Boundary options are binary options with a higher payout than high / low options that do not require you to predict the future market direction exactly. They take away the hardest part of trading while rewarding traders with a higher payout. This article will teach you how to trade boundary options effectively.
Using a momentum indicator to determine the market’s reach
Boundary options provide you with the unique advantage of not having to predict in which direction the market will move in the future. You can win your option by simply predicting that the market will move far enough in either direction. To win your binary option, you only have to estimate how far the market can move over a given period of time. That is not that hard. Momentum indicators are perfect to help you with that.
If your boundary option should have an expiration time of 30 minutes and you are trading a 10 minute chart, you know that the market will move three periods until your option expires. While this information is easy to obtain, it is valuable. You can use it to calculate a wealth of predictions about future market movements, for example the expected market range.
To know how far the market can move in the three periods until your binary option expires, you can use momentum indicators such as the average true range. The ATR calculates how the far the market has moved with each single period in the recent past. By multiplying the ATR’s value with the number of periods until your boundary option will expire, you get the maximum market movement in this time.
Since this value would require the market to move in only one direction the entire time, you should discount this value. For that purpose, some traders multiply the ATR’s value with a constant factor, for example 0.5, or use a second indicator to create a variable factor.
Both methods can work equally well. The important thing is that you create a definite value for how far you expect the market to move until your boundary option expires.
Now you can compare this value with the distance the market has to move to reach either target price of your boundary option. Should the target prices of your boundary option be closer than your expected market reach, you should invest in a boundary option. The market is likely to trigger either the high or low target price and generate a winning trade for you.
Should the target prices of your boundary option be further away than your expected market reach, you should not invest in a boundary option. The market is unlikely to reach either trigger price.
How to trade boundary options effectively
To use this kind of strategy, you do not need to generate a trading signal. Since you do not care in which direction the market will move as long as it moves far enough, you do not need to determine the future market direction.
Nonetheless, some traders try to eliminate market environments that are less suited for this type of trading strategy. They argue that this strategy works the best when the market moves in one direction. Therefore, they try to eliminate sideways periods and find trending periods.
If you want to follow a similar approach, you can use lagging indicators such as moving averages, especially with strategies like the three moving average crossover technique, to determine whether the market is in a trend and where it is going.
Be aware, though, that even in a trending market, corrections will happen regularly. Therefore, some traders argue that all market environments are equally suitable to this type of strategy and that using additional indicators to filter out some environments is an unnecessary complication that will cost more money that it safes. Since there is no right or wrong in this matter, you should make the decision based on your personal preferences.