There are some simple trading practices that anyone can follow in order to ensure that their experiences in binary options trading remain pleasant and that they don’t have to deal with one too many losses.
Treat these strategies as golden rules as they can make your trading more profitable.
When trading in binary options, most investors think it is the simplest and easiest way of trading. This is true, but it is not without rules and conditions that you must know. Since it is very short term as a process, you should be able to predict the direction in which the asset will move without much difficulty. Ensure that you use a reliable and easy to handle trading platform for the binary options. Check that all regulations by the government are followed and that it is a recognized site.
There are different laws when it comes to binary options trading in different parts of the world. For example in Israel a license is not required as is the case in the US. Firstly, when you have decided to do options trading, you must have money that you can set aside and put into it without it endangering or crippling your lifestyle. Ensure that you will not need that amount for the next 12 months. Set aside a certain amount that you know you can use for trading and keep your account active on the trading platform.
Check and learn all the rules that you need to so that you know exactly how things work when it comes to the trading platform. You should know how things work, how you can plan it, what will be the bonus payments available to you, how much should you pay each time in a call-out and call-in situation. What kind of earning can you get and what is the minimum you can spend are also important in binary options trading. There should also be clear attempts to avoid overtrading, you should be careful not to overdo things thinking you can win more. Instead diversify the trades as much as possible. This will be a better idea and will also give you better chance at winning as much as possible.
Use the instruments available to you in a trading platform when trading in binary options. Check out different reviews and find a platform that is user friendly and has enough instruments to make the process simple for you. It makes a lot of difference the kind of platform you use as it is what will determine how much you understand the process and the trading that you do. Look for a trading system based on probabilities that you can tie in with a money management system.
Look for some easy to follow advice. There are plenty of tips and strategies out there and excellent brokers who are experienced and will be able to place the best odds that will win you enough to make it a good thing. You should be able to read up on and research on strategies so you can approve or disapprove of decisions made on behalf of you for the account. Also look at having instrument diversification in your trading habits and practices. Geographical diversification and chronological diversification is just as important if you want to maximize the profits you earn.
- 1 Trading the News
- 2 Technical Analysis Strategies
- 3 Fundamental Analysis for Binary Options Trading
Trading the News
News events have a major influence on financial markets. Some traders are only focusing on financial news to make their trading decision and every good broker will provide you with an advanced financial news feed to help you build and adapt your trading strategies depending on the content of the news flow.
As you will learn, events and indicators can dramatically move asset prices in some particular direction extremely quickly.
The majority of the macro news events are scheduled (GDP reports, Non-Farm Payrolls, Manufacturing indexes…) and you better learn the release dates of these major numbers before implementing any macro strategy. All the indicators we just mentioned can have a huge impact on forex pair levels.
Nevertheless, there exist multiple types of news. The macro news are the ones mentioned above. They are likely to impact financial markets as a whole. A good GDP reports from the United States is likely to push the US dollar and US equity indices up.
Micro News releases are associated with single assets such as oil inventory reports that will mainly impact the commodity price or major company earnings that will mainly impact the related company equity stock price.
How to use binary option to trade the news
Asset prices will generally become volatile before the news release but even more after the release. Generally 60 to 90 minutes before the news events, price will likely start following a trend.
- It will follow an uptrend if most market participants believe that the actual news will be more positive than what is estimated.
- It will follow a downtrend if most market participants believe that the actual release will be more negative than what is estimated.
If price is in uptrend and the news surprises negatively, or match the expectations, the asset price will drop in seconds and likely resume a downtrend.
When you try to trade the news, you should both focus on the news itself and the expectations prior the news release. If you believe that the asset price has outperformed the likely benefits of positive news, it is the time to buy a Put (also called Low binary option). If you believe that the asset price has under-performed the likely benefits of positive news, it is the time to buy a Call (also called High binary option).
Binary options are extremely useful to trade the News. They are both short-term and leveraged financial instruments that can enable you to realize huge profits in a short amount of time if the asset evolve on the desired direction after the release of the news. This is the most important advantage of binary options.
Technical Analysis Strategies
Although there exist many approaches used by traders and asset managers to forecast individual asset prices in financial markets, fundamental analysis and technical analysis are two disciplines among the most commonly used.
Technical analysis is best defined as the use of charts and historical prices in order to study market price activity and evolution. The ultimate objective is to use this information in order to attempt to forecast future price trends.
In order to fully understand and dig into technical analysis, you need to acknowledge 3 main principles that lay the groundwork for this practice:
- Market prices move in trends
- Market action reflects all known information that is available
- The past predictive value of price patterns that reflect the bullish or bearish psychology of the marketplace are assumed to apply in the future.
Simply put, technical analysis consists of a set of graphical and mathematical tools that can be visualized in real time on graphics that traders use to help them improve their investment decisions.
Advantages of technical analysis for binary options trading
Technical analysis presents many advantages for retail traders, it requires a lot less data, knowledge and experience than fundamental analysis. You just need an historical graph of an asset price and volume to run the most basic technical analysis. We want to highlight below the main advantages of technical analysis:
- Technical analysis can be applied to all asset classes (stocks (equity), forex, indices, commodities…)
- Applicable to any time horizon (short, medium and long-term) and mostly used for short-term trading decision that is the most relevant for binary option traders
- Established framework allows diverse markets to be followed at once, the most advanced trading platform provided by binary option brokers allow you to build advanced technical indicators in one click.
- Permits the focus on trending markets, as opposed to markets that are not “moving”.
Nevertheless, you should always remember that technical analysis is a subjective science, some say its mort an art than a science and that no technical indicator will be right 100% of time. Technical analysis is here to help you formulate hypothesis about the market direction but is in no way an absolute truth.
As a reminder, the regulated binary options broker that proposes the most complete offer in terms of technical indicators and chart analysis is OptionTime. Don’t hesitate to have a look at our detailed review of OptionTime for further details.
1. Chart Analysis
There exist different types of charts that convey more or less information about the evolution of the asset price over a chosen period. Please find below a brief description of different chart types used by professional traders.
It consists of merely plotting the closing prices of an instrument over a chosen time period.
Implications: While this most basic chart is easy to construct, the open, high and low data is not plotted for consideration.
Vertically plotting the open, high, low and closing price of an instrument for a chosen time period will produce the bar chart.
Implications: It overcomes the weaknesses of the line chart by including open, high, low and close data for scrutiny.
It consists of plotting the open, high, low and closing values for an instrument. However, the difference between the opening and closing values forms the candle and is termed the “real body”. The wicks that protrude above and below the real body are termed “upper shadows” and “lower shadows” respectively. Hollow real bodies are usually used to represent days with a positive net change in price, while solid real bodies usually represent days with a negative net change in price.
Implications: This is the most commonly used graphical representation by technicians as the up and/or down days are more easily discernible.
Point and Figure Chart
It records price changes that are defined by box size criteria. While “X’s” and “O’s” denote upmoves and downmoves respectively, prices must reverse by the amount of the box size in order to be plotted. The example in displays a point and figure chart for USD/CAD using a box size of 10×3. Therefore, each “X” or “O” represents a price move of 10 points, and prices must reverse by a minimum of 30 points (10×3 is termed the reversal amount) in order to be plotted.
Implications: A multidimensional chart format that eliminate the “time dimension” and concentrates on pure price movement. This type of chart is used by experienced trader and for the analysis of longer term trends, it is then less relevant for binary option traders and is almost never proposed by binary option brokers.
2. Support and Resistance
The principal purpose of technical analysis is to identify trends, supports and resistances that can either be tested or broken. These levels can then serve as entry points for binary option traders.
Asset price trends and binary option trading strategies
A trend can be defined as the general direction of an asset price. These trends can be uptrends, downtrends or sideways and may vary in length.
An uptrend consists of a series of ascending peaks and troughs that rise successively. A downtrend consists of a series of descending peaks and troughs that fall successively. Markets that are in a sideways trend are often called “range trading” and feature a series of roughly level peaks and troughs. Markets actually spend up to 33% of time in this state.
Technical analysts draw trends on candlestick charts by linking the successive highs or the successive lows of an asset price. These trends represent the general direction of the asset price and can be used to identify pivotal points. Indeed, when a trend is broken, the asset price is likely to move strongly in the opposite direction of the preceding trend. When successive highs and lows of an asset price chart draw two parallel lines, it forms what technical analyst call a channel. A break of a channel bound would imply a strong move of the asset price in the direction of the break.
Supports and resistances: Buying and Selling opportunities for binary option traders
Supports and resistances are graphically formed by horizontal lines on which an asset price has bounced at least more than two times. These levels represent the virtual fight between buyers and sellers of the asset. Asset prices are likely to pull-back on a resistance level and to bounce on a support level. Nevertheless, if one of these levels break, the trend of the asset is likely to accelerate in the direction of the break. An asset price that breaks a resistance will accelerate its uptrend move while an asset price that breaks a support will accelerate its downtrend move.
How to use supports and resistances for binary option trading?
Binary option traders will wait for an asset to bounce on a support before buying a bullish binary option on this asset. They will also wait for an asset price to pull-back from a resistance to buy a bearish binary option on this asset.
3. Moving Averages
Moving averages are one of the most popular technical indicators in the retail trader’s community. One of the main reasons of their success is that they are really easy to read and interpret on a technical chart in order to take an investment decision.
What is a moving average?
A moving average is the arithmetic average of a number of data points over a chosen time period. The most commonly used data points are closing prices.
The 20 day moving average will thus be the arithmetic average of the last 20 closing prices for a specific asset. The data is then smoothed daily and is used to identify the beginning or termination of a trend.
How to use moving averages for binary option trading?
The most commonly used moving averages by professional traders are the 20 day, 50 day, 100 day and 200 day moving averages, they use this moving averages on candlestick charts most of the time. The shorter the investment horizon, the more traders will use a short-term moving averages to identify potential technical supports and resistances. Moving averages can be used to identify trading trends (long term bullish trend when moving averages all in uptrend and vice-versa) but also to determine support and resistance levels on which the asset is likely to bounce or breakout.
Using moving average crossovers to identify BUY/SELL signal
A buy signal is generated in the context of a single moving average crossover when the closing price of an instrument moves above the selected moving average; it is called a bullish crossover. Conversely, a sell signal is generated when the closing price moves below the moving average; it is called a bearish crossover.
Implications: A bullish crossover can be used to implement long positions, while a bearish crossover can be used to reverse positions and to initiate a short position.
A buy signal is generated as part of the double crossover method when the shorter moving average closes above the longer moving average. This is often referred to as “the golden cross”. Conversely, a sell signal is generated when the shorter moving average closes below the longer moving average. This is often referred to as “the death cross”.
Implications: The “golden cross” can be used to implement long positions, while a “death cross” can be used as a take profit and to initiate a short position.
Most of the binary option brokers presented on the website propose platforms that will enable you to display live charts and moving averages to help you take quick investment decisions.
4. Trend line strategy for binary option trading
As you may know, most financial assets available with binary options are following trends (uptrend or downtrend) that may vary in magnitude and time horizon. A long-term uptrend is often called a bullish market on Wall Street and long-term downtrend market is often referred as bear market. This is why most financial analyst and economists defend the idea that financial markets and assets are evolving in cycles.
Using trends for binary option trading
Even though binary options are really simple to understand and to use, it would be foolish to assume that you can earn an income without having a clear trading strategy. Binary options are relatively straightforward instruments, as the retail investor is only required to predict whether the price of an asset will go up or down. Analysing, identifying and predicting trend lines can thus represent a huge advantage to implement successful binary option strategies.
As a reminder, a support line can be drawn by the lower price extremes. Most support lines are uptrend support lines where the asset price tends to bounce and resume its uptrend pattern. An experienced binary option trader will thus buy a High binary option around the support line level, as the probability of a rebound is much higher around this level.
A resistance line can be drawn by the upper price extremes. Most resistance lines are downtrend resistance lines where the asset price is likely to pull back and resume its downtrend pattern. An experienced binary option trader will thus buy a Low binary option around the support line level, as the probability of a pull back is much higher around this level as volatility increases.
Trend line characteristics
The longer a trend line the stronger and more likely is the asset price to bounce or pullback on this trend. Another indicator of the trend’s reliability is the number of times that the price has tested support and resistance lines (that is trying to break them), but it did not stand their power and came back.
Fundamental Analysis for Binary Options Trading
Fundamental and technical indicators will enable you to identify trends and opportunities to accurately time your entry and exit points on a specific asset.
When it comes to analysing the market and asset prices movements, there exist two main tools: fundamental analysis and technical analysis. Technical analysis is best defined as the use of charts and historical prices in order to study market price activity and evolution. The ultimate objective is to use this information in order to attempt to forecast future price trends. Fundamental analysis is best defined as the study of macro and micro economic data in order to attempt to forecast their impact on future asset price movements. It is extremely useful to gain at least a basic understanding of both these tools if you want to get the most from your trading and increase your chances of making money.
The analysis of macroeconomic indicators
Fundamental analysis is the study of fundamental and economic data. There exist a large range of data and indicators that may vary according to the asset class you are trying to study. Major indicators include interest rates, employment figures, GDP growth and inflation figures. For the forex market, more specific data include the variation of Central Banks’s forex reserves, monetary policy stimulus, consumer price indices evolution… For the equity stocks and index market, more specific data include earnings, dividend policy, merger announcements and Purchasing Manager Indices (PMIs). Eventually, for the commodity market (oil binary options for instance), more specific data will include weather conditions, producers’ reserves and importing countries’ expected consumption.
Fundamental analysis for binary option trading
From the binary option traders’ perspective, fundamental analysis is useful in building up a bigger picture of key themes and trends. Most economic data are scheduled in advance on the economic agenda and economists are freely providing estimates of these incoming data. It is thus not so much the data in itself that matters but the deviation of the released data from the consensus estimates and its evolution compared to the previous periods. This allows binary option traders to schedule their strategy around these events, when the volatility is expected to pick up.
Fundamental indicators are the drivers of wider and longer market trends. This is why most binary option traders prefer to base their strategies and entries timing on technical indicators that are more short-term focused.