A great article by Polly Fergusson that Binary Option Trade wanted to pass on to you from MoneyAM:
Binary Option Strategies
Binary option is gaining in popularity around the world – punters like the fact that it’s simple to understand and, crucially, that you can only lose a certain sum. Polly Fergusson explains some of the strategies behind binary option and how you can maximise your winnings
A binary option is nothing more than a fixed odds option but quoted in a binary format, ie in 0-100, instead of the odds offered by a high street bookie. Say, for example, you want to option on Arsenal winning the FA Cup and your bookie is quoting odds of 2-1, which equates to a binary market of 66.7. If you were to buy the binary option at 66.7, your maximum profit would be 33.3, multiplied by your stake per point, and the maximum loss would be 66.7 multiplied by your stake. All a binary option does is settle at 100 if the event is true or settle at zero if not true.
This sort of option is gradually spreading through different markets and sectors, but you are still most likely to come across it on financial indices such as the FTSE 100 or Dow Jones. ‘It’s the thinking man’s game of trading,’ explains Tom Hougaard, chief market strategist at City Index. ‘It is in fact very close to options trading as the same elements are taken into account, ie time to maturity, volatility and the direction of the markets.’
Another key attraction of binary option is that you can choose whether to be the bookie or the punter. If you’re the bookie you can lay options, if the punter you can take the option. With the Arsenal example above, where the binary market was 66.7, then to lay it you would buy the option, giving you a maximum loss of 66.7 and a maximum profit of 33.3 (multiplied by your stake per point). If you were the punter you’d sell the option short, giving you a maximum profit of 66.7 with a maximum loss of 33.3.
‘Binary option is attractive to the novice and to the experienced trader. People new to financial markets enjoy the simplicity, trades are resolved into a simple “will it/won’t it” outcome, the option sizes are small and there is limited risk nature,’ says Dan Moczulski, director of new business at IG Index. ‘Binary optiontors can never lose more than their agreed deposit. Experienced traders enjoy the volatility – flat markets can enjoy 90-point turnarounds in seconds.’
Stock indices are well matched for this because they have a habit of over-reacting; buying dries up, with selling pressure creates more pressure and before long it’s a route to get out. This is the basic approach, but you can be more sophisticated and try various option strategies, depending on which markets you are option and the level of risk you can afford to take.
‘We say that you can play binary options two ways,’ explains Hougaard. ‘Trade up depending on where you think the market is going, or work as a professional. In the latter case there is more in-depth research and you tend to trade on numerous statistics in the market, such as where the FTSE or Dow are heading, or economic news that is coming out.
Moczulski has a more basic approach to the right strategy. ‘Quite simply, the right strategy is the one that makes money overall. Even if nine out of 10 trades lose, as long as the winner outweighs the losers, it’s a great strategy.
‘A slightly longer-term strategy seems to be the most effective, where a genuine view on the market is taken, as opposed to scalping a point here or there. Admittedly, a long-term view in binary option is probably anything above five minutes!’.
Non-directional – the Range Option or No-Touch Option
The range option or no-touch option offers a way to make money from lack of movement or volatility in a market. You need to find a market with a high statistical probability of going nowhere or trading within a very tight range optionween two set time points.
A number of market situations could lead a market to move within a narrow range. A very large move in an equity market will often then lead to anything from a few hours to a few days of sideways movement.
Equity and currency markets will frequently stagnate in front of or around holidays in other markets or even at certain times of day. For example, US markets frequently have a Monday holiday on days when European equity markets are still open, and often traders will sit on the sidelines marking time during such periods. On an intra-day basis, indices and currencies often stagnate before key figures or announcements come out. A regular event, such as the US Federal Open Markets Committee (FOMC) meeting, often means hours of waiting as markets come to a near-standstill prior to an announcement.
An advantage of Binary Options is that they are always quoted
A big advantage of binary options is that they are always quoted. The problem with a traditional bookie is that once your option is placed there’s nothing much that can be done until the event is over – you either win or lose. This creates a problem: say you had the foresight to option on Ray Quinn winning X Factor at the beginning of the latest series. At the time, there were more than 40 contestants, so you might have got 40-1. He did in fact get to the final but lost. Perhaps on the day of the singing final, his odds were around 3-1 to win.
With the bookies, there’s no way to take a profit before an event happens – even if you think the outcome is changing. But binary options are always trading, so you can change your mind and take a profit before you’ve reached your target.
Let’s say you option on the FTSE 100 to move 30 points lower on the day but change your mind when it moves just 10 lower. With binaries, you can take a small profit on the back of this 10-point move rather than the bigger profit on the still potential 30-point move lower.
Reversal strategy – a common Binary Option Strategy
This is a very common binary option strategy. Wait for a big move in the market one way or the other and then buy a cheap binary option (less than 15 points) on the assumption that the market has a good chance of reversing. If the trade goes wrong then the maximum loss is 15 points (or whatever the binary option was trading at when you bought it). But if the trade goes right, then the maximum profit is anything up to 85 points multiplied by your stake.
The trading strategy is simple. Look for sudden sharp moves on the back of news and then option that the move will reverse. For example, some economic news is announced, which moves the FTSE 100 sharply higher, option the move will not last and the market will head back down.
Trade the economic figures
You can put on a trade before significant economic figures in anticipation of a big market reaction once the figures are released. The US non-farm payrolls (employment report) is always released at 1.30pm London time on the first Friday of every month. This figure has the potential to move the Dow at least 50 points, if not 100 points, in a flash. Obviously this is not always the case but if the figure is widely different from the general market prediction sparks can fly.
You can trade hourly Dow Jones binary options before the figure is released on the assumption that the market forecast will be wrong and the figures will come in far optionter or worse than expected. Although a binary option is a tradable market, you don’t have to keep the option open until expiry. If, for example, you buy the option at 15 you can sell all or part of it at 35 should the market move partly in your favour.
Have you got what it takes?
You are more likely to be successful if you possess certain psycholological traits. This doesn’t guarantee success, but it can help. For example, are you patient? Most binary optionters never force a trade. You should be prepared to wait for days or even weeks for the market to set up correctly. Trades don’t set up that often, so wait for the right opportunity to present itself to you.
Binary options are also quoted on hourly markets so often you will be playing a very short-term strategy. You’ve got to be quick and nimble here. ‘This is a market where very small movements can make or lose you money quickly,’ adds Moczulski. ‘You are not going to be right all the time and it’s all about minimising these losses. I think this acceptance is borne out in that the most successful binary optionters tend to also trade in options – perhaps due to the inherent similarities in the products.’
However you use trading strategies, start trading with very small position size because binary options can and do move very fast. Experience is more important than you might have first thought. ‘If you treat binary option as a punt, it will always be a punt and you won’t really get anywhere with your trading,’ says Hougaard. ‘It’s important to do lots of research on the markets. This will put your binary option into its true place.’
Setting up a trade::
The FTSE 100 will close either up or down from where it started.
After the market closes at 4.30pm, IBM (a US company and not quoted in London, but still a global and therefore influential stock).
announces a surprise profits warning. This sends the Dow Jones down over 150 points.
The FTSE 100 opens the following day perhaps optionween 40-80 lower due to IBM.
Stage 1 of the trade setup is now complete – a sudden and quick move in the FTSE 100 the next morning.
You buy the binary up-option for the day. This will settle at 100 if the stockmarket closes in the green (ie UP), or it will settle at 0 if the FTSE 100 closes in the red (ie DOWN).
The likelihood of the FTSE actually closing higher may seem remote with all the bearish news and views around but the market has a habit of reversing.
The binary option may have been bought at only 12 points, meaning a potential payout of 88 (x stake) but more importantly a potential loss of only 12 (x stake).
If you work out the standard fixed odds on this option they’re 15-2, risking £1 to make £7.50.
This article originally appeared on MoneyAm
