As a trader, you have to pay your bills like anyone else. Therefore, you will have to meet a certain income goal with your trading. Choosing an improper strategy might make that impossible. Your ability to adjust your trading strategies for binary options according to your needs will greatly determine your trading success.
Whether you chose a strategy based on trends, technical indicators, candlestick formations, or gaps, you always need to be able to tailor your strategy according to your needs.
To help you make the right adjustments, this article will answer all your questions about trading strategies for binary options. In detail, we will answer these questions:
- What are trading strategies for binary options?
- Why do I need trading strategies for binary options?
- Which other elements do I need to create successful trading strategies for binary options?
- What are examples of trading strategies for binary options?
- How can I evaluate trading strategies for binary options?
- How can I adjust trading strategies for binary options?
With the answers to these questions, you will be able to create the perfect trading strategy for binary options for you, and you will be able to adjust existing trading strategies for binary options to your needs.
What are trading strategies for binary options?
Trading strategies help binary options trader to deal with a simple problem: you will never be able to win every single trade you make with binary options. The goal is to make money by the end of the month, after a large number of trades, maybe 100 or 200 trades. To accomplish this goal, you need a strategy that helps you to coordinate your trading in a way that guarantees that each trade is a step to achieving your overriding goal – making a profit by the end of the month.
For this purpose, trading strategies for binary options define concrete rules for how you trade. They define what you invest in, how you invest, and how much you invest. The goal of a strategy is to guarantee that you will always react in the same way to the same situation, thereby making your trading comparable and repeatable.
If you always do the same thing and know that this thing works most of the time, you will make money by the end of the month – this is the simple logic behind a trading strategy.
There are hundreds of thousands of different trading strategies for binary options, and most of them can work if you feel comfortable with them. To help you get a better feeling for what binary options trading strategies are, we will now take a look at a random example: trading trends. Just bear in mind that this is only one of many possible strategies and the fact that we mention it here makes it in no way superior to any other strategy.
Trading trends is a classic strategy traders of all types of assets have used for decades. Trends are the zig-zag market movements that take the price of an asset to new highs and new lows, depending on the direction of the trend. Such market movements never happen in straight lines, and by understanding the exact nature in which they develop, you can find enough trading opportunities to serve you for your entire career.
Even during strong upwards movements or downwards movements, the market has to go through a consolidation period every once in a while. It is simply impossible for traders to constantly keep buying and push the market to new highs or constantly keep selling and push the market to new lows. At some point, everybody willing to buy or sell has bought or sold, and the market has to gather new momentum before it can continue its movement.
These consolidation periods make trends predictable.
- In an uptrend, every new high and low are higher than respective preceding high and low.
- In a downtrend, every new low and high are lower than the respective preceding low and high.
When you recognize the classic trend pattern of taking two steps forward and one step back, you know that this trend is likely to continue and that you can win a binary option by predicting that the market will continue moving in the trends direction.
Every time you find a trend, a trend-based trading strategy would want you to invest in a binary option in the direction of the trend. The strategy would dictate the expiry you use, for example as the length of five periods or one full swing of the trend, and the amount you invest for example as 2 percent of your overall capital.
With this strategy, you would know everything you need to find trading opportunities and react to them. After a large number of trades, ideally at least 100 trades, you would know whether the strategy makes you money or loses you money. Depending on the outcome, you could adjust the strategy and improve your overall return until you can guarantee that you can turn a profit by the end of the month.
Why do I need trading strategies for binary options?
Many newcomers feel that they could do without the strict rules of a trading strategy. The main reason why you need them is the point we made at the end of the last paragraph. To understand why you make or lose money by the end of the month and whether what you are doing is working for you, you first need to know what you are doing. A trading strategy guarantees that you understand where your results come from.
Without a trading strategy, your trading would be random and driven by emotion. After a while, you would have made some money or lost some money, but you would be unable to say why you won or lost money. Consequently, you would be unable to improve. You would be trapped trying new trading styles every day but being unable to settle for a style that can guarantee your success.
A trading strategy makes your trading evaluable. Because you can connect what you are doing to the amount of money that you make, you can try different approaches to the market and find the one that works best. When you are trying to improve your trading, you can test which parts of your strategy work well for you and which do not, and you can strengthen your strengths and eliminate everything else.
Your trading strategy is the tool that allows you to improve over time. Nobody was born a master, and no trader starts their career with a perfect strategy, generating huge profits from the start. As with any skill, trading binary options takes time to master. Only with a strategy, you know whether what you are doing gets you closer to where you want to go.
Without a trading strategy for binary options, long-term success is impossible.
Which other elements do I need to create successful trading strategies for binary options?
A successful strategy for binary options contains more elements than a trading strategy. It is made up of multiple elements that combine to create the total set of rules that guide your trading.
The multiple elements that make up your overall strategy are the result of the many tasks your strategy has to accomplish. As we already pointed out, your strategy defines how you find trading opportunities, how you invest, and how much you invest. Additionally, you need a way to analyze whether what you are doing works for you and improve your results. There is an element for each of these tasks in your trading strategy.
In detail, your strategy contains these elements:
- A trading strategy,
- A money management strategy, and
- An analysis and improvement strategy.
Your trading strategy is the first and most important step to binary options success, but it is not the only step. To understand why, let’s take a quick look at what the other two strategies do for you.
- Your money management strategy defines how much money you invest on a single trade. This strategy helps you to survive losing streaks, which every broker will suffer sooner or later, and grow your money continually when things are going normally. Your money management strategy defines a small percentage of your overall account balance that you invest on every trade, ideally around 2 to 5 percent.
- Your analysis and improvement strategy define how you analyze your past trades and find ways to improve your trading. The classic way of performing this analysis is keeping a trading diary in which you detail your thought process for every single trade that you make. After a while, you can come back to this diary and understand which elements of your strategy led to winning trades and which led to losing trades. You can keep what works for you and eliminate everything that hurts you.
Add these two strategies to your trading strategy, and you have all the tools you need to become a successful binary options trader.
What are examples of trading strategies for binary options?
We already explained one example of trading strategies for binary options. To provide you with a better understanding of the world of possibilities that binary options strategies have to offer, we will now take a look at a few other strategies. We will choose examples from different aspects of technical analysis to show you the full bandwidth of possibilities out there.
Trading strategy for binary options #1: Trading resistance and support levels
Two of the simplest elements of technical analysis are resistance and support levels. Both elements are simple to explain:
- When the market has tried to rise above a price level and failed repeatedly, the price level is considered a resistance. Apparently, traders are unwilling to pay this much for the asset, which keeps the price below this price level.
- When the market has tried to fall below a price level and failed repeatedly, the price level is considered a support. Apparently, traders are unwilling to sell the asset this cheaply, which keeps the price above this price level.
Resistance and support levels allow for easy predictions: since the market is apparently unable to break through a price barrier, you can predict that it will turn around when it gets near this barrier the next time.
Depending on the binary options types your broker is offering you and your personal preference, there are a number of ways in which you can trade this prediction. These ways are:
- High / low options: When the market is closing in on a resistance or support level, you can predict that it will turn around by investing in a high option (for support levels) or a low option (for resistance levels). If you want, you can use additional indicators to find the perfect time to invest, candlestick formations or the relative strength indicator (RSI), for example. This would be the classic way of trading resistance and support levels, combining a good payout with a high winning percentage.
- Ladder options: Some brokers allow you to predict that the market will trade higher or lower than a price other than the current market price. You can use these ladder options to predict that the market will trade below a resistance level or above a support level. Since these are relatively safe predictions, you will win more of your trades than with high / low options, but you will get a lower payout. Consequently, using ladder options to trade resistance and support levels is the safe and secure approach.
- Nadex: Nadex is one of the best brokers in the world and offers a feature that no other broker offers: Nadex allows you to invest in binary options based on 30 strike price. You can choose which price you want to use freely, which is something like ladder options squared. If you want to vary your trading and to find the best strike price for any resistance and support level, Nadex is the broker to choose,
- No touch options: Some brokers offer no touch options that allow you to predict that the market will not reach a target price. These options are ideal for resistance and support levels. Simply choose a target price that is above the resistance or below the support, and you know that the market is unlikely to reach this target price. Unfortunately, no touch options are a rare instrument, and you might be better off sticking with one of the first three options that we mentioned.
Trading strategy for binary options #2: Trading oscillators
Oscillators are technical indicators that allow newcomers to binary options to find trading opportunities in a simple and easy way.
As all technical indicators, oscillators aggregate past market movements in a way that allows for predictions about what will happen next. The special thing about oscillators is that they calculate a ratio of market data, generate a value between 0 and 100 and display the changes in this value in a chart. The result is a line that oscillates between 0 and 100. The current value of the oscillator and the relationship of this value to past movements make predictions easy, obvious, and unambiguous, which is a great way to trade for newcomers to strategies for binary options.
One of the most popular oscillators is the relative strength index (RSI). The RSI relates the size of past upwards movements to past downwards movements to understand whether the market has some momentum left to rise or fall.
The RSI generates a value between 100 and 0.
- A value of 100 would indicate that prices rose exclusively over the last periods.
- A value of 0 would indicate that prices fell exclusively over the last period.
- A value of 50 would indicate that prices rose just as much as they fell over the last periods.
These results are interesting because the RSI follows a simple logic: at any given time, there is only a limited amount of traders who are willing to buy or sell an asset. As soon as the traders have bought or sold, even the best reasons in the world are unable to move an asset higher or lower. The market has to go through a consolidation period first and gather new momentum. In this way, the RSI can help you avoid investing in weakening movements and discover new movements before they become trends.
Generally, any RSI value of over 70 is considered overbought, and any value below 30 is considered oversold. You should be careful to invest in downwards movements when the RSI is below 30 and in upwards movements when the RSI is above 70.
On long time scales, when you look at the price movements of months and years, for example, the RSI can stay in an overbought or oversold area for a long time if there are strong enough reasons to push the market up or down. On the short time frames of binary options, however, such strong reasons are rare, which is why the RSI’s readings become prime tools for finding new trading opportunities.
The classic way of generating trading signals with the RSI is to invest when the market leaves an extreme area.
- When the market was in the overbought area and moves back below 70, you know that the weakening upwards movement has apparently ended and turned into a downwards movement. Consequently, it is time to invest in falling prices.
- When the market was in the oversold area and moves back above 30, you know that the weakening downwards movement has apparently ended and turned into an upwards movement. Consequently, it is time to invest in rising prices.
To trade this prediction, you can use a number of binary options types:
- High / low options: When the RSI is leaving the overbought area, you can invest in a low option; when the RSI is leaving the oversold area, you could invest in a high option. Choose an expiry that is at least three times the length of one period in your chart but no more than eight periods, and you should be able to win a high amount of your trades with this strategy. This is the low-risk strategy for the RSI.
- One touch options: Traders that are willing to accept more risk can also use one touch options to trade the RSI. This binary options type defines a target price, and the market has to reach the target price at least once for you to win your option. This is the ideal option type if you expect that the market will create a strong movement. You will probably win less of your trades than with high / low options, but because one touch options offer higher payouts of up to 300 percent, you can trade just as effectively. Compared to high / low options, this is the higher-risk/higher-reward strategy for the RSI.
- Ladder options: If you want to maximize your payouts, you can also use ladder options to trade the RSI. When the RSI leaves an extreme area, you can scan the market for resistance and support levels that will determine how far the market will move. You can then predict that the market will trade near these levels. Make sure to choose a reasonable expiry, and you have a good chance of winning a trade with this strategy. If the market breaks out of the RSI at $100 and the next resistance is at $102, you can predict that the market will trade above $101 when your option expires.
Trading strategy for binary options #3: Trading large price formations
When the market moves up and down, it often creates formations that allow deep insights into what will happen next. We already looked at trends, but there are far more price formations that you can use to create trading strategies for binary options. Some of these price formations are:
- Continuation patterns: Continuation patterns form when a trend has to go through a consolidation. Once this consolidation is complete, the trend is likely to resume its main direction. Some of these patterns look like a flag, some like a triangle, and some like a pennant. You can trade continuation patterns directly by trading the clear boundaries that they set for market movements or the breakout that occurs once a continuation pattern is complete. You can also trade the implications that continuation patterns allow for future price movements. Usually, they come around halftime for a trend, allowing you to predict how far the trend will move once the pattern is complete.
- Reversal patterns: The opposite of continuation patterns, reversal patterns predict that a movement will end a movement in the opposite direction will start. There are plenty of reversal patterns such as the double top or the shoulder head shoulder formation, and each of them allows for specific predictions about what the market will do next. By learning these formations and the predictions for which they allow, you can create plenty of trading opportunities.
- Candlestick formations: When you display market movements as candlesticks instead of line charts, every single candlestick can tell you a story about what you should invest in. Learn a few candlestick formations, and any market environment will provide you with plenty of trading opportunities. One of the most significant candlesticks is the big candle, for example. The big candle shows that prices moved up or down significantly during this period and that the market closed near the top. Consequently, it is likely that this movement will continue. After an upwards big candle, you should invest in rising prices; after a downwards big candle, you can invest in falling prices.
You can trade all of these predictions with multiple binary options types:
- With high / low options, you should be able to win a high percentage of your trades but will get a relatively low winning percentage.
- With ladder options, you can go in two ways:
You can predict that the market will move significantly when a formation is complete, thereby creating high payouts but also taking high risks.
You can predict that the market will stay within the boundaries that the formation defines.
- With one touch options, you can find a middle way, combining higher payouts than with high / low options with moderate risk.
How can I evaluate trading strategies for binary options
All of the strategies that we outlined so far have their unique characteristics. Some of them are the high-risk-/high-reward type, and some follow the slow-and-steady approach to trading. To help you understand whether the characteristics of a trading strategy match your personality and whether your strategy is good enough to make you money, we will now take a look at how to evaluate trading strategies for binary options.
In conventional theory, the success of any trading strategy is determined by two factors:
- The percentage of winning trades you have with this strategy, and
- The average payout you get for a winning trade.
By multiplying both numbers, you will get your total winnings with this strategy. As long as the result is over 100, you will make money with this strategy. For example, if a strategy enables you to win 70% of your trades, and you get 1.7 times the invested amount with each winning trade, the result is 119%. The result is over 100, which means you will make money with this strategy.
This, however, only tells you whether or not your strategy will work. It does not tell you how fast it will work. If your strategy is to trade double tops and double bottoms in hourly charts, for example, you will probably only get one trading signal a day, even if you are monitoring dozens of assets and markets at the same time. Sometimes you will not even get a single signal a day. If you had been planning to make four or five trades each day, this would turn into a big problem for you. After some time, you will inevitably realize you need to be making more money.
How can I adjust trading strategies for binary options?
One of the most dangerous situations any trader can be in is to trade an effective, money-making strategy, and still not make enough money to cover his cost of living. In this situation, most traders start looking for more trading opportunities to make more money.
Since many of them do not know how to adjust their trading strategies, they make the mistake of investing outside their original trading strategy. Desperate for more money, they fall back into old habits of making random trades without a strategy, and start losing money instead of making more. This vicious cycle will speed up until they are in deep trouble. It is therefore very important to know how to adjust your trading strategy according to your needs.
There are a number of ways you can adjust your trading strategies in binary options without completely abandoning your original strategy. First of all, you can try to monitor more assets for signals. This is not always possible, and in most cases, it cannot triple the number of signals you can find. If you are trading rare signals like double tops, you, therefore, have to look for other solutions. One possible option would be to switch to a smaller time frame. If you are currently trading an hourly timeframe, you could get significantly more signals by switching to a 15-minute timeframe.
Keep in mind, though, that if your old strategy was working for you, almost every adjustment to generate more signals would lead to a reduced quality of each individual signal.
In other words: You will be able to invest in more trades, but you will win a smaller percentage of them. Still, if you triple the number of your signals, for example, and at same reduce the percentage of winning trades from 80% to 70%, this trade-off is well worth it. On paper, your strategy might look worse than what you started out with, but over the course of a month, you will make more money. In the end, that is the only number that matters.