Binary Options Trading Strategy - Business - Nairaland
I will dedicate this thread to put little touch on different trading strategies of binary option. Contribution is welcome plsssss
Overbought/ Oversold Binary Options Trading Strategy
I looked at a simple trend trading technique to make profits from binary options. In this second strategy article I want to look at a simple technique that can be used to profit from movements within the trend.
We have already covered the fact that trends in asset prices are a strong phenomenon. However they should not be assumed to be linear. This means that within a trend there will always be periods where the price action takes a rest and consolidates for its long term direction. At these times the price of an asset is often referred to as being ‘overbought’ or ‘oversold’. Essentially this means that the market has temporarily overextended itself.
There are many ways in which extreme points in the market can be identified. Two of the most commonly used technical indicators which are used to identify these times are the Relative Strength Index (RSI) and Stochastic Oscillator.
Both of these indicators measure the ‘rate of price’ change. When an asset price moves beyond the average rate of change, the oscillator will move into either overbought or oversold territory. For the RSI indicator this is normally assumed to be when the level posts above 70 (overbought) or below 30 (oversold). When using the Stochastic oscillator the most common levels used are 80 and 20 respectively.
The Overbought/ Oversold Markets Binary Trading Strategy
This strategy for trading on binary options works well with Forex options, particularly when used with hourly contracts. You can of course apply this methodology to other markets and time periods if you wish.
When trading with one hour binary contracts if is best to follow the price movement on a five minute trading chart.
To set yourself up to trade this method you will need the following:
• A chart of your asset set to a 5 minute time-frame
• To know the directional trend of the market (see previous article)
• Stochastic Oscillator configured on your chart
• Binary trading account open and set to trade hourly contracts
The Stochastic Oscillator can be configured with a number of different settings. However I tend to stick with the most common (8,3,3) in conjunction with the simple moving average.
FIG 1 GOES HERE
The Strategy Theory
The chart above shows the EUR/USD with the oscillator plotted. You can see that the lines from the indicator oscillate up and down as the price action moves on the chart. With this strategy we are only interested in the times when the indicator has registered either above 80 or below 20. These signify that the price gain in the asset has entered an extreme oversold/overbought reading.
The strategy is looking to capture the temporary unwinding of this extreme rallies against the dominant daily trend. If an extreme reading is reached, then a contract is purchased in the direction of the dominant trend to run until the next hourly expiry.
The method makes of use of the basic Call and Put binary option contract.
The Entry Signal [color=#006600][/color]
FIG2 GOES HERE
The signal for a trade entry is when BOTH lines on the oscillator have moved back OUT from the extreme reading. At this point you open a contract in the direction the daily market trend.
Let’s take a look at the following real examples to help clarify the signal entry.
The EUR/USD was in a downtrend over the previous trading days. Therefore we look to buy any intraday ‘rallies’. These are signalled when the osciallator shows readings above 80.
Example 1 – At around 07:40 the price moves out of the overbought reading with both lines of the oscillator crossing back below 80. At this point a PUT contract is placed for the nearest hourly contract (08:00).
Example 2 – At around 08:50 the chart reading again shows the pair overbought. A PUT contract is again placed for the nearest hourly expiry at 09:00.
Both of these examples saw PUT contracts placed. However the strategy works exactly the same in the reverse. If the daily trend of the asset is higher then the extreme reading used would be 20 (oversold). In this instance a CALL contract would be placed to close at the nearest hourly expiry.
Performance
The exact number of trading opportunities and the performance you get will vary. While I enjoyed an 85% strike rate for the day when writing up this article (6 wins, 1 loss) you should not expect this to happen all of the time. Over the longer term I expect to see a strike rate of around 70% (7 winners, 3 losers). This will net you a very good return over the long run.
Things To Consider
The strategy as presented is designed to be simple. You could however refine if further. Adding additional indicators or confirmations to each signal may help to improve the results you get.
It is however important that you only trade overbought and oversold levels when they occur against the dominant trend. If you don’t then you are likely to become unstuck.
As ever it is worth keeping an eye open for any big upcoming big news. These could derail the daily trend and cause a sudden shift in sentiment. Daily markets can quickly change and the price action reverse if the fundamental outlook suddenly changes.
Finally as ever, put in place a good risk control strategy so that you don’t overexpose yourself when trading. I tend to use around 5% of my capital set aside for this strategy for each contract placed.
WILL CONTINUE AGAIN FROM HERE.
Today, we'll looking at Binary Options Trend Trading Strategy
Anyone who has already been involved in some form of financial trading previously will no doubt have heard reference made to the market ‘trend.’ For those who haven’t, let me explain. Trends are perhaps one of the most important things to consider when trading on any asset. Of all the various trading strategies and methods you will find, probably 90% of them make some reference to the trend in their calculations.
This binary trading strategy looks to profit from Intra-day trends. So first I will cover off a little about trends and why they are so important when trading.
Understanding The Trend
The term ‘trend’ refers to the dominant direction that the price of an asset has been moving. The trend can be set over a number of time periods. Short term trends exist as part of much larger trends which may run over days, weeks or even months. What is important is that you note the trend over the time period and recognize the larger trend when making your trading decisions.
A trending market is normally referred to as being in one of two states -
• Uptrend - The textbook definition of an uptrend is when the price action of the chart shows a series of higher closing highs and higher closing lows. There will be some periods where the price action pulls pack and consolidates, however the dominant directional movement of price will be upwards.
• Downtrend - This is the reverse of the above. Here the price action on the chart will display a series of lower closing highs and lower closing lows. Again there will be periods where the price rallies and times when the market consolidates. The dominant direction will be downwards.
A trend trading strategy will only yield profits when the price of an asset shows clear directional movement. When a market is ‘non-trending’ it shows no specific directional movement.
FIG 1 HERE
AUD. USD – Chart Showing Daily Market Uptrend
Why Trends Are Important
The key thing to understand when trading trends is that they tend to persist. This means that if for example, the price of an asset is moving higher, the odds on it continuing to move higher are significantly greater than a reversal taking place.
For this reason trend trading is often said to be ‘trading with the backing of the market’. Think of it a little like a summers day. The odds on the following day being sunny are far greater than a forecast for rain. Every now and again a shower may appear but the long term forecast of hot weather will eventually continue.
Trend trading strategies can be used on any asset class be it a stock, currency pair or commodity. They can be complicated, or simple. This strategy forms the basis of a very simple trend trading approach. It can be used on any asset and uses end of day Call/Put binary contracts.
Identifying Trends
The most common way in which to identify a trend on a chart is by the use of a technical indicator called the ‘moving average’. This works out the average rate of price change over the selected time period. So for example, the 10 day moving average works out the rate of price change over the last ten trading days, the 20 day moving average over 20 and so on.
The two most commonly used forms this indicator are known as the ‘Simple Moving Average’ (SMA) and the ‘Exponential Moving Average’ (EMA). These use slightly different calculations to work out the rate of price change. You can read a full explanation here. For Binary Options trading I tend to use the EMA as it provides a greater weighting to the the most recent price change in the calculation. However there is little practical difference between the two given the time-frames involved.
The Strategy Theory
The strategy uses the EMA and looks to profit from Intraday moves. Essentially what we look for is a crossover of a lower time-frame moving average with one from a higher time-frame This signals a change in market momentum in the direction of the cross. This strategy works well with hourly binary options strategies although it could equally be applied to both shorter and longer term trades.
The specific approach used with this binary strategy targets any moves in the first few hours of trading with end of day binary contracts.
To set yourself up for this strategy all you need the following:
• Chart of your asset set to a 30 minute time-frame
• Moving Averages on chart set to 5 day, 10 day and 20 day (EMA or SMA)
• Binary account open and set to ‘end of day’ contract for the asset you want to trade
The Entry Signal
The signal to enter the market comes when both the 5 day and 10 day EMA have crossed over the 20 day EMA. When the signal occurs a contract is opened in the direction of the move to expire at the end of the trading day.
Trading positions are only opened if this occurs within the first four hours after the market session opens. For trades taken on the Forex market the last point at which I would enter a position would be four hours before theclose of the US Markets.
Trade Example
FIG 2 HERE
EMA Binary Strategy Example
The above example shows a trade take on the Gold market. The 5 day EMA (light blue), 10 day EMA (green) and 20 day EMA (dark blue) have been plotted.
The signal was given at around 6.00am when both the 10 and 20 day EMA had crossed over the 20 day EMA. A CALL contract was then purchased (in the direction of the break) and set to expire at the end of the day (20:30). As you can see the contract expired in-the-money.
Performance
This binary options trading strategy obviously works best when markets are trending over high time-periods – essentially it aims to tap into the daily intra-day moves of a wider dominant trend. When a market is trending strongly on the daily or weekly charts then I would expect this intra-day approach to produce anywhere from a 65-85% rate of success.
Things To Consider
The moving average is a ‘lagging’ indicator. This means that it will only show you where the market ‘has been’ and not necessarily where it will head. This is one of the reasons why I look to only place trades if the signal is given in the first few hours of trading. This helps to ensure that that their is sufficient time for the market to work through any pullbacks before the end of the day.
Many traders will also trade this strategy using higher or lower time-frame charts (15min, hourly) and also by using different time frame moving averages. However I have found that lowering the chart time-frame can often lead to too many false signals, while if the chart time-frame is too high then the signal will often come to late into the move.
It is also worth looking out for any upcoming news due for release in the trading session. This may affect the price of the asset your are trading. News can sometimes bring about an abrupt change in the daily trend. You may therefore want to add a filter to avoid entering a position if significant news is due for release while the contract is open.