The article was written by Connor Harrison from Binary Brokers (BBZ). BBZ makes an effort to educate their traders so that they can understand recommendations regarding binary options, international legislation, risk management and other issues related to trading.
Trading in binary options is one of the popular trends in the financial markets today. Both experienced and novice traders are rushing to include them in their investment portfolios. Just like any other trading platform or business, you must have a strategy to use in order to consistently be making money.
If without a strategy or a tactic to help you trade in binary options, you might as well consider yourself gambling. Relying on luck is not very safe in trading binary options as it will eventually not work for you and might end up losing all of your investment. You will need a solid technique that you can use every time, which will help you make the right predictions. Moreover, you need to employ a strategy that you understand well and which consistently increases your chances of winning.
Bet or Trade?
Strategies are generally categorized into two groups. These categories are;
- Betting model based strategies – In these strategies, it is assumed that the investor will employ betting strategies, whether they are familiar with financial markets or not. These strategies use several tactics that are designed to increase the probability of winning. Strategies based on the news are the best example in this category.
- Market behavior strategies – In these strategies, the investor relies almost wholly on technical and statistical data that are readily available or that which they have researched and worked on. While these strategies are a bit harder to understand and master, they are the most reliable ones since they are objective. There are techniques developed to help you understand some of the data, such as charts and which will make it easier for a new trader.
The popular strategies to go for are:
I – Fundamental Analysis Strategy
This strategy is concerned with the analysis of the behavior of the overall performance or attributes of a company. As an investor or trader in binary options, you are interested in knowing about the health of the balance sheet, income statement and the cashflow statement of the company before you consider buying an option. The other factors that you should check out include the employee and the business partners’ satisfaction. In short, this strategy tries to look at the overall picture of the business they want to invest in their stock and at times the overall industry.
II – Technical Analysis Strategy
This is a quite popular strategy in options trading. It is mainly concerned with the study of the past, using different parameters such as charts in order to predict the future price of an asset. This method is not concerned with getting the intrinsic value of an asset. It’s quite useful in options trading because as a trader, you don’t have to delve into the company’s financial statements. Among the tools used in technical analysis include Bollinger bands and Moving Average among others.
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III – Basic Options Strategy
This strategy is quite popular among options traders. It is designed and employed by a trader to safeguard him/herself from incurring total losses on their investments. You will pick an underlying asset or currency that you are interested in and then if the market movement of the strike price is heading towards a good direction, say upwards, you place a call option. At the same time, you will place a put option on the same asset.
Let’s use an example:
The GBP/USD currency option is going at 1:4000. You place the call option of $100 which will expire in 30 minutes. The payout is 70% and 15% if you lose. In the first 15 minutes the asset is at 1:4015 which is good so far. At this specific time, you buy a put option for the same asset at 1:4015 expiring in 15 minutes at $100. The payouts are the same as those of the call option.
At the end of the 30 minutes there will be two outcomes;
- Your 30 minutes call option wins and the 15 minutes put option losses. You will have earned $185 from the 70% call winnings and the 15% consolation refund from the put option (the opposite can happen, put option wins and call option losses).
- Both the call and the put options end up in the money. You will get $340 ($170+$170). Since it’s almost impossible to lose on both options, the general risk of loss in this strategy is only $15 in order to win $140.
IV – Algorithmic and signals
There are apps which are sold and which are very good at trading or analyzing the market data. You might find it appropriate to invest in such an app. This app is installed in your computer and gathers data that you want and then analyzes it to come up with the best possible outcomes. Technical and fundamental analysis data are used here.
The computer will then pick a trade for you to trade in. You could even go ahead and design the app to be actually trading for you. You will however need to be regularly updating the raw data that the app picks its analyzing details from.
V – Co-integration Trading Strategy
There could be two stocks in the market that have a high correlation relationship. This could be because they are in the same industry and are traded in the same market, hence affected by many factors the same way. Given the high correlation between such a pair of stocks, you will find that whenever there is a gap between them it will close soon after. The gap can be caused by the weakening of one stock temporarily. The main task here is to identify the gap.
After identifying the gap, you should buy the call option for the stock that is weak or a put option for the asset if the stock higher in price is bound to come down. Eventually, the two assets will come to the correlation path and that should be the ‘point of exit’.
Strategies, just like investment options, are many and you could end up with one which gives you consistent winnings. If you are a new trader, research well and identify the one strategy that best suits your trading portfolio and pattern. If you are a bit more experienced, you can create your own strategy or combine two existing ones to form a hybrid.