Currencies are one of the most popular and most used asset types to invest in a binary option. To make money with currencies and binary options, however, you need strategies for currencies.
Currencies are a unique type of asset in many ways, and to deal with these special features successfully, you need a special type of strategy.
In this article, we explain everything you need to know about binary options and currencies. In Detail, we answer these questions:
- Why do I need special strategies for currencies?
- Which strategies are ideal for currencies?
With the answers to these questions, you will immediately be able to start making money with strategies for currencies and binary options.
Trading strategies for currencies
Strategies for currencies differ from strategies for other binary options types because currencies feature a number of distinct characteristics that no other binary options type has in the same way.
In general, there are two unique characteristics to trading currencies:
Currencies are traded all day from Monday to Friday. Currencies are the only type of asset that is traded 24/7. Stocks and indices are only available when their home stock exchanges are open for trading, which is only for 8 hours a day. Commodities are theoretically available throughout the day, but most binary options brokers limit their availability during time with low trading volume when trading binary options becomes impossible.
Currencies are influenced by factors outside of the stock exchange. Currencies are not only influenced by the supply and demand created on a stock exchange, but also by supply and demand created by fundamental influences such as imports, exports, and people exchanging currencies privately. Stock and indices are exclusively influenced by what happens on stock exchanges.
Both of these factors set currencies apart from all other binary options types. You can use both factors to create the perfect trading strategies for currencies. In the next part of this article, we will present you with three of the best trading strategies for currencies, so you can make money with binary options.
Which strategies are ideal for currencies?
To trade currencies successfully, you need a strategy that takes advantage of the unique features of this asset type. While there are hundreds of strategies that attempt to do exactly this, we will now present three of the most popular examples. We picked strategies that even newcomers can execute easily and that come from different ends of the spectrum.
Strategy for currencies #1: Trading long term trend lines
Binary options are short-term investments. Therefore, you cannot profit from the typical long-term trends in currencies directly. You can, however, profit from them indirectly. Long-term trends have a significant influence on the market. This influence translates to shorter time frames: When a long term trend line dictates the market to turn around, you can trade this reversal on a shorter time frame.
Find the trend that will take the market to the trend line. Then look for signs of a new, developing trend in the opposite direction around the trend line of the long term trend. As soon as you find that trend, invest in that direction with a high / low option with a medium to long expiration time. Such a strategy will create secure but few signals per asset. Therefore, it is absolutely necessary to monitor more than one asset.
Also, search for long term trends on multiple time frames: A long term trend can occur in any time frame from an hourly time frame upwards. Make sure to also check daily charts.
Strategy for currencies #2: Trading the news
Currencies are heavily influenced by fundamental factors. News about a change in an important fundamental factor will have an immediate, significant impact on a currency pair. When a central bank increase or decrease its base rate or prints new money, for example, the market will react strongly. As a trader, you can use these events to win a binary option.
One word of caution, though: When news hit the market, the market often reacts in unforeseen ways. Sometimes, good news can weaken a currency because traders expected even better news. Sometimes, bad news can strengthen a currency because traders expected even worse news. Therefore, you should not invest in the news and what you think they imply, but on how the market reacts to the news. Only invest in a high / low option or a touch option, when the market has shown you where it will move.
Since you do not know which way the market will react but know for sure that the market will react strongly, scheduled news can also be a great opportunity to invest in a boundary option.
Strategy for currencies #3: Trade divergences in momentum indicators
Divergences in momentum indicators, such as the relative strength index (RSI), can give trend followers an early signal for a weakening trend.
The relative strength index (RSI) has a simple goal: it wants to measure whether there is still room for the market to move up or down. For this purpose, it compares the number and the size of periods with rising prices in the past to the number and the size of periods with falling prices. With this system, the RSI wants to find out whether there are still some people left that can buy or sell an asset and push the market further in one direction.
Because stock prices are exclusively determined by supply and demand, when an asset has risen for a long time, there might be no more traders left to push the asset any higher – when nobody is left to buy an asset, its price has to fall even if there are the best reasons in the world for why the price should keep rising. The RSI can help you to find these moments when a change in market direction is imminent.
One of the most significant signals of the RSI is a divergence between the RSI and the market’s movements. The RSI creates a divergence when the market forms a new extreme (high or low) without the RSI forming a new extreme, too. This is a major signal for a weakening trend.
There are two ways in which the RSI can form a divergence:
- When the market creates a new high but the RSI remains lower than its last high, the uptrend is in trouble, and a downwards movement is imminent.
- When the market creates a new low but the RSI remains higher than its last low, the downtrend is in trouble, and an upwards movement is imminent.
Trend followers can use these signals to anticipate an impending reversal. Stop investing in the current trend, and either invest in a change right now or wait for additional signs of a reversal and then invest in the new movement.
One thing you have to keep in mind is to use a long enough expiry for your investments. Even with an imminent change in market direction, there is no guarantee that the market will turn around right now. It might happen instantly, but it might also take a few more periods. When the market does turn around, however, the change will last for a while. This is why it is safer to pick a long expiry and make sure that you hit the impending movement while it still lasts.
With a strategy like this, you can win a high percentage of your currency trades, and you should be able to turn a profit with binary options.
What other strategies for currencies do I need?
So far, we focused on strategies for currencies that help you find trading opportunities. While this is the most obvious part of trading and the part new traders focus on the most; it is only one of three strategies you need to make money. The three types of strategies for currencies that you need are:
- A trading strategy: This is the type of strategy that we focused on so far.
- A money management strategy: A strategy that tells you how much you should invest in every single trade.
- An analysis and improvement strategy: A strategy that helps you identify strengths and weaknesses in your trading.
Let’s look at the two strategies that we ignored until now. Each of them is just as important as your trading strategies.
Why do I need money management strategies for currencies?
To make a profit with binary options, you need to manage your money well. To understand why consider these two examples:
Example 1: A trader chooses their investment per trade according to how they feel. On some trades, they invest next to nothing; on some trades, they invest almost their entire account balance. While this trader might have a few big wins, they will sooner or later lose a trade they felt sure about, and most of their money will be gone. Since once big loss can wipe out many, many preceding wins, this trader will sooner or later end up bankrupt.
Example 2: A trader invests 20 percent of their overall account balance on every single trade. Thinking that they should be able to win one trader every five trades, this trader believes to be in a safe and secure spot. Even if this trader wins 80 percent of their trades, however, they will sooner or later lose four or five trades in a row or six trades with only one or two trades in between. Such losing streaks are inevitable, and they are enough to ruin this trader.
These two examples show why you should be careful to invest too much in a single trade. You should, however, also avoid to do the opposite and invest too little:
Example 3: A trader with an account balance of $1,000 invests only $1 per trade. After a month, the trader has made a profit of $5 and concludes that this small gain is not worth their time. Viewed from a percentage standpoint, however, the trader has made a profit of 500 percent their investment per trade in one month – which is great. They only lost interest in binary options because they invested too little per trade.
With good money management, you can avoid both of these mistakes. The goal of a money management system is to find the investment sweet spot where you invest enough to grow your money when things are going your way but not so much that a losing streak can ruin you.
You find this sweet spot when you invest 2 percent to 5 percent of your overall account balance in every trade. With an account balance of $1,000, for example, you should never invest more than $50 per trade and never less than $20.
The exact height of your investment depends on your strategy. Some strategies are riskier than others, which is why you have to prepare for longer losing streaks. Other strategies are relatively safe, which is why losing streaks will be shorter. You have to adapt your investment per trade to the risk of your strategy:
- With a risky strategy, you should invest only 2 percent of your overall account balance per trade.
- With a safe strategy, you can afford to invest 5 percent of your overall account balance per trade.
- With a medium strategy, you should invest somewhere around 3 percent to 4 percent of your overall account balance per trade.
To find the ideal investment amount for your strategy, we recommend starting with an investment of 2 percent and increasing your investment, if necessary. You start out safe and increase your risk if it turns out that you can afford to do so. This approach is significantly better than if you would start with a 5 percent investment per trade and end up broke because your strategy is too risky to allow for such a high investment.
Use this type of money management, and you will be able to steadily grow your capital and survive losing streaks without going broke.
Why do I need an analysis and improvement strategy for currencies?
Your analysis and improvement strategy might be the most important part of your strategy for currencies.
The reason for this statement is simple: no trader has ever started with the perfect trading strategy or the perfect money management. It takes time to master a skill, and learning to trade binary options is no different from any other skill. You will start out with what is your best idea at the time, but let’s be honest: how many times in life has your first idea been the perfect guess? Do you really want to bet your hard-earned money on such long odds? If you do not, you need an analysis and improvement strategy.
An analysis and improvement strategy does exactly what the name promises: it analyses your trading and helps you find the areas in which you need to improve. While this might sound like a simple task, the lack of an analysis and improvement strategy is why most traders fail.
The truth is that it is difficult to understand why you made money or lost money after a month of trading. With short-term assets such as binary options, you can easily place five trades a day, which amounts to 100 trade a month if you trade 20 days of the month. If you invest more time, you can easily end up with significantly more trades.
With such a large number of trades, it is difficult to point to a single factor that cost you the most money this month. You will be left with such a vast amount of data that you are unable to make sense of what is happening. Unable to improve, you are stuck at your current level, unable to ever become a successful binary options trader.
With an analysis and improvement strategy, you can overcome this dilemma. The idea is simple. For every trade that you make, you note your motivations and your reasoning for why you thought that this would be a good investment.
- You write down the asset you invested in, the type of asset, the direction, and the expiry. Are you trading a big currency pair or a small currency pair? Are you investing in rising or falling prices? Are you using a short or a long expiry?
- You write down the basic idea behind your trade. Were you trying to follow a trend? Were you trading the news? Were you relying on a gut feeling?
- You write down the indicators that led you to believe that this would be a good time to invest. Did you use technical indicators, candlesticks, or trends? Did you combine multiple techniques or use a single indicator?
- You write down the basic setting for your trade. Where did you trade from? How many time did you spend analyzing the market before you invested? Were you alone? How did you feel when you made the trade? Were you sleepy, angry, or ready and awake?
With such precise data, you can find out what is working for you and what is not. After a while, you can go back to your notes and evaluate your trading by different criteria. You will find the things that cost you money and the things that make you money.
- Maybe you are doing especially well or especially bad with certain types of assets. Some traders do better with big currency pairs involving the U.S. Dollar, others do better with small currency pairs involving the Euro. There might not be a reasonable explanation for your preference, but as long as you can identify your strengths, you can play to them. Find the assets that you have the most success with and focus your investments on them.
- Maybe you are doing especially well with a certain directions. Many traders find it easier to identify opportunities for rising prices than falling prices, some are the exact opposite. If you are like these traders, you might want to find investments in one direction and improve your results.
- Maybe you are doing especially well with a certain type of trading style. Most traders have a trading style with which they feel the most comfortable. By focusing on this trading style and eliminating everything else, they can improve their results.
- Maybe you are doing especially well with a certain type of indicators. Indicators are very different and create different readings. Each type of indicator suits a specific type of trader, and by finding the indicators that suit you the best, you can maximize your winning percentage and your returns.
- Maybe you are doing especially well during a specific time of the day or in a specific mood. Most traders find that their mood has a significant influence on the quality of their trading. Some traders get worse when they are stressed or angry, some can use these emotions to trade better. Other traders make their best trades in the morning or find that the time of the day has little influence on their trading. Either way, knowing when to trade can help you make more money.
Understanding the influence that these factors have on the quality of your trading is an essential part of your strategy for currencies. Since many of them are irrational and unpredictable, it is difficult to identify them without the help of an analysis and improvement strategy.
You can tailor your analysis and improvement strategy to your personal preferences:
- You can keep a trading diary. Some traders like to write things out. These traders can take write down what they thought, allowing them to compare the thought process behind successful and failed investments.
- You can keep an Excel sheet. Some traders like to keep things statistical. These traders can write down their trades in an Excel sheet. Make one column for the asset, one for the direction, and so on. Repeat the process for every characteristic of your trade that you want to understand, and you soon be able to identify which parts of your strategy work for you and which do not.
- You can do anything that works for you. As long as you find a way of identifying the parts of your trading that make you money, any strategy will do. While there are certain limitations to what your trading strategy and your money management strategy can look like, when it comes to your analysis and improvement strategy, anything that works for you is fine. Go crazy and find your perfect solution!
Make sure to have a working analysis and improvement strategy, and you are well on your way to binary options success. This is the most important part of your strategy, and you can greatly benefit by getting it right from the beginning. If you do, everything else will fall into place over time.
When we talk about strategies for currencies, there are really three strategies you have to understand. Those strategies are:
- Your trading strategy,
- Your money management strategy, and
- Your analysis and improvement strategy.
Your trading strategy tells you what to invest in, when to invest, and which binary option and expiry to use. Since currencies have a number of unique characteristics that set them apart from any other asset type that you can trade with binary options, you can employ unique strategies. Three popular strategies that are ideal for currencies are trading long-term trend lines, trading the news, and trading divergences in momentum indicators.
While trading strategies take up most of the spotlight in trading discussions, your money management strategy is just as important as your trading strategy. It helps you to grow your money consistently and survive losing streaks. Invest between 2 percent and 5 percent of your overall account balance per trade, and your money management will be fine.
Finally, the most important part of your trading strategy is your analysis and improvement strategy. It helps you to eliminate the things that cost you money and to strengthen your strengths. Since you will start out with imperfect trading strategies and money management strategies, a well-working analysis and improvement strategy is essential to finding your way to binary options success.
Make sure to use and improve all three of these strategies for currencies, and you should be able to become a successful binary options trader.