Binary option trading, like any form of speculation, requires a certain degree of preparation before taking a position. This is known as developing a trading strategy that, over time, should be profitable provide an edge. Whichever underlying asset market you choose to trade you should be prepared. As with other forms of trading, a rationale for buying or selling the binary options as well as a time of expiry which will be critical to the success of the trade. Although many brokers allow binary options to be sold prior to their expiry for a lower percentage profit, maintaining a healthy risk:reward ratio requires the majority of trades to expire in the money. Developing a strategy that fits with your trading style is therefore essential to become a consistently profitable trader.
Choosing your asset
Binary trading provides investments for a wide range of underlying assets including stocks, currencies and commodities. The first decision in developing a successful strategy will be to select which markets have the highest probability of success. Although this sounds fairly straightforward, and will depend on the both your strategy and what time of day you intend to trade. It is important to distinguish the differences between asset class before parting with any money. Most traders will be familiar with Forex and perhaps a particular Forex pair. However, the availability of a wide variety of underlying assets can provide a temptation beyond this. Advice from successful people in the industry initially can stick to what you know as this will provide the highest possibility of success. Developing an understanding of more unfamiliar markets, such as the active trading periods. Volatility and tendency to act as anticipated is important for traders as the element of expiry time is essential to the success of each investment.
Choosing a type of trade
While binary options trading traditionally involves the basic, higher-or-lower call or put investments it is increasingly innovating with other more dynamic forms of investment. These include trades such as One-Touch trading which allows traders to purchase options based on the probability that they will ‘touch’ a predetermined threshold over the course of a day or week.
The weekly One Touch options can be purchased during the weekend and they often carry a very high reward of up to 500% if the price level is reached. Other forms include range trading which allows you to predict if price will stay between a specific price range for a period of time. These two additional forms of investments clearly provide exciting ways to trade both range-bound and volatile markets and should also be considered beyond as part of any strategy.
Selecting a Timeframe
Binary options remove many of the necessary elements of traditional Forex and stock trading, but it also adds an additional one in the expiry time. Rather than focusing on a stock rising and falling by number of points, binaries is all about where price will be at any one point in time. Adapting a trading strategy to incorporate this element is essential as a single point could mean the difference between profit and loss.
A good example is trading breakouts where we are sure that price will go in one direction, but not quite so certain that it will remain higher or lower at the time of expiry. One way that breakout traders can combat this is to purchase very short binary options, hoping that momentum will hold the price higher or lower for, say, 60 seconds. Another may be to apply some additional patience to the strategy, wait for price to return and retest the breakout level and then enter with increased certainty. Adapting a points/pips-based strategy to accommodate time as the most important factor and is absolutely essential for success.
Preparing a Disaster Plan
Perhaps the most important aspect of any trading strategy is how to get out should it move against you. Luckily, binary brokers provide two very helpful tools to help prevent disaster and to limit the exposure to a trading account. The first is the ability to close a position early, often for a lower loss than the 85% of the investment predetermined at the beginning of the trade. This depends on where price is and the length of time remaining before expiry. It’s worth noting that it won’t be an available feature in the first and last few minutes of the trade.
The other way to prevent disaster is the ability to hedge your position. This can be exercised when a trader knows that the trade has failed and places an entry close to the original strike price as possible. The probability that one of the options will close in the money is most important. With returns of around 80% and a loss of 100%, will expose the account to a 20% loss if carried out successfully.