Swing trading is an effective trading style that can help you make a lot of money with binary options in a short time. As a new trader, make sure to explore the possibilities of swing trading, or you might miss out on a lot of money.
In this guide to swing trading, we explain everything you need to know to trade swings with binary options. In detail, we will answer these questions:
- What is swing trading?
- What are the advantages of swing trading?
- How do I trade swings with binary options?
- Which binary options types can I use to trade swings?
With the answers to these questions, you will be able to create a swing trading strategy that is tailored to your preferences and talents.
What is swing trading?
Every new trader, not just in binary options, has to choose a trading style. There are plenty of different options to choose from, but one of the most popular trading styles is trading trends. Trends are the market movements that take the market to new highs and lows. These movements are predictable and a great basis for finding profitable trading opportunities.
The key to understanding trends is understanding that the market never moves in straight lines. When the price of an asset is rising or falling, it is impossible for people to buy or sell the asset continually. At some point, everybody who is willing to buy or sell the asset right at this time has bought or sold, and the market has to go through a consolidation period where it creates new momentum before it can resume its main trend direction.
- Even if there are the best reasons in the world for an assets price to fall, there have to be at least brief periods where the asset’s price rises.
- Even if there are the best reasons in the world for an assets price to rise, there have to be at least brief periods where the asset’s falls price rises.
These periods of consolidation allow traders to recognize and predict trends. The typical picture of a trend looks like this:
- The trend moves into its main direction and creates a new high (for uptrends) or low (for downtrends).
- The trend goes through a consolidation period where it moves opposite to its main trend direction. Often, these consolidation periods retrace the trend one-third or two-thirds of the prior movement.
- Once the consolidation is over, the market turns around again, resuming the main trend direction. The furthest part of the consolidation period creates a new low (in an uptrend) or high (in a downtrend).
- For the trend to remain intact, every new high or low has to be in trend direction:
a. In an uptrend, every new high is higher than the previous high, and every new low is higher than the previous low.
b. In a downtrend, every new low is lower than the previous low, and every new high is lower than the previous low.
In this way, an uptrend zig zags its way to consecutively higher highs and lows, and a downtrend zig zags its way to consecutively lower lows and highs.
Understanding trends is the first step to understanding the market. Even if you trade another strategy, you should know trends and the effects they have on the market.
To trade trends directly, every trader has two options: they can become either a trend follower or a swing trader. The basis of both approaches is the trend. The difference between both approaches is that a trend follower is looking to trade in its entirety, while a swing trader is looking to benefit from every single movement from high to low and vice versa.
Generally, every movement between high and low in a trend is considered a swing. Swing traders to maximize their profits by profiting from every single swing in a trend.
When a trend follower recognizes a trend, they will invest in a binary option in the direction of the entire trend. When a swing trader recognizes a trend, on the other hand, they would first ask themselves whether the trend is currently moving in its main direction or going through a consolidation period. They would then invest in a binary option in the direction of the swing, using a much shorter expiry than the trend follower.
Some swing traders exclusively invest in a certain type of swings. In an uptrend, for example, a textbook swing trader would try to trade a binary option every time the market has created a new high or low. Some swing traders, however, prefer only to invest in movements from high to low or from low to high. Also, some swing traders do not trade the entire movement, but only a part of it such as the breakout or the drawback.
We will take a closer look at the many possibilities to trade a swing later. For now, the important thing to understand is that swing traders try to profit from every single swing – we will focus on how they try to profit later.
Advantages of swing trading
Compared to trend following, swing trading has a number of advantages:
1) More trades and higher winning potential
On the same time frame, a swing trading approach will generate significantly more trading opportunities than a trend following trading approach.
A trend follower has only one trading opportunity for every trend. As a swing trader, however, you can invest once for every high and once for every low in a trade, which can easily accumulate to ten or fifteen investment opportunities for every single trading opportunity you would get with a trend following approach.
More trading opportunities mean more money. With a good strategy, you can guarantee that you make a profit on every trade on average. Consequently, more trades increase your profit. Swing trading is the ideal way of trading trends to maximize your trading opportunities and your overall profit.
2) Shorter movements translate better to binary options
With binary options, finding trends that are worth following as a whole is somewhat difficult. Since binary options work on very short expiration times, most commonly only one hour or less, you would have to use a very short time frame to find a trend worth following.
Assuming that a trend takes at least 20 candlesticks to develop a pattern you can recognize as a trend, you have to use a one minute chart or shorter to find trends you can trade with binary options. On these short time frames, market movements are more erratic, and patterns are less dependable than on longer time frames. This makes finding a trustworthy trend difficult.
With a swing trading approach, on the other hand, you need to find only two or three trustworthy bars. This is easily possible, even on short time frames.
Alternatively, you could also switch to a higher time frame, such as 15-minute or 30-minute time frame, where assets move in more reliable patterns. Since you plan to trade only a part of the movement, not the entire thing, you can trade the swings of these trends even if it would be impossible to trade the entire trend.
How to trade swings with binary options
As we alluded to earlier, there are a number of possibilities how you can trade swings with binary options. These options are:
1) Trade all swings in a trend
The classical approach to swing trading would be trying to benefit from every movement in a trend. Technical analysis provides you with a vast array of methods to identify when a movement is over, and a new movement is about to be created: candlestick formations, momentum indicators, resistance and support levels, and much more.
Depending on whether you feel that you can predict the distance the movement will reach, you can use touch options or high / low options to trade the swing.
2) Trade only selected swings
Both the correction and the movement in a trend have certain characteristics that allow you to predict how far they will reach. Some traders, however, find it easier to trade only one of the two movements. If you find that your winning percentage is significantly higher for one of the two movements, you might want to think about following a similar approach.
3) Trade only a part of a swing
Some traders choose only to trade a part of a single swing. This could be the breakout, the reversal, or any other part they feel most comfortable with. If you find it easy to predict the reach of the breakout after the market breaks through the price level of the previous point 2, for example, you might make the most money by focusing on this part of the movement.
4) A combination of the above
To increase their earnings, some traders decide to trade multiple parts of each swing. If you feel comfortable with more than one aspect of swing trading, you could choose a similar trading style and make more money at the same time.
Which binary options types can I use to trade swings?
One of the advantages of swing trading is that you can use a wide selection of binary options types to trade swings. Whether you are a risk-averse trader or a trader that likes to take the risk, with swings you can always create the type of strategy that suits your character.
Let’s take a closer look at the possibilities swing trading offers to traders:
Swing trading option 1: High / low options
The most basic approach to swing trading is to invest in a high / low option in the direction of the swing. When you expect a swing upwards, invest in a high option; when you expect a swing downwards, invest in a low option.
With this strategy, be careful to time your swings right. Swings in trend direction are on the safe side – the trend is moving in your direction anyway, which can compensate for bad timing. Consolidation periods, however, are more difficult.
You want to make sure that your option expiries during the consolidation, and not when the trend has already resumed its main trend direction. Otherwise, you might lose your option because the consolidation period is already over. Some traders use this difficulty as a reason to only trade swings in trend direction with high / low options.
Since most trends swing in similar patterns, you can take the duration of past consolidation periods to estimate how long this period will last. Indicators such as the RSI can help you to detect weakening movements in trend direction early, which allows you to maximize your chances of winning the option with which you trade the consolidation period.
Executed properly, this strategy should be able to win you a high percentage of your trades, but you have to accept a lower payout than with the other more risky strategies.
Swing trading option 2: One touch options
One touch options allow you to predict whether the market will reach a predefined target price. Trends are a great tool to make these predictions.
When the market is in a consolidation, you know that the next swing in the main direction of the trend will take the market at least past the last high (in an uptrend) or low (in a downtrend). If your broker offers you a one touch option within reach of this movement, this is a relatively safe investment to make.
When the market is moving in its main direction and you detect that the movement is weakening, you can also use a one touch option to trade the impending consolidation. Most consolidations move back one-third or two-thirds of the previous movement in the trend’s main direction. This knowledge provides you with a target for your investments:
- When your broker offers you a one touch option within reach of the 33 percent retracement, you know that there is a very high chance that you will win this option. Consequently, you should invest.
- When your broker offers you a one touch option with a target price between the 33 percent retracement and the 66 percent retracement, you have to decide for yourself whether the trade is worth the risk. There is a good chance that you will win it, but there is no guarantee.
- When your broker offers you a one touch option with a target price beyond the 66 percent retracement, you know that you are unlikely to win this option. Consequently, you know that you should not invest in this option. You can, of course, trade the swing with another binary options type.
With this strategy, you should be able to combine a relatively high winning percentage with a relatively high payout, thereby creating a nice profit.
Swing trading option 3: Ladder options
If you want to maximize your payout when trading swings, ladder options are the right tool for you. Ladder options are a mix of one touch options and high / low options, allowing you to predict that the market will trade above or below a certain target price.
Most brokers offer multiple target prices for their ladder options. Target prices that are further away from the current market price create higher payouts but are more difficult to reach, which makes trading them the high-risk/high-reward type of strategy. Ladder options can create payouts of up to 1,500 percent, which makes them an attractive tool if you know how to predict whether the market will trade above their target price.
Swings are the perfect tool to maximize your profits with ladder options.
- When the market is in a consolidation period and you want to predict that it will resume its main direction, the previous high (in an uptrend) or low (in a downtrend) provide you with a target for the price you should choose. When you choose your expiry long enough, you can safely predict that the market will trade above the previous extreme, which is a great basis to win a ladder option with a high payout.
- When the market is moving in the main trend direction and you see signs of a weakening movement, you can predict that the impending consolidation will take the market at least back one-third of the preceding movement. Consequently, you know the target price for your one touch option and can win another high-payout trade.
- When the market is moving in the main trend direction, you known that a consolidation period is unlikely to take the market back further than two-thirds of the previous movement. At any given time, you can, therefore, trade a ladder option that predicts that the market will stay within these boundaries. In an uptrend where the movement has taken the market from $100 to $101, you know that a retracement will likely stay above $100.33, which allows you to win a safe ladder option. You will get a lower payout than with the first two points in this list, but you will most of your traders, which is why you can make money nonetheless. This strategy is ideal for risk-averse traders.
Swing trading option 4: A combination of the above
Many traders like to combine multiple binary options types to trade swings. There are no limitations to how you can combine binary options types. We will provide you with a simple example, but please keep in mind that this example is in no way inherently superior to all other binary options types.
To combine multiple binary options types to trade swings, your strategy could look something like this:
- Use ladder options to trade swings in main trend direction. Swings in the direction of the main trend allow you to easily predict how far the movement will move – at least as far as the last extreme. Since this prediction can generate a high payout with ladder options, it would be a shame to waste it on a binary options type with a lower payout than ladder options.
- Use one touch options or high / low options to trade the consolidation: When the market enters a consolidation, defining a price target is more difficult, which makes ladder options more difficult to use. Instead, you can use one touch options if your broker offers you a target price within reach of the 33 percent retracement. If your broker offers no such option, it is best to trade the consolidation with a well-timed high / low option.
- Use ladder options to secure the current movement: Once the market has reached a new extreme in its main trend direction, you can invest in a ladder option that predicts it will trade on this side of the 66 percent retracement. These trades will create a relatively low payout, but they can add a nice stream of income to your overall profit over time.
- Use high / low options to trade the trend as a whole: Even if you want to trade swings, there is no reason why you should miss out on a trade you can win easily. When you recognize a trend, you might as well invest in a high / low option in the direction of the trend. Make sure to choose a reasonable expiry, and you can add a nice profit to your account balance.
Swing trading is a form of trading that fits binary options perfectly. Swings bring out the best in many binary options types, and can, when executed correctly, make you rich. The most important key to trading swings effectively is understanding trends and the individual swings they create.
Compared to trend following, swings provide the advantage that you can place more trades, which increases your earning potential, and that you can trade shorter movements in longer trades, which is ideal for binary options.
You can decide whether you want to trade a swing as whole, only selected swings, parts of a swing, or a combination of these elements. The three best binary options types for swings are high / low options, one touch options, and ladder options, which you can combine to create the perfect strategy for you.
With this information, you know everything to start trading swings with binary options yourself. We wish you a lot of fun and a successful trading career.