Similar to trading stocks, currencies and commodities, binary options traders must learn the use of certain trading strategies to turn the odds on their favour and gain profits in the long term. There are different trading strategies available based on the use of technical analysis as well as fundamental analysis of the underlying assets. While every investor follows his individualstyle of trading, it’s important to choose a strategy which suits his style and trading skills. While some strategies are based on the market news and investor sentiment, some apply the use of statistical market data and technical analysis tools.
Breakout trading strategy
Breakout trading strategy is an effectivetechnique which applies technical analysis tools to discover trading opportunities based on market conditions. With the use of technical indicators like Moving Averages, Bollinger Bands, RSI, and candlestick charts, etc., we can identify when the underlying assets are anticipated to undergo a major shift in price movement within a short time span. Based on technical analysis using support and resistance levels, investors can predict the sudden changes in market trends. Using this prediction, investors can purchase “Put” options when prices fall below the support levels and choose “Call” options when price fall above the resistance levels.
Co-integration trading strategy
This is a tricky strategy used by experienced traders who have very good understanding of the relationships between various stocks. This strategy is applicable mainly for trading binary options with correlated stocks as underlying assets. There could be stock pairs which have a close relationship with each other and will move either in the same direction or opposite direction. This could be since the stocks could belong to companies in the same industry or traded in the same market which can cause the stocks to move together in tandem. Since the stock pairs are highly correlated with each other, you can notice that whenever a gap arises between the two stocks, it will get closed soon after. This gap can be the result of one of the stocks getting weak or strong temporarily and it will get recovered automatically.
In order to apply co-integration trading strategy, you should discover the gap between related stocks and purchase “Put” for the stock which is strong and is expected to fall down or “Call” option for the stock which is weak and is expected to rise. Eventually,both the stocks will come to correlation path and the gap will get closed which can be the exit position for your trade.
Trading based on signals generated using Market News and Technical Analysis
There are many software applications which can analyse the market data and derives with best possible trade signals. Such software works based on technical analysis of the market movements using various indicators. Some trading platforms are integrated automated trading robots which can generate signals for you and execute trades without any manual intervention. But many of these tools are not reliable and can lead to huge losses. On the other hand, trade signals generated based on various financial events and market news can be reliable. The announcement of interest rate hikes, monetary policy changes, government budget, quarterly earnings reports of various companies etc., can have a direct impact on the price movement of various assets. Most of the binary options trading platforms will have an economic calendar which is very helpful for traders to know the upcoming financial events.
Based on the upcoming market events, traders can generate signals and place their trades in advance accordingly. For example, if you anticipate the quarterly earnings report of some company to boost its stock price, you can place a “Call” option in advance on that particular stock. Similar to news events, signals can also be generated based on technical analysis of price movements which happened in the past. Based on the technical analysis, various patterns can be established which can be used to predict future price movements.
Risk Reversal strategy
It’s a traditional binary options strategy among experienced traders which involves simultaneously placing a “Call” and “Put” option on the same underlying asset to decrease the risk. This strategy applies to underlying assets which keep fluctuating constantly and is used by traders during extremely volatile market conditions. As implied by the name, binary options can result in 2 possible outcomes for each trade. If the asset reaches the strike price before expiry time, the trader will win and gain as high as 80% returns on his investment. But if the asset does not reach the strike price and expires out of the money, the trader will lose his initial investment. By placing both “Puts” and “Call” option on the same asset with different investment amounts, it can be guaranteed that at least one of the trades will generate a positive outcome.
Trend Trading Strategy
This is a basic binary options strategy adopted by both experienced and novice investors. It is also called Bullish/Bearish strategy and involves continuously mentoring the trend lines of an underlying asset which is primarily moving in a downward or upward direction. You will purchase a ”Put” option for theasset which is declining and “Call” option for theasset which is having a rising trend. If the asset is having a flat trend line and is expected to rise, you can go for the No Touch option. This strategy is based purely on the market trends of the underlying assets.
Traders who invest in binary options without adopting any trading strategy are more likely to lose all their money. Binary options trading based purely on luck without applying any strategy is equal to gambling. So, you should choose a proper trading strategy which can generate profits more consistently. Also, it’s advisable not to bet more than 5% of your investment capital on a single position. For instance, if you have $2000 in your trading account, you should never invest more than $10 on any trade position. By following good money management principles and using any of the above fail-safe trading strategies, you can definitely become a successful binary options trader.