Binary options gained immense popularity over the years are often referred to by seasoned traders as a plain form of “gambling.” As demand for the simplified form of options increased we have witnessed gambling sites adding binary options to their loyal gamblers, heavily masked by the term “trading.”
We have seen many “traders” lining up in front of the market-making butcher, ready to be stripped out of their Crown of Jewels. The massacre is taking place 24 hours a day, even at the time of this writing. If you have never traded before welcome to the real financial markets.
You may select any financial instrument provided by the broker, a currency pair, a stock, an index or a commodity. You then predict whether the future price of the selected instrument will be higher or lower at the end of a predetermined time frame such as 15 minutes, 30 minutes, 60 minutes, the end of the trading day etc. Let’s take EURUSD as an example.
The current price is 1.3470. I must predict whether the price will be higher or lower than the current price (1.3470) in a certain time frame that the broker provides me. If I chose 15 minutes, if at the end of the time selected EURUSD is trading as I predicted (even by just a fraction of a pip) I will earn on the binary option trade. The predetermined time is known as the expiration.
The earnings over successful trades in the binary options market come in the form of percentage points and are commonly referred to as the payout. The payout varies on the selected instrument but often ranges between 70% – 85%.
For example, if I invested $1,000 in a binary option and it expired as I predicted, if the payout was 70% my earnings would be $700 (70% of $1,000). If however the market went against my trade at the expiration I would incur a loss of $1,000. There are no spreads, no commissions, no hidden charges, just you and the market.
Advanced Trading Strategies: Timing
Unlike other markets your trade can easily expire out-the-money (a trade that expired in a loss as the market did not trade as you expected) due to the fact a fraction of a pip (0.00001) determines the fate of your trade. Mistiming the entries is another element we would like to discuss.
You cannot place a trade whenever you desire, even if your trading strategy provides you with a decent entry. Additional precautions must be taken to ensure the outcome of the established trade. There are hundreds of trading strategies but we will attempt to provide a universal guideline that anyone can employ.
Based on our experience, your entry must be constructed to its core on buy/sell on dips strategies. For continuation patterns, reversal patterns and breakout, if we have a 30min entry in GBPUSD for example, rather than vigorously pointing the mouse to the execution button we would examine the 15min and look for a dip to place our trade.
The desired dip may materialize in many forms such as support/resistance retest, test for supply, Elliott waves etc. If the entry is on a daily chart we would examine the 4hr chart and hourly chart to time our entry. Timing your entry is as crucial as your expiration and has the power to destroy or concrete your trading account. Again, if you haven’t been trading for at least two years we suggest to refrain from the 5min chart.
Advanced Trading Strategies: Risk
The next element is risk management and trading psychology in the binary options market. A completely different approach must be taken, do not attempt to mimic your traditional risk management strategies from other markets into binary options. We suggest exposing only 3.00% of your invested capital in any given time.
That means if we invest $5,000 that means are maximal exposure would be $150. However, we will not invest the entire amount in a single trade but split it into 4 binary options. For example, $60 + $40 +$25 + $25. The binary options can be placed simultaneously only if an entry is provided but on different instruments.
By spreading your risk you will minimize the possibility of over-exposing yourself to a specific currency or other financial instrument.
Advanced Trading Strategies: Psychology
The trading psychology is more demanding in binary options. When incurring consecutive losses, which of course is an undivided part of trading any market, the human nature may seek a vengeance trip on the market’s bulls and bears. The trader will step out the conservative risk management and expose a great amount of capital in order to retrieve the burnt-to-crisp funds. This the beginning of a treacherous journey, made by many traders that ends with tears, sorrow and mental pain.
Once you understand consecutive losses are nothing exceptional despite the success rate of your trading strategy, you must set limit to your market exposure. To simplify, how much are you willing to lose before stepping out of the market for day/week/month. If you invest $5,000 your daily cap can be $150 (3.00% of your total balance) for example.
We would not step over 4.00% exposure of your total investment. Likewise, you must set yourself a daily limit on your earnings. If your daily target is $200 via a $5,000 investment (4.00%) for example then quit trading for the day after your target has been achieved.
We are aware it is easier said than done, which is why we suggest holding a demo account with your broker and instead of trading in the live account turn to the demo. On the long run, this will protect you from irrational trading decisions such as over-exposure.
If after earning $200 (for example) you incur a loss of $100, there is a sudden urge to reclaim the lost funds from the market, which will give birth to irrational decision-making as you are motivated with vengeance. If you have access to a computer all day we suggest daily targets. For the rest who do not plan to trade on a daily basis a weekly or monthly target is more realistic.
These are the precautionary steps we emphasized earlier to minimize the psychological effect of trading binary options as well as a healthy risk management.
You are unlikely to find the above guidelines in other places as they were developed by our own experience in this financial sector. If you are completely new to trading be prepared to work and study multiple trading strategies. The Return on Investment (ROI) is very attractive but we hope you understand how to fine tune your trading style into binary options.
We discussed short expirations such as 60 seconds in our previous article, ‘The Binary Options Lie.’ We have developed our own trading strategies for such expirations but we must warn such expirations, unfortunately, are open to manipulations.
As this is our second research into the binary options market we do not wish to encourage trading with such expirations at this stage due to the risk involved.
Trading strategies for determining entries to the market will be provided in a separate article. We invite you to follow us to be updated on future market research and trade alerts. We are in the process of introducing binary options trade alerts into DDMarkets. You’re welcome to review our current trades performance in Forex, Commodities, Stocks and Indices.