Touch options are a binary options type that provides the highest payouts of all binary options, sometime up to 500 percent in a single trade. A successful trader of touch options can make higher profits than with any other option type. In this article you find strategies for touch options that will help you accomplish exactly that.
Using the average true range (ATR) to estimate the market range
The average true range is a technical indicator that measures how far the market has moved on average over the last periods. While the market could slow down or speed up in the future, the ATR gives you a good indication of the possible range a movement can have in a given time.
If you are expecting a long movement for example and your binary options broker is offering you a long touch option you can use the ATR to determine whether it makes sense to invest in this touch option by comparing the touch option’s target price to the ATR.
Should the distance between the touch option’s target price and the current market price be twice as much as the ATR’s value, you know that it should take the market about two periods of time to reach the target price. That is important information. You can compare this prediction to the expiration time of your option. As long as the expiration time of your option is longer than two periods, you are looking at a profitable investment opportunity.
If you are trading a time frame of 10 minutes, for example, and the touch option has an expiration time of 30 minutes, you know that this equals three periods.
Since the ATR predicts that the market should reach the target price in two periods, you know that you have a good chance to win this touch option. Should you find a touch option with an expiration time shorter than the predicted duration of the movement, you should not invest in a touch option. In that case, you can trade the breakout with a high / low option.
Some traders also offer high risk and low risk touch options. Low risk touch options have target price closer to the market price, but also offer a lower payout. In that case, you can use this strategy to determine whether you should invest in the high risk or low risk touch option.
Of course, there are other volatility indicators than the ATR. You can use any of them with the same kind of strategy.
What to watch for in strategies for touch options
To trade this strategy successfully, there are a couple of signs you should know:
1) Future market movements are uncertain
When you are trading touch options, you are trying to estimate the volatility of future market movements. That is a hard task, since even that change the market environment could occur at any time. Therefore, the longer the expected movement has to last for the market to reach the target price, the riskier the investment. New events could make the market turn around or delay the movement past the expiration time of your touch option.
When investing, factor in some room for these events. A tight calculation on trades over many periods will likely reduce your winning percentage.
2) Using a second indicator makes sense
To trade the strategy outlined in this article effectively, you could use a second indicator that generates the trading signal. With the ATR you can then evaluate whether it makes sense to invest in a touch option.
One possibility to apply this type of strategy is to trade breakouts, for example breakouts through resistance and support levels, out of continuation and reversal patterns, or out of candlestick formations. As soon as you find a breakout, you can use the ATR to determine whether it makes sense to invest in a touch option or if you should rather go with a high / low option.
Trend followers could also use a moving average or a moving average crossover technique to generate a trading signal. Once they receive a signal, they could use the ATR to evaluate whether they should invest in a high / low option or a touch option.