Binary Options Reversal Strategy

The binary options reversal strategy can be a winning approach but it can take practice to execute consistently. A big part of being a successful binary investor is predicting when and in what direction an asset’s price will trend, which forms the foundation for this investing system. This 2024 guide will outline the binary options reversal strategy by explaining how it works, discussing how to get started and offering the pros and cons of the method.

What Is The Binary Options Reversal Strategy?

The binary options reversal strategy involves opening BO contracts on the assumption that the current price trend will soon change. For instance, a bullish trend will end and the asset’s price will decrease. This system is suited to all contract lengths as you can capitalise on both short-term and intraday trend reversals, as well as longer-term shifts.

How Does The Binary Options Reversal Strategy Work?

To demonstrate how the binary options trend reversal strategy works, here is an example. The image below is the price history chart for Barclays stock (BARC) listed on the LSE. Assume you are interested in opening a contract at 09:15. You can see that, since the market opened, there has been a general bearish trend. A broker is currently selling binary contracts with a strike price of 153.25 GBx for an expiry of 45 minutes with a fixed payout of 80%. If you believe that it is likely there is an upcoming trend reversal, you would open a call (high) contract.

At 10:00 the value of BARC is approximately 153.7 GBx, following a trend reversal at 09:30. Because the value of BARC at contract expiry at 10:00 is greater than the strike price, you would receive 80% profit on your initial stake.

Trend Reversal Example

How To Setup The Binary Options Reversal Strategy

Identifying suitable trend reversals is not always the easiest, especially for investors with less binary options strategy experience. One of the best ways to spot when a reversal is likely is using technical analysis with indicators like the relative strength index (RSI), Bollinger Bands and moving averages.

Relative Strength Index

The relative strength index (RSI) is a useful indicator to help plan out your binary options reversal strategy. An RSI line that ranges from 0 to 100 is calculated using averages of upward and downward trends from previous time frames. In the example image below, the previous fourteen time periods have been used. An asset is considered to be oversold when the RSI is at or below 30, which implies that the asset is currently undervalued and there will likely be a subsequent uptrend. When the RSI is at or above 70, the asset is overbought and considered to be overvalued, meaning there will likely be a downward trend in price.

RSI Reversal Signal

Bollinger Bands

Bollinger Bands are detailed indicators that can be used to convey information regarding volatility, potential breakouts and, importantly, trend strength. Bollinger Bands are formed of three lines. The middle line, which most closely follows the price, is a simple moving average (SMA) with a period of 20. The two outer lines, which create the cloud, are two standard deviations away from the SMA in either direction. The cloud is the most useful part for trend detection and reversal identification.

When the cloud is smaller (the two boundaries are closer together), the trend has stronger momentum and is less likely to reverse. When it is wider, there is greater volatility and a trend reversal is considered more likely.

Where the price is relative to the two lines can also help to indicate the direction of the following trend. If the price moves towards and passes above the upper boundary, the asset is considered to be overvalued and so will likely decrease in price. Vice versa for a bearish crossover of the lower boundary.

Bollinger Bands Reversal

Moving Averages

Moving average indicators can be used to support a binary options trend reversal strategy. This is a simple indicator that takes the average price of an asset over a previous set of time frames. The two most common versions are the simple moving average (SMA) and exponential moving average (EMA).

The SMA is a mean of all prices across the chosen period. The EMA also takes a mean but the most recent prices have a greater impact on the indicator reading. The best way to set up technical analysis with the moving average indicator is to use several at once. For instance, the image below makes use of 9-period, 26-period and 50-period EMAs altogether.

A bullish crossover by a shorter-term moving average (MA) of a longer-term MA is indicative of an uptrend in price. When there is a bearish crossover by a shorter-term MA of a longer-term MA, a downtrend is indicated.

Moving Average Reveral

Getting Started With The Binary Options Reversal Strategy

Comparing BO Brokers

While using the binary options reversal strategy, we found the following factors to be the most important for choosing a suitable binary options brokerage.

Payouts & Fees

The entire point of a binary options reversal strategy is to make money, so the most important consideration should be how much profit you can generate from your broker. This will, of course, be linked to the brokerage fees, as any charges will quickly eat away at your profits. When researching firms, look at fees for the different account types, trading commissions, deposit & withdrawal costs and any charges for extras.

Deposits & Withdrawals

The best companies offer a range of methods for transferring funds to and from your investing account. Not only should you consider the available methods but also the transfer minimum and maximum limits and the expected time taken to process any transactions.

Additional Trading Tools

Many firms also offer extra services such as algorithmic trading, alerts and signals, copy trading and market analysis, which can all support your binary options reversal strategy. These can help with planning trades and identifying promising assets, contract lengths and when positions should be opened.

Algorithmic trading takes this a step further with dedicated trading bots that will execute trades on your behalf using the instructions that you provide. Keep in mind that simply using these services will not mean all your positions end ‘in the money’, they can only help to improve the chances of success.

Reviews

Since the Financial Conduct Authority (FCA) introduced a ban on the sale of binaries to retail traders, UK-based investors must use either unregulated or offshore brokers. Therefore, you cannot rely on licensing to judge which brokers can be trusted. Our experts found that customer reviews are often the best way to see which firm is genuine. You can find client reviews and comments online.

Remember that these ratings and reviews are only opinions, so try not to let one or two impact your views too much. It is best to read several so you can get a general idea of how good or bad a broker is.

Benefits Of Using The Binary Options Reversal Strategy

• Works in all markets
• Simple to understand
• Short & long-term strategy
• Many supportive indicators
• Frequent viable opportunities
• Demo accounts support risk-free practice

Drawbacks Of Using The Binary Options Reversal Strategy

• Trend reversals can be tricky to identify
• No UK-licenced & regulated brokers
• Binary options can be high-risk

Trading Tips

Adopt Risk Management Techniques

Binary speculation carries a high risk as, each time that you trade, there is a chance that you lose your entire stake. A short losing streak of just a few negative positions can quickly lead to big losses. To help mitigate the risk of a binary options reversal strategy putting your portfolio in the red, it is recommended that you adopt stringent risk management techniques.

When we used the strategy, we found the 1% rule to strike a nice balance. This is where you never invest more than 1% or 2% of your capital in a single position. Another option is incorporating straddling or hedging strategies. These both involve opening additional contracts such that at least one will always return a profit, though with the potential for both ending ‘in the money’.

Using risk management techniques may mean that your short-term profits are not as large but, in the long run, you will see the benefits from the reduced impacts of negative trades.

Education & Practice

Judging when a trend reversal is imminent is not an easy task. For instance, if an asset’s value is reaching a resistance level, will it break out or will it rebound? The best way to improve your chances of making accurate predictions with a binary options reversal strategy is through
education and practice.

There are many learning resources online, such as books and ebooks, PDF guides, YouTube videos and web classes that you can take advantage of. There are also investing communities on websites and forums, where you can discuss your trading strategy and tactics with other experienced investors.

Of course, education can only take you so far, so you will need to put what you learn into practice. The best way to do this is with a demo account, which many binary brokers, such as Pocket Option, offer for free. Demo accounts use simulated funds, so any trade you make is risk-free and will not impact your capital.

Use More Than One Indicator

It can be easy to fall into the trap of relying on just one indicator as your source of technical information. To help you execute trades for the binary options reversal strategy, you can combine several to better identify suitable opportunities. For example, using the aforementioned trend reversal indicators together with momentum strength indicators, such as the MACD, can further determine when is best to open a contract.

Final Word On Binary Options Reversal Strategy

The binary options reversal strategy is a proven method that all investors should consider. Whether the market is forex, stocks or crypto, this is a viable strategy for binary options trading. Keep in mind though, that even though there are investors who have had success with this strategy, it is not guaranteed that you will also. For this reason, take the time to learn and practise the method and implement risk management techniques wherever possible.

FAQ