Touch Options
Touch Options aka Barrier Options aka American Binary Options
Touch/No Touch Explained
The Touch/No Touch binary options contract is one of the trade types that traders will come across on a binary options platform. This bet type is structured for the trader to place a trade on an outcome that predicts if the asset to be traded will touch a set price target or not touch that price target before the expiry of the trade.
Trade Variants
a) The classical Touch/No Touch trade type has been described.
b) There is the High Yield Touch trade, in which the asset has to touch an ambitious price target for the trade to be in the money. The trader has a choice of choosing an upside or downside target.
The trade variant the trader is presented with will depend on the platform used for the trading operation. If the trader is using the SpotOption white-label product, then the variant that will be available will be the high yield version of this trade. The Tech Financials and Tradologic platforms will usually present the trader with both variants. Some of the proprietary platforms such as that of BOM will give the trader the classical version of this trade. So it is important for the trader to identify which of the versions he is interested in trading so as to make an informed choice of the trading platform to use.
Approach to a Touch/No Touch Trade
Let us examine the correct approach a trader should adopt for each of the variants of this trade.
The high yield version of this trade is an extremely risky and speculative trade. The high payouts that are on the average five times higher than the regular trade type translate into an increasing level of difficulty that matches the payout. The broker usually has the sole discretion of setting the strike price and the expiry. The Tech Financial platform partners are a bit more generous with the expiry time, giving traders a week to pull off the trade. The SpotOption partner brokers are not so forgiving. Traders have a much shorter expiry to work with. In any case, the only chance of winning with this trade is to choose an asset with a wide range of movement or choosing an asset with a good chance of a breakout. It takes experience to identify both scenarios and traders without experience are better off trading the second variety.
The classical Touch/No Touch trade is easier to profit from. It involves three key steps. The first is to identify the direction that the asset will assume. Secondly, the trader must have an idea of the range of movement in the preferred direction. The third is to set the price target for the trade, which will usually be between the point at which the analysis is made and the extreme of the price action. Once the first two steps are properly carried out, the third step is a breeze.
a) Identifying Price Direction
Price direction can be identified using technical or fundamental analysis. Technical analysis involves the use of candlestick patterns, chart patterns and price action analysis to determine the direction of the price of the asset. Fundamental analysis involves using the outcome of the news releases of the economic calendar to determine where the market sentiment will push the asset. Once price direction has been established, the trader now has a basis for setting a price target that will be used for the Touch trade or for the No Touch trade.
b) Determining the extremes of price action
If you have determined that the EURUSD will move upwards from its current levels of 1.3402 (hypothetical), and you set a price target of 1.3492 as a Touch target but the price moves only to 1.3472 before retreating, then the trade would have failed. This underscores the importance of knowing the extent to which the price of the asset will move in a particular direction before setting any price targets for the trade. One method of determining this is by using the daily pivot points. These show the lines of support and resistance, and depending on what direction the asset will take, a trader can be sure that the price of the asset will at least get to the nearest support and resistance. Use of the pivot points is one of the most reliable ways of determining the extent of movement of an asset. Using the intraday price range is another method, but this is not reliable.
Once (a) and (b) is done, simply choose a price target between market price and the nearest support/resistance. For the Touch trade, give a reasonable time for trade expiry. The No Touch price target will be set in the opposite direction, usually beyond the nearest key level of support or resistance.