Binary Options Strategy
Binary options have grown in popularity in recent years due to their fast-paced nature and simplicity. But this style of trading also come with risks, so it is important that traders follow a reliable strategy. This guide will provide key information on beginner-friendly binary options strategies alongside the best indicators. Read on for a detailed overview of binary options strategies that work in 2022.
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Do You Need A Binary Options Strategy?
Standard highlow binary options involve speculating on whether the price of an asset will be above or below the current market price after a certain amount of time. This length of time varies and could be anything from 60 seconds/one minute, to one hour, a week or longer.
If the trader speculates correctly they will receive a predetermined payout, typically 70-80% of the premium paid for the binary option. However, if the market does not move in the direction they chose, they lose their entire premium. There are other types of binary options on the market such as ladder options and no-touch binary options, which also require a suitable strategy in order to achieve success.
Because traders lose their entire premium if they fail but generally only receive 70-80% of their premium back if they win, investors need to consistently win more than they lose. This is why having a good binary options strategy is important to help you finish in-the-money (ITM).
Binary Option Example
We buy a binary options contract for $50 that states that the price of the EUR/USD will be above 1.0718 at 14:00 on 1 June 2022. If our strategy proves successful and we are correct, we receive a payout of 70%, which would be $35. If incorrect, we lose our entire $50 premium. With a suitable binary options strategy, we can increase our chances of winning.
It’s also clear from this example why binary options trading is often referred to as betting due to the fixed-odds involved.
Indicators use mathematical formulae and historic market data to help traders identify trends, support and resistance levels, and more. Importantly, traders must understand certain indicators to utilize them in their binary options strategy.
Moving averages level out price data over a certain time period. For example, a 50-day moving average will take price data from the last 50 trading days and calculate the average, which is useful information for binary options trading. On the next trading day, the average will likely change again as new price data is included in the calculation.
The standard moving average is a simple moving average (SMA) where prices across the period are given equal weight. An exponential moving average (EMA) will attach additional weight to more recent trading days. Moving averages can, in theory, be any length. Many other indicators depend on moving averages, for example the Ichimoku Cloud indicator, which can also be used as part of a binary options strategy.
Bollinger Bands plot support and resistance levels on a chart. They take a simple moving average and plot the support band two standard deviations below the SMA, and the resistance band two standard deviations above the SMA. Bollinger Bands are commonly used by those trading binary options with a range strategy to help identify overbought and oversold territory.
Keltner Channels are similar to Bollinger Bands in that they plot support and resistance levels on a chart. However, the difference is that the calculation involves adding/subtracting an Average True Range (ATR) to and from the SMA.
The Money Flow Index (MFI) is an example of an awesome technical oscillator that helps identify overbought and oversold conditions as part of a binary options strategy. The MFI is a value between 0 and 100, where a reading of 80 or above is considered overbought and a reading of 20 or below is considered oversold. Both volume and price data for the asset is used to calculate the MFI.
Like the MFI, the RSI is also a technical oscillator that has a value between 0 and 100 to identify overbought and oversold conditions and is used by many binary options traders with their strategy. However, the main difference between the RSI and the MFI is that the former uses data on just price rather than price and volume.
Let’s examine how you can use these indicators to implement a killer binary options trading strategy…
Binary Options Trend-Following Strategy
Being able to successfully identify a trend is arguably the most effective component of a binary options strategy. Those spotting a positive trend would place a call option and those identifying a negative trend would place a put option.
Identifying a trend can be complex. It is estimated that markets only trend/move up or down 15-30% of the time, and the rest of the time they simply move sideways. There are also “false trends,” which occur when a market temporarily shows movement in a particular direction but is not sustained. Traders can often struggle to get clarity on which way the market is moving, which will cause issues for any binary options strategy.
Although some binary options traders may use line charts, candlesticks are the most commonly used chart style when employing a trend-following strategy. For example, a series of green candlesticks with limited or no negative shadows may indicate a strong positive trend. On the other hand, a series of red candlesticks with limited or no positive shadows may indicate a negative trend.
Traders can set the candlesticks to various timeframes, including 30 seconds in length, an hourly time frame or a daily time frame. A variation of this is the Pinnochio strategy, which states that if the shadow is longer than the body, this is an indicator that the market may soon trend in the opposite direction.
Renko charts can be a very good addition to a trend-following binary options strategy. These charts cut out noise by only plotting blocks on the chart if the price moves beyond a certain threshold. Any price movements below this threshold are not plotted. This helps filter out minor fluctuations in price so the trader does not mistake these for an actual positive or negative trend. They have similarities to a zig-zag indicator, which will usually only record price movement if greater than 10-20%, which can also be used for a binary options trend-following strategy.
Binary Options Trend-Reversal Strategy
Trends are rarely infinite and usually a time will come when any trend reverses. This creates strategy opportunities for binary options traders. Being able to anticipate when a trend is likely to reverse can lead to higher payouts.
A bullish fractal reversal pattern in which a series of five candlesticks show a change from a negative trend to a positive one is a way to utilize this binary options strategy. Another way is by using a crossover strategy, which some binary options traders find is something that really works.
For example, let’s say we have a 50-day EMA and a 1-day EMA plotted as two separate lines on a chart. Currently, the 50-day EMA line is well above the 1-day EMA line but on a gentle decline, which indicates a negative trend. However, the 1-day EMA moves upwards towards the 50-day EMA and then crosses it. The fact that the 1-day EMA has moved up sharply would suggest there are now more buyers than sellers in the market, and that the trend may be about to reverse to a positive one. A trader using the EMA crossover strategy in this situation would take an optimistic position in the binary options market.
Other indicators such as the MACD indicator, and binary options strategies including the rainbow strategy use multiple moving averages.
Binary Options Breakout Strategy
Sometimes instead of following a trend, the price of an asset fluctuates within a range. The upper band of this range is often referred to as the resistance level and the lower band as the support level. The reasons why the price of an asset may fluctuate within this range is fairly logical: as the price approaches the support level, the market is in oversold territory. All those that wanted to sell have now done so and the price is now low enough to attract more buyers than sellers, which should drive it up.
Bollinger Bands are a common indicator used to illustrate the upper and lower bands on a chart, and are usually a key part of a binary options breakout strategy. They can be supplemented with the Average Directional Movement Index (ADX), which is an indicator that shows when an asset is within a range but not trending.
When the price breaks the resistance level, this may indicate the start of a positive trend and the asset gaining momentum. Likewise, the price dropping below the support level may indicate a negative trend and encourage traders to place a put option. Renko charts can supplement Bollinger Bands and make it easier to identify the trend by removing noise. Additionally, impulse waves can be used as part of a binary options trading strategy to help identify strong price movement in the direction of the trend. The Bollinger Bandit strategy is also linked to the breakout strategy.
Binary Options Hedging Strategy
A hedging strategy involves opening binary options in different directions (call and put options) at the same time in the same market. This strategy is particularly useful when trading binary options in a volatile market such as with an exotic currency pair. If a trader anticipates that the price of the asset will change but is unsure in which direction it will trend, hedging can be a low-risk strategy option. Of course, hedging will also reduce profit potential and requires a greater initial capital outlay. Linked to hedging is the straddle trading strategy, which is a type of combo strategy, and the strangle strategy.
A long strangle is one of the best forms of a binary options hedging strategy. A trader purchases a call option, which typically has a strike price higher than the current market price of the asset. Simultaneously they purchase a put option, which usually has a strike price lower than the current market price. This works well when a large price movement is anticipated but where the direction is unknown. However, it does still carry risk if the price finishes between the two strike prices, as this would result in both premiums being lost.
Swing traders tend to hold positions for longer than day traders. With these longer-term binary options strategies, fundamental factors such as the performance of the economy and the strength of a company can come into play. If you are holding positions for more than a few days, it may be worth incorporating fundamental analysis into your binary options strategy. This can be done alongside the technical analysis strategies outlined above.
For example, let’s say a company is set to make a major announcement on its annual profit and loss. Speculators are unsure whether the news will be positive or negative in terms of trading. In this case, traders may wish to hedge their position using binary options in opposite directions if they anticipate volatility but are unsure which way the price will move. Although this limits profit potential, it means should the market move in a direction not anticipated, the losses will be contained which makes it a sensible binary options strategy.
Remember that when events occur outside of market hours, such as over the weekend, it can cause volatility when the markets reopen.
How To Implement Your Strategy
1. Choose A Broker
The binary options market is smaller than the forex, stock and commodities markets. Many brokers don’t offer binary options so your choices can be more limited. One broker that does offer binary options is IQ Option. Before you commit to any broker, check for any markups or commissions, or any deposit and withdrawal fees, particularly if your trading strategy involves making a large number of trades. Also, make sure that the broker offers binary options in your desired market, whether that’s forex, stocks, commodities or cryptocurrency. Understanding the underlying market is key to a successful binary options trading strategy.
As 70-90% of traders lose money when trading binary options, it can be a good idea to test your strategy using a demo account to improve your win rate. Although a 100% win rate is near impossible, you need to win more than you lose to achieve success in binary options trading. Check to see whether your chosen broker offers a free demo account that you can try out.
2. Choose A Market
Some markets carry more risk than others. Crypto, for example, is extremely volatile. Although this creates opportunities for binary options traders, it also carries significant risk that could potentially wipe out all your capital. Choose the market that you understand best and that aligns with your risk management strategy.
3. Be Disciplined And Follow Your Strategy
It can be easy to choose a strategy and then discard it very quickly when it appears that it’s not working. A key part of trading binary options trading is being disciplined, as well as thinking rationally rather than emotionally. Traders must accept that they are unlikely to get rich quick or never lose a trade when trading binary options.
When adopting a hedging strategy to reduce risk, this is likely to reduce your profit potential. Therefore, it can take a large number of trades before you begin to notice funds accumulating in your bank account. Always remember that almost no binary options strategy can guarantee zero risk/risk-free or no loss to the trader.
Bottom Line On Finding The Best Binary Options Strategy
The secret when it comes to profitable trading of binary options is to have a good strategy. The ultimate expert strategies are those that incorporate various indicators and methods, rather than just one scalping tool, for example. Although there is risk attached to binary options, a sensible strategy that is based on market data can increase your chances of success. The best winning binary options strategy is often the system that is the simplest and easiest to implement. And remember, even the best investors don’t become millionaires overnight.
What Is An Oscillator In Binary Options Strategies?
An oscillator is a technical analysis tool used to identify overbought and oversold conditions. A trend indicator fluctuates between two bands: when the indicator approaches the upper band, the market is deemed to be in overbought territory. Conversely, when the indicator approaches the lower band, it indicates that the market is in oversold territory. Another example of an oscillator that could be used for a binary options strategy would be the Commodity Channel Index (CCI).
What Is The Best Binary Options Strategy?
The best binary options strategy will depend on various factors, including the length of the binary option. Binary options can be 1 minute, 2 minutes, 3 minutes, 5 minutes, 15 minutes, 20 minutes, 30 minutes, 1 hour, 4 hours or longer until expiry. The wide variety in length of binary options means that traders need to adapt their strategy accordingly. For example, a strategy using fundamental analysis to determine price action is unlikely to be necessary for a 60-second binary option. Traders may also find the latest new binary options strategy by researching posts on an online forum or broker websites. In addition, there will often be detailed tips, videos and tutorials available for download for each of these strategies.
Where Can I Test My Binary Options Strategy?
MetaTrader 4 (MT4) have a Strategy Tester, although the default version does not work with binary options that have expiry times. Traders can download software to try this out for themselves. In addition, binary options robots can be downloaded, many of them for free, which will implement a strategy automatically.
Is Binary Options Trading Over-The-Counter (OTC)?
Although binary options trading traditionally has been Over-The-Counter (OTC), regulated exchanges such as Nadex now also offer binary options. This is positive news for traders as implementing a binary options strategy on a regulated exchange is usually safer.
What Is The Best Binary Options Strategy For Beginners?
The best binary options strategies for beginners are those that are simple and limit risk. A hedging strategy may be a good starting point, but this depends on the market being traded. Newbie traders can test their strategies with a demo account before they begin trading.
Are There Other Strategies That Binary Options Traders Can Use?
There are many strategies for binary options trading available online, although no strategy should be seen as the holy grail and each has its pros and cons. For example, there is also the Martingale strategy, where you double up on your investment following a loss. Other strategies include a binary options arbitrage strategy, an alligator strategy, correlation strategy, end-of-day trading strategy, CCI divergence strategy, stochastic strategy, 3 candle strategy and a bronze grail strategy. Many binary options traders will complement these strategies with a compounding strategy where profits are reinvested back into their trades.