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Binary Options: Concepts and Trading
Binary options – a popular financial tool for profit. Types of binary options, strategies and indicators for BO. How to choose the right time for the expiration of a binary option and not make the most common mistakes.
The attention of traders trading in the Forex market or on stock exchanges, recently began to attract binary options. If with traditional option contracts Since everything is pretty clear, the prefix “binary” is not completely clear to everyone. Let’s try to understand this tool and get a basic idea of it.
“Binary” – what is it?
So, binary options is an option that has only two options for profitability: either a fixed percentage of profit or a loss. It is this dualism that is characterized by the name “binary”, i.e. consisting of two elements. Various instruments can act as a trading asset for a binary option: currencies, stocks, raw materials and others. The execution time of such a contract varies from a minute to several months, profitability reaches 70-95 %%. If in a nutshell to describe the principle of operation of any type of binary options, then the expression “deal-bet” is best.
Types of Binary Options
Trading binary options operates with five main types:
View 1. Binary option “Cash or nothing” / “All or nothing”
This type of binary options is the most popular among traders. At the time of purchase, he has a certain percentage of profit and price. This amount is the volume of the transaction, and it is to her that the trader risks it. Prior to the purchase of “Сash or nothing” binar, it is required to make a prediction in advance whether the selected asset will rise or fall, a Put / Put or Call / Call option is purchased (see the previous article), respectively.
If in the end, at the time of execution, the trader is right, then he receives a predetermined amount of profit, usually 70-85 %% plus the initial cost of the contract. If the forecast did not materialize, then he loses the invested amount in full. Sometimes companies make a refund when they lose in the amount of 10-15%, but this cannot be considered the rule, rather, it is just a bonus to cheer up.
View 2. Binary option “Asset or nothing” / “Asset or nothing”
The binary option “Asset or nothing” is practically no different from the above “All or nothing”. It can also be bought and sold by setting a certain level, above or below which there will be a price at the time of execution, also receive declared profits or lose the value of the contract. The difference is only in determining the profit, which is expressed in the value of the selected asset.
Which binary options are better?
Choosing binary options for trading
In fact, because profit calculation is automatic, many traders do not even see the difference between the binary options Cash or nothing and Asset or nothing.
View 3. Binary options “One touch” / “One touch”
One touch in execution and trading strategies differs significantly from the previous ones. Having all the same value and profitability, the contract also implies the existence of a certain level of asset price. Knowing him, the trader must predict whether the price reaches this mark in the allotted time period. At the same time, it does not matter at what price the contract closes, the main thing is that the asset touches a fixed level.
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View 4. Binary options “No touch” / “Inviolable”
The opposite in name and meaning for the “One touch” binary option is “No touch”. The only difference is the trader’s forecast of whether the price reaches the level specified in the contract. If he believes that he will not achieve, then you should buy the “No touch” option. If at the time of closing the asset did not touch the level, the trader receives the agreed profit. Otherwise, he loses the value of the contract.
View 5. Binary options “Double one touch” and “Double no touch” / “Double one touch” and “Double touch”
These are the most complex, and therefore the least popular types of binary options. In fact, this is a modification of the “One touch” and “No touch” options – the strategy and execution are identical. However, in order to achieve profit, two fixed levels are set, to reach or not to touch which the asset must until the expiration of the exercise time of the option.
Based on your own preferences, offers from binary options brokers., as well as market conditions, it is more profitable to trade different types of binary options. Nevertheless, most traders prefer “Cash or nothing” as the most affordable and easy to understand.
Strategies and indicators for binary options trading
Binary Options Trading Strategies, if you do not go into details, are based on determining the estimated direction of movement of the asset in the terms specified by the contract, as well as the likely time to reach the specified price level. So, to get a fixed profit, you will need to indicate either the level below or above which the price will be after the time you specified, or indicate the mark near which the value of the asset will be in the near future. Your forecast options and trading strategies are closely related to the types of binary options.
Trading robots for binary options
All the pros and cons of using forex experts in binary options trading
In order to correctly predict the direction of the asset price movement and buy a binary option, most traders use forex indicators.
In fact, no special indicators for binary options not being developed. For the most part, traders use signal and arrow Forex indicators, which are adapted for trading binary options. Popular are both built-in terminal and user indicators that allow for a qualitative analysis of the asset – the direction and strength of the trend, possible pivot points, etc.
In addition, in trading binary options, trading robots have been successfully used.
How to trade binary options?
Trading binary options and trading in the Forex currency market are based on the same principles:
- market price moves the same way;
- with binary options the same rules of fundamental and technical analysis work;
- money management rules are also relevant for binary options trading – it is important to determine acceptable risks and manage your capital;
- trading strategies and forex indicators successfully work on binary options.
However, there are a number of differences that stem from the nature of binary options:
- Unlike classical trading, Sell transactions and Buy purchases do not open. When trading binary options, only Call options (price growth is forecasted) and Put options (price reduction is forecasted) are purchased;
- The “lifetime” of a transaction when trading binary options does not depend on the price reaching stop-loss or take-profit levels, as in Forex trading. In BO trading, a fixed option expiration time is determined, at the end of which the transaction is closed with a profit or loss;
- accordingly, take profit and stop loss orders are not used in strategies for binary options trading.
More on binary options trading
Binary options trading – an intelligent casino for gambling traders
The minimum contract is usually $ 100. At the same time, profit reaches an average of 80%. This, of course, is not comparable with a loss in the event of an erroneous forecast, but the trader can accurately calculate the level of his losses and not exceed them if he does not want to. In addition, some brokers provide the ability to trade binary options without investments.
Quite convenient and easy to use are platforms provided by companies. Most often it is a web platform that has the required set of tools and simple forecast indicators. To some extent, this simplifies the work and it may seem that there is no need to analyze something deeply, trading binary options. In fact, this is not so. Any profitable trading requires knowledge of fundamental and technical analysis, as well as its application. Otherwise, such work turns into a casino, which is unacceptable. Therefore, for a competent approach to trading and evaluating an asset, we recommend that you analyze on your usual platform, transferring transactions to the terminal of the options broker. So, to work with binary options on currency pairs, you can use the full set of available tools of the cTrader or MetaTrader platforms, including indicators, created specifically for these contracts.
Most traders are of the opinion that trading binary options somewhat simpler than classic forex trading. Nevertheless, in trading binary options there are a number of difficulties that are associated with the choice of the expiration dates for the option, because the mistake made during the selection often leads to losses even with the analysis and correctly planned work of the trader.
Dependence of the expiration period of a binary option on the trading style
- With long-term binary options trading (from a month or more), the process of determining the expiration date does not represent any difficulty. It is determined based on the timing of events expected in the future. It could be an expiration date. foreign exchange intervention, change in monetary policy by the Central Bank and more.
- In medium-term trading (from a week to a month), emphasis should not be placed on fundamental economic events, but on the results of technical analysis. In this case, the best choice would be a period of two or three weeks, that is, the average life of a medium-term transaction.
- In short-term trading (up to 1 week) it would be logical to determine the expiration period within a few days. There is one significant point – it is recommended that binary options trading be completed before Friday evening, as over the weekend some events can occur that seriously affect the market picture.
- For intraday binary options trading, the best choice for the expiration date is the end of the trading day, since all fundamental factors have already been won back today, the market is entering a stagnation phase. When trading faster options, the guideline for the expiration dates should be the end of the trading hour.
The choice of the period for trading binary options
So what period should a novice trader choose for profitable binary options trading? Taking into account the fact that short-term options trading, as a rule, is accompanied by a lack of significant trading information, as well as a significant share of excitement, binary options are the best choice, the expiration period of which is no earlier than the end of the trading day.
To achieve more profitable and stable results when trading binary options, it makes sense for a novice trader to try medium-term and long-term trading. The use of super-short terms in binary options trading is not recommended for beginner traders, as they can lead to the formation of a gaming attitude and financial losses. The use of tick options by beginners will generally look like a game in a casino.
Dependence of signal processing time on trading tactics
Along with all of the above, it can be noted that traders often calculate how many bars an open transaction will start to work out, which also allows you to choose the expiration dates of the option. Roughly speaking, for this you need to figure out how many bars will be needed to implement the plan, multiply it by the one used timeframe and then buy the option for the resulting time.
It should be remembered that a certain trading tactic provides for different times necessary for working out a trading signal:
- The fastest for working out a trading signal is trading by candlestick patterns – 2-3 candles.
- Trading on the rebound from the level also implies a quick expiration time – 3-4 candles.
- Trading binary options using breakdown certain levels require a little more time to work out the signal – up to 10 candles.
- The longest period is trend trading, since you have to take into account a possible correction. In this case, the expiration period of the options should be chosen within 20-30 candles.
- When trading using fundamental factors, the range of options expiration periods is very wide. For example, when trading on news, it can be several minutes, when trading on goals that the Central Bank has determined – up to a year.
The most common binary options trading errors
Any financial trading needs to be learned, one way or another, working out its strategy. We will consider the main errors and mistakes of novice traders who trade binary options. It is possible that if you take our advice more carefully, they will help you avoid some bad deals.
1. Trading binary options does not require knowledge
We have already touched upon the consideration of this error at the beginning of the article, but it will not be superfluous to repeat it. Many newcomers to trading, when dealing with binary options, find that they do not need any special knowledge in working with them – I figured out where the price would go, clicked on the button and wait. I would like to note that even the simplest initial knowledge about pricing the asset for which the option is presented will significantly reduce your losses. Not to mention the fact that, ideally, for trading binaries for currency pairs, it’s worthwhile to have a proven strategy and trading experience on Forex. One way or another, any forecasting skills should increase the profitability of your investment, reducing losses.
Bonuses for trading binary options
Binary Options: 9 bonuses to your trading account
2. Binary options – it’s almost a casino
Many players come to binary options trading like in a casino, focusing on the fact that the instrument is actually a “bet” transaction. We will not say that this is completely wrong – there is still a degree of similarity, however, some practice and knowledge in the field of analysis of exchange instruments, and luck rates turn into a well-thought-out strategy that increases the probability of winning from 50/50 to a more attractive number .
If you came into binary options trading for adrenaline and fun, then understanding the process will not reduce your pleasant emotions, but only increase it, because you will start opening deals wisely. Do you agree? Then read the first paragraph again.
3. Short-term binary options are more profitable
Yes, of course, to buy an option contract of 60 seconds and earn 75% of profit in a minute is very tempting. However, it is important to understand that making money on such short (minute, hour) intervals is not so easy, because the noise in the market can turn a profitable contract into a minus in one second. Trends over long periods are much more predictable, and therefore it is better to start with them, not to chase quick and risky profits and learn to see the market.
4. Quick transition to high rates
Quick and easy profits often give rise to euphoria among beginners of binary options trading. Having made 2-3-5-10 profitable trades in small amounts, the trader begins to think: “Why am I trifling if I can buy a contract more expensive and get more money?”. Remember, 11 trades can become unprofitable. Of course, we do not claim that this must happen, but you need to increase the contract value gradually, using about 2-5% of your total deposit. Only in this case, the profit will settle in your pockets stably.
5. Trading only one type of binary options
There are quite a lot of binary options, each of them can be used in different market situations, so you should not focus on one thing when you can use all the features of the market and binary options. It is not necessary to actively get involved in different options, but we recommend you try different options and choose the most suitable for yourself.
In general, binary options trading is characterized as more simple and understandable for beginners trading, including because it does not support the principles of margin requirements and does not require knowledge of money management. Any interested speculator can already evaluate his strength on a demo account with numerous brokers that provide this service.
Other binary options articles
FORTRADER magazine experts
FORTRADER Magazine is a large team of experts in trading in financial markets. Traders, managers, investors, programmers, testers, technical administrators – we all work for you every day for many years. Sometimes we write articles together, then the whole journal becomes the author.
What are binary options
A binary option is a type of option with a fixed payout in which you predict the outcome from two possible results. If your prediction is correct, you receive the agreed payout. If not, you lose your initial stake, and nothing more. It’s called ‘binary’ because there can be only two outcomes – win or lose.
Advantages of binary options trading
Aside from the simplicity of its ‘yes or no’ proposition, binary options trading is also very flexible. It gives you the ability to trade:
- All markets
Trade on underlying markets that include Forex, indices, commodities, and more.
- All market conditions
Predict market movement using up/down, touch/no touch, and in/out trade types.
- All durations
Take a short-term or long-term view with trade durations from 10 seconds to 365 days.
- All payouts
Earn payouts up to USD 50,000. Losses are limited to your initial stake and nothing more.
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- Security and privacy
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All conditions and durations
- All markets and conditions
Trade currencies, indices, commodities and more in rising, falling, sideways, quiet, and volatile markets
- Short to long-term durations
Choose timeframes from 10 seconds to 365 days
Competitive and transparent pricing
- Sharp, benchmarked prices
Receive prices that are benchmarked against interbank rates
- Transparent risk and potential reward
Know how much you will win or lose before you purchase the contract
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- Two-way pricing
Receive quotes for a trade and countertrade, so you always get unbiased, transparent rates
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How to trade binary options
Binary options trading is relatively easy. You can purchase a contract in just three steps:
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In BinaryOptions.auz.net we review and compare the best binary options brokers regulated by Australia Securities Investment Commission ( ASIC, Australia ) and who are accepting Aussie and NZ traders.
We recommend that you read our article about ” binary options trading in Australia” before choosing a broker.
What are Binary Options or Up/Down Betting?
In the world on financial trading, binary options or Up/Down Betting is a way of trading that is heavily used. A binary option is when an investor chooses if an asset will go up or down in a given time frame. All binary options are categorized into 2 types. These are the cash-or-nothing or the asset-or-nothing. The cash-or-nothing pays a fixed amount while the asset-or-nothing pays a value. Some people do not believe that binary options are good to use because of the issues that come with taxing them. In many countries around the world, investors are required to pay a taxation fee on binary options. Unlike Europe where there is no taxing in Australia binary options are included in market investing which requires a capital gains tax.
Assets included with optimizing binary options
Assets are different options given of stock, currency and investments that hold value that can be sold and traded for a profit. There are many assets that are integrated with binary options. These include your frequently used assets such as currency pairs such as AUS/USD and AUD/JPY. Another asset is commodities such as gold and oil and lasts your indices such as ASX200.
How to trade using binary options?
Open an account on a trading platform and add money to your account. Many platforms offer bonuses upon joining. Pick your asset and choose if the return will go up or down. At the expiry, you will learn if it is a loss or gain in your favor.
How to choose a broker for binary options or Up/Down Betting
When choosing a broker make sure you have information regarding if they are regulated. Second, check out their customer service department and their reputation. Third check out the different types of trades they offer and the software used. Last check out their payout due to the payouts being very diverse when coming to binary option. We have constructed a list of the best known and reviewed brokers in Australia:
- High Low – Up to 200% profit, AUD $50 to open, Demo account available, Australian Regulated by ASIC ( Australia ).
- GO Markets – Up to 80% profit, AUD $200 to open, free demo, regulated by ASIC ( Australia).
All these brokers have good startup bonuses as well as reputation and customer service. Try setting up a demo or micro account this way your investment is protected. You can learn skills and crafts in the trading industry. You will grow as you learn the trading system and soon you will be on your way.
Australian Dollars used by Binary Options Trading in Australia
Binary Options Trading in Australia and NZ
Digital or Binary Options Trading is a fairly new simple way for making profits from financial markets in Australia and New Zealand, and already a very popular method to make fast money among traders in Sydney, Melbourne, Canberra or Auckland
Although Australia is the major financial trading area in the Asia-pacific region, and Australian traders are accepted to most binary options platforms, unfortunately mostly brokers are not regulated and licensed in Australia by the government agency ( AFSL- Australian Finance Service License ), so they are not complying with all the requirements to operate in our country.
Type of Assets to Trade:
There are four types of assets to trade at this time. These include:
- Forex or Currencies
There are six types of indices available in the Australian market today. They include Capitalization indices like S&P Asia Pacific BMI, fixed income indices like Australian Bank Bill, Residential Property indices like RP Data-Rismark Home Value, Sector indices including S&P All Ordinaries Gold, Strategy indices like S&P Buy-Write and Volatility indices like S&P/ASX 200 VIX.
Forex Trading in Australia:
This type of market is the currency trade market. It was created for large companies needing to trade currency on a frequent basis but is now a way to make a profit from an investment. You can trade currency pairs like AUS /USD, AUD /NZD or AUD / JPY.
Some Australian forex trading platforms licensed by ASIC are offering binary options: Vantage FX or Go Markets.
In this market, you have the option to invest your money in commodities from around the world. You can choose everyday items like coffee to more lucrative options like silver or gold.
Binary options strategies
A binary options trader is only as good as the strategy he follows. Finding a strategy that works, and fine-tuning it as you go, will focus your trading, build discipline and help ensure that you win more often than you lose.
In this lesson we will introduce you to three of the most popular and potentially rewarding binary options trading strategies.
We will talk you through how and why they work as well as what kinds of assets, time frames and expirations to use. We’ll also provide you with a concrete trading example for each to show you what a trade looks like.
Strategy No. 1: Short-term Boundary In options before big news events
One way binary options can be used is to predict whether the price of an underlying asset will remain within a specified range for a certain period of time or break outside its boundaries. This approach is known as boundary trading, tunnel trading or range trading.
The strategy we will introduce you to now involves making a short-term bet that prices will remain inside a specified range during a time when you think markets will be quiet and asset prices will trade sideways – for example in the ‘quiet before the storm’ often experienced ahead of a major event or news announcement that the market is waiting for.
How it works
In the run-up to major events like the monthly publication of US Nonfarm Payroll figures, the Federal Reserve’s FOMC meetings and press conferences or interest-rate decisions by central banks, many traders choose to keep out of markets, either because they are nervous of the volatility the event will trigger or are waiting to place trades on its outcome.
This often creates a lull in activity and creates a small range of price action that binary options traders can take advantage of.
How to trade the strategy
- First, choose an underlying asset to trade. Currencies tend to work best with this strategy. It’s also possible with other assets like indices or stocks, in which case you might choose to trade in the run-up to company reports, for example.
- Next, try and identify an upcoming event that you think will have a major impact on the underlying asset you have chosen. Our Economic Calendar outlines some of the biggest.
- Double-check which other factors could also affect that market and make sure there isn’t another major new event happening at the same time. This could seriously blow your strategy off course.
- If you are trading currencies, also remember that you are effectively trading two individual assets, each with a life of their own. So apply the step above to each currency in the pair you trade.
- Look for confirmation that the asset is entering or looks likely to remain within a range and form a view on where you think the upper and lower boundaries of this range will lie. Technical analysis offers a number of patterns or indicators that will help. For example, Bollinger bands or the Moving Average Convergence Divergence (MACD) indicators can help you identify a range-bound market. The appearance of certain kinds of doji candlesticks meanwhile can indicate a trend is about to reverse or that volatility will pick up and the price will break its range, in which case it might be best to avoid this strategy and try another.
- Next, identify the contract type that you will use. You’re looking for a ‘Boundary In’ option – also sometimes called an ‘In Range’ option – with a duration of no longer than 20 minutes and which will expire before the event starts. Not all brokers offer boundary options so make sure you’re using a company that does.
- Price ranges for boundary trades are usually determined by the broker, but occasionally you can choose your own range – pick one strike price above the current price and one below. Make sure the range allows the price plenty of room to move within the anticipated boundaries you identified earlier – you want some leeway. Remember, the tighter the range, the higher the potential payout if you are proved correct, but also the higher the risk that your trade will fail.
- Decide how much capital you want to risk on your trade. Our lesson on money management for binary options will help.
US Nonfarm payroll figures are set to be announced in 30 minutes’ time. The EUR/USD currency pair will be very sensitive to the result and you notice that volatility is low. It’s currently trading at 1.11. Your binary options broker is offering Boundary In options on EUR/USD with a range of 1.109 and 1.113. You buy one that expires in 20 minutes. The market then moves sideways and your option expires with EUR/USD at 1.112 – comfortably inside the range. Your option pays out.
Strategy No. 2: Long-term High/Low options following surprise events
This is a long-term strategy in which you use High/Low options to predict whether an asset price will be higher or lower than a specified level within a pre-determined time period (usually a number of weeks).
It tends to work well following a major, unexpected news event that you think will have long-term repercussions. This could be a pioneering decision by a central bank, surprisingly good or bad corporate results or even a natural disaster.
How it works
When an important news event takes markets by surprise it can trigger some big price moves in underlying assets that are directly affected by the event. If the event looks likely to have a real, fundamental impact on assets that will last for some time it can trigger the start of a long-term price trend.
For example, if war broke out in a major oil-producing region and threatened a big chunk of global crude production, this would usually be positive for oil prices. While crude oil prices would probably jump straight after the news as the market priced in the shock, they may continue to rise – albeit more slowly and steadily – for several weeks as production was actually taken offline and the conflict perhaps even escalated.
Similarly, if the central bank of a major economy announced a big or unexpected interest-rate cut, the currency of that country could enter a prolonged downward trend.
Binary options traders can take advantage of these longer-term trends by forming a view on how far they think prices will rise or fall and how long the trend will continue. They can then use a High/Low option to bet that prices will be higher or lower than a certain point on expiry.
How to prep the strategy
- Unlike Strategy 1, this isn’t a strategy where you can pick an event in advance and plan your trade around it. Rather, you have to act fast in the aftermath of an unexpected event.
- Your first job therefore is to pick one or two underlying assets to specialise in and really get to understand them well. It can help to choose underlying assets that you have some special interest in. For example, if you have worked in a specific industry you might choose to trade shares of companies in that industry or one of the commodities it produces. If you have lived abroad or have family ties with a different country, you may have a more indepth understanding of what affects its currency.
- Because this strategy is long term and involves a simple directional bet, a solid grounding in fundamental analysis is essential before you place your first trade. Apply fundamental analysis to the assets you have chosen to trade so that you understand in advance what are the biggest drivers behind its price, what other assets it is correlated to and what kind of events would be negative or positive for its price.
- Some basic chart work is also essential. Dig out charts that show you how markets behaved following a range of major events in the past. Study what happened to the price of the asset you trade.
- Before you place your first ‘real’ trade, it is also advisable to practise a few times with a demo account. Surprise events aren’t uncommon in financial markets, so simply wait for the next one and then place some dummy High/Low binary trades to experiment with the strategy. Even trending prices experience some volatility that could throw an otherwise winning trade out of the money if you don’t allow enough wiggle room for the price. Practice will help you learn how much to give.
How to trade the strategy
- This strategy relies on a high degree of certainty that an event will create the directional move you are betting on. So as soon as an interesting event occurs, double-check that it is strongly correlated with the asset you trade and big enough to produce the long-term move you need.
- Double-check also which other factors could affect the asset you will trade and make sure it isn’t simultaneously being impacted by another major news event or other head-winds.
- Although fundamental analysis is your best friend with this strategy, you might also want to apply some technical analysis to confirm that a trend is underway before you enter your trade.
- Next, identify the contract type you will use. You’re looking for a High binary option if you think the event will trigger an upward move or a Low binary option if you think it will trigger a downward move. Most brokers offer High/Low options.
- Now choose the maturity and strike price you want. Your broker will probably determine for you which are available. This is a long-term strategy so go for an expiry of at least a week or two, making sure that the trend has time to develop but not leaving so much time that it fizzles out. As with Strategy 1, you also have to leave room for unexpected volatility that could knock an otherwise successful trade out of the money right at expiry. This is perhaps the hardest part of the strategy to master.
- Decide how much capital you want to risk on your trade, remembering that the trade is generally higher risk – with a higher potential payout – the further the strike price from current prices. Our lesson on money management for binary options will help.
Japan’s central bank makes a surprise announcement that it will act to weaken the yen in the long term, for example by selling the currency or lowering interest rates. You now try to identify a currency pair comprising the yen and another currency that is currently fairly strong. You opt for EUR/JPY and buy a High option that expires in three weeks. When the option expires three weeks later, the yen has weakened against the euro and your trade pays out.
Strategy No. 3: Short-term Breakout strategy using previous day’s highs and lows
With this strategy, we again use High/Low options. This time however we are betting that if an asset price breaks through its previous day’s high or low, the price will then experience a large short-term push in the same direction.
How it works
The strategy hinges on the concept of support and resistance. These are levels that, in the case of support, a price struggles to fall below or, in the case of resistance, it struggles to rise above.
Technical analysts have observed that when a price does breach either of these levels, it often suddenly picks up momentum and moves further and faster in the direction of the break.
This is usually because a lot of other traders – range traders in particular – use support and resistance levels to set stop losses so they can automatically exit trades as they move out of the money. A surge of fresh orders often also enters the market at this point, pushing the price further in the same direction.
Binary options can take advantage of this phenomenon by keeping track of the highest and lowest points a price reaches within a single day. The following day they then wait for it to touch these levels again.
If, for example, the price breaks through the previous day’s high (its resistance level), a binary options trader would buy a High option with a short maturity of typically five minutes to bet that the price will be higher when the option expires.
If the price breaches the previous day’s low (its support level), the trader would buy a Low option, again with a short maturity, to bet that the price will be lower when the option expires.
How to trade the strategy
- First, choose an underlying asset to trade. Because this strategy depends on trading having paused overnight, avoid 24-hour markets like foreign exchange. Indices, shares or commodities tend to work well with this strategy.
- Next, identify the previous day’s high and low. You don’t usually need any complex indicators for this – it should be clear from a simple price chart.
- If prices have ‘gapped’ overnight and the opening price on the morning of the day you will trade has already broken through the previous day’s support or resistance levels, do not use this strategy.
- This strategy relies on fast action, so prepare in advance what option you will use. It tends to work best with short time frames, so you want a short-term option with a five-minute expiry. Use a High option if the previous day’s High/Resistance level is breached, and a Low option if the Low/Support level is breached. If you use Japanese candlestick charts, it’s a good idea to wait for a second candle to form that confirms the breach and lets you know there is decent momentum forming.
- As before, decide how much capital you want to risk on your trade. Our lesson on money management for binary options will help.
Germany’s DAX30 index achieves a high of 10.800 and a low of 10.680 on Monday. On Tuesday morning at 10.30am, it breaks the 10.800 level and quotes at 10.803. You buy a short-term High option with a five-minute expiry.
At 10.35am, the DAX30 quotes at 10.823 and your option expires in the money.
So far you have learned that:
- there are 3 common strategies to trade binary options: a short term ‘Boundary In’, a long-term, surprise event, and a short-term Breakout strategy that uses the previous day’s high and low
- these strategies are based on real market dynamics and they repeat over again across different markets
- you can apply any of these strategies with the right practice and preparation
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