Binary options trading strategies can be designed in a very similar way to regular trading strategies as long as the fundamental differences are taken in to account. Binary options trading in its most basic form is simply for options to expire at higher or lower the strike price in order to be profitable and this should therefore be the focus of all trading systems. Regardless of the number of pips that price moves after the options are purchased, binary options live up to their name as ‘all-or-nothing’ options as they only require price to be fractionally above or below this strike price. Traditional trading strategies may be designed to close when price hits a certain profit target, or number of pips, before moving below the original entry- as situation which could end in a negative binary options trade. They key to successful binary options trading is to therefore make sure that the trading strategy employed takes in to account that the binary options need to expire above or below, regardless of what happens in between.
Trading the news
Trading important news releases is one of the most effective ways to trade short-term binary options. Purchasing options with between 1 minute and 1 hour expiry can take advantage of the price swings that occur when significant data or information is released to the market. One of the most popular ways to do this is to ‘fade’ the news release and the price spike that is created as a result. Many traders recognise that, given the phenomenon of financial markets, price will often react sharply in one direction before correcting and moving in the opposite direction. This is particularly true if price has been maintained within a narrow trading channel as professional traders try to trigger entry orders in the wrong direction with the first reaction in order to trap traders looking for a breakouts either side of the channel.
Taking advantage of large market moves
Binary options traders can take advantage of this by waiting for the first five to ten minutes of market activity in cases where price moves sharply lower or higher towards the daily average. As the move appears to stall, anticipating a fade back to the pre-news price will often be rewarding. For binary options traders, the price does not need to correct all of the way, or even part of the original move, given that the options only need to expire fractionally higher. Judging when to purchase the options and how long to set the expiry may be based on technical oscillator or candlestick analysis to indicate the reversal, and the options should be given time to allow for the fade to take effect.
Trading short-term price movements with Bollinger bands
Another very simple, yet highly effective, way to trade short-term binary options is to look for short term price movements which show that the market may be ‘over extended’. One of the best technical indicators used by binary options traders are Bollinger bands. As is clearly visible on charts with this popular indicator, price generally stays within the two outer bands and only occasionally ventures outside of these. When price does break through the band it often quickly returns to at least the centre of the Bollinger band. Binary options traders can take advantage of this repetitive and high-probability action by fading the move when price moves outside of the Bollinger bands. Again, the number of pips that price moves is not of concern for binary options traders but simply that the options close in the anticipated direction.