Gaps are a popular trading opportunity for binary options. Many traders struggle, however, to determine the right gap type and draw the right conclusion from a gap. As a result, they lose money. Don’t make the same mistake. The easiest and the most profitable way to trade gaps is by using boundary options.
Why boundary options are perfect for gaps
A gap is a price jump in the market. Between periods, something has made the market jump from one price level to another without covering the prices in between. This jump is always due to a significant surplus in demand (upwards gap) or supply (downwards gap).
The trouble with gaps is that this surplus can have fundamentally different reasons, which leads to fundamentally different implications for future price movements.
To know which direction the market will move in after a gap, you should at least know these gap types:
If that seems too complicated to you, however, there is an easier approach to trading gaps: Instead of using high / low options or touch options to trade a gap, you can simply use a boundary option, which does not require you to predict the direction the market will move in.
Boundary options relieve you from having to make the difficult prediction which gap type you are dealing with and which direction the market will move in as a result. Yet, they generate a higher payout than high / low options and a higher winning percentage than touch options. Both facts are good reasons to trade gaps with boundary options.
How to trade gaps with boundary options
A boundary option works much like a touch option with two target prices: There is one target price to the upper side of the current market price and one target price to the lower side of the current market price. If the market triggers each target price, you will win your boundary option.
Usually, both target prices are equally far from the current market price. This creates a symmetrical canal around the current market price. To win your binary option, the market has to leave that canal. When trading gaps, this canal is a great tool to win a boundary option.
When you recognize a gap in the market, you know that it will create a strong movement. In one direction, you also know how far this movement will last at least: If the gap closes, the movement has to be at least the size of the gap. If the gap does not close, it will create at least an equally large movement into the other direction. This knowledge equips you perfectly to invest in a boundary option. Try to find a boundary option with both target prices closer to the current market price than the size of the gap.
Now, you only have to find out whether the market will reach either target price before your boundary option expires. Luckily, there is a technical indicator that is perfect for that: The average true range (ATR). The average true range calculates the market’s average range of movement for one period over the last periods. Since a gap creates a stronger movement, the ATR provides you with a minimum value.
All you have to do to know whether the market has a realistic chance of reaching either target price of your boundary option, is to divide the distance from the current market price to the boundary option’s target price by the value of the ATR. The result will indicate how many periods it will take the market to reach the target price.
Of course, this result requires all periods to point in the same direction. After a gap, however, this is a reasonable expectation.
Make sure to find a suitable boundary option with a short expiration time (no more than 3 periods; the shorter, the better) and a target price shorter than the size of your gap. Than you will have a good chance of winning that option. Remember: Boundary options generate a payout of about 300 percent. If you win 50 percent of your trades with a strategy like this, you will make a fortune.