Whatever the reason, binary options are intoxicating trading channels for many traders today. Binary options trading has taken off over the past five years, and there are no signs of it slowing down any time soon. Heading into this dangerous field without a solid trading strategy, though, is just as foolish as making any other investment choice without a firm strategy.
You need to have a method to the madness before you risk a single penny. Obviously, you want to make money, but how much do you want to make — and how quickly do you want to make it?
This will determine how aggressive you are. You also need to determine your preferences for assets. Some binary options traders do not believe it matters.
The most popular tend to be stocks and currency pairs; virtually any major options broker will have several choices for each asset class to choose from. You can find more exotic choices with some brokers, but the downside to those is that information for them is often harder to find. Pick the asset class with which you are the most familiar. And ignore those who say you should trade a wide variety of assets; trading an unfamiliar asset is the same as flipping a coin and basing your trading strategy off of whether it lands heads or tails.
The most important key to any successful trading strategy, to me, is knowledge — knowledge about the asset class; knowledge about the asset market; knowledge about the asset itself; and knowledge about how other traders view the asset.
The more you know, the more of an informed opinion you can form on what the asset will do in the near future. Similarly, if you understand what major forces move the market for your chosen asset, you can take advantage of current events as they happen to make a quick decision and invest in the appropriate options contract.
Having knowledge of your asset and how your asset performs in the market can give you the insight you need to make valuable strategic connections, such as….
Basically, you will learn that certain assets are related to other assets. When something happens to one, then, a reaction is created that results in the other asset rising or falling accordingly. If one person chained to another person takes off running at full speed to the left, chances are his chained-up partner is going to go left too! Similarly, you can look for assets that are connected to other assets to get a hint for what will happen. Take, for example, the relationship between gold and the Australian dollar the Aussie.
So, when gold rises in value, you can bet that the Aussie will similarly rise in value. The same holds true in reverse; if gold falls, the Aussie might fall, too.
There is also a relationship between oil and the U. Oil is denominated in dollars, which means there is an inverse relationship between the two. If the dollar strengthens i. This effect is even greater when you trade with futures, since they are more sensitive and volatile and are more likely to be impacted by news that happens within the hour or within the trading day.
Learn as much as you can about your chosen asset. Find the relationships that cause the asset to rise or fall in price — then exploit them with your strategy. Technical indicators also offer a compelling piece of any trading strategy — and, according to who you talk to, form the basis of trading altogether. I subscribe to a healthy mix of fundamental and technical analysis, but I do emphasize the big role technical indicators can play in any investment strategy.
Two of the most popular indicators you can incorporate into your strategy are moving averages and stochastic crossovers. A moving average is a running average of the value of a particular asset over a certain period of time. A day moving average does the same for a day period. The goal is to help you identify trends by smoothing out day-to-day volatility. One popular strategy is to overlay day and day MAs and look for when the two cross over each other.
A bullish trading signal is given when the day MA crosses above the longer MA; likewise, a bearish trading signal is given when the shorter MA crosses under the longer one. You can also look for when the price goes above both MAs as a bullish signal especially when the day MA is above the day MA.
Another tool is a stochastic oscillator. You can find this tool if you look on a chart with the oscillator overlay selected. It appears at the bottom and features two horizontal lines labeled 80 and 20 from a scale on the right-hand side. Plotted on the chart itself are the two moving averages you select. You are essentially looking for when the two moving averages cross over each other above or below the 80 and 20 lines, respectively.
For example, if the shorter moving average dives below the longer moving average while both are above the 80 line, that is a sell signal — because the asset is likely at the top of its range and ready to head downward.