Similar to trading stocks and currencies, trading binary options require a winning strategy that can produce gains over a long-term horizon. A winning strategy can be vary from one trader to another. Some use technical analysis while others trade with a purely fundamental approach.
Regardless, you should not be trading with a live account or with big capital until you actually find a strategy that best suits your personality and trading objectives.
Strategies based off gambling models are common in the binary options market. These strategies assume the highest winning probability based on specific patterns in terms of position size and timing. Itdoesnotconsider the experience or skill level of the trader. Common examples of a probabilistic approach are the Grinding strategy and news-based volatility strategy.
Another popular betting model is known as the Martingale system, wherein an individual increases the amount of his/her bet per loss until they make a profit. For instance, you take a bet of $20 in the Euro/Yen exchange rate. If you lose the bet, you add another $20, making your total capital exposure at $40.
If you lose again, you proceed to another $20. The merit of using the Martingale system is that it allows you to make a profit even after you’ve incurred a string of losses. The downside, however, is that you need a bottomless account to continue playing the game after a string of losses.
Perhaps the more common and popular means of trading binary options is through a technical approach. Trading a technical strategy assumes statistical data and makes use of historical price data to create reliable signals that merit a position entry or exit.
Technical analysis, however, is more attuned to quantitative analysts and traders who have a strong understanding of mathematical models. Still, it remains a possibility for regular traders to train and master chart and price interpretation to guide them in trading binary options.
A simple strategy that makes use of technical analysis is using two sets of moving averages and placing a Call option if the lines intersect upwards or a Put option if the moving averages intersect downwards. Technical analysis also makes use of price’s daily highs and lows, average true range, and volume in some financial markets like stocks.
This particular strategy involves simultaneous trading of a financial product in the opposite direction. This hopes to act as a risk reducer by preventing you from incurring heavy losses on your trading capital in the event that your original position moves sharply against you. A hedging/straddle strategy is based on the idea that “what comes up, must also come down”.
Before hedging a position, make sure you analyze the asset’s chart activity. Choose a general direction and decide if you want to buy a Call or Put option. Then, choose your underlying asset, whether it’s currencies, commodities, or major indices like the Russell 2000. If the position does move towards your anticipated direction, open an opposing position.
Historically, financial products tend to go through spontaneous surges in either direction during the starting and closing hours of the irrespective exchanges. These surges also tend to manifest before, during, and following key market data.
Using a correction-based strategy, you should expect the price to cover the price gap between its previous price and the price following the surge.
Reinforcing Your Trading Strategy
It isn’t enough to copy and paste a tested-and-proven strategy from one’s account to yours. No one strategy is perfect in its default nature. You will have to tweak with the parameters in order to complement your lifestyle, risk threshold, and investment objectives.
For example, your lifestyle might restrict you from checking up on positions and re-analyzing charts daily, so you have to work with a technical strategy that accounts for weekly or monthly price movements and gives you enough space to leave your position without it getting stopped out while you’re away from the screen.
Having the right online trading platform is another key differentiator between success and failure. Work with a proven brand like TorOption to make sure your orders are executed in the timeliest and most accurate manner possible.
Depending on which underlying market you decide to trade, volatility can come at different times. An intuitive trading platform with accessible support ensures seamless order execution and maximum profit.
A winning strategy by itself is an inadequate tool. You will need to be psychologically attuned with the strategy and approach the trading business as a risk manager and not as a gambler.
Fortunately, one of the advantages of trading binary options compared to other financial markets is that risk and reward potential are already predetermined. By capping losses in any one trade, you protect your capital and your trading business.