak points in your trading and improve over time. Without an analysis and improvement strategy, long-term success is at least difficult, if not impossible.

When you get started in binary options, you still have a lot to learn. That means you have to try different strategies, vary the parameter of each strategy and make improvements. This might sound simple, but it is very difficult to figure out what works for you and what does not. There are so many variables that it is almost impossible to connect all the dots.

Without an analysis and improvement strategy, newcomers lose themselves in the endless complexity of trading. An analysis and improvement strategy makes this complexity manageable.

Defining Analysis

There is no precise definition of what your analysis and improvement strategy should look like, but by far the most common approach is using a trading diary. In a trading diary, you note every aspect of your decisions. After you invested, you write down which indicators you used, which time frame, which asset, and which expiry. You also write down your location, your mood, the time of the day, and your trading device. Once the trade is finished, you note the result.

After a while, you can analyze your diary. You might find that you won significantly more trades in the morning in the afternoon, that you are a better trader with your phone than with your PC, or that you can interpret moving averages more effectively than candlestick formations.

Spot Trends To Identify Strengths And Weaknesses

Regardless of what you find, the result helps you to focus on the elements of your trading strategy and your money management that work for you and eliminate everything else. You will get better and better, and eventually, you will be good enough to turn a profit. Keep writing your diary anyway, and you will be able to recognize mistakes creeping in before they cost you a lot of money.

In theory, anything can be your trading diary. Some traders take screenshots, others keep an Excel file, and some write old-fashioned books. Pick the diary that works for you, and you will be fine.

Sub-Strategy Conclusion

A binary options strategy is your guide to trading success. While it can seem difficult to find the right strategy at first, with the right information, things are rather simple. You need a trading strategy, a money management strategy, and an analysis and improvement strategy, and you will be fine. This article has provided you with the perfect play to start. We recommend you now try a few strategies via demo accounts and find the one that suits you the best.

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.