Piggy has noted that Binary Options are a relatively new tool in the financial markets. Interestingly, this new investment alternative allows for low-cost entry where all trading is conducted over a web-based, real time platform on which one can trade with a simple click of the mouse. Until recently, Binary Options were hard to obtain, but a new generation of web-based electronic trading platforms, as well as several market innovations designed to simplify the trading decision are generating excitement and activity in retail binary options trading.
A Binary Option is in fact a prediction of which direction the price of the underlying asset (stock, commodity, index or currency) will move by a specified expiration time. With Binary Options, an investor does not purchase the asset – he or she is merely predicting the direction that the underlying asset moves. There are just two possible outcomes. A fixed gain if the option expires “in the money”, or a fixed loss if the option expires “out of the money.” The price of the asset is not important. The only thing that is matter is whether the prediction is correct or incorrect. It is that simple!
A binary options trade is executed in 3 simple steps;
- First, you choose a trade expiration time, this is the time you want the trade to end. It could be any period between a minute and even one week;
- Second, you choose Call or Put. If you think the price will end up above the current price: you click the Buy/Call button. If you think the price will end up below the current price: click the Sell/Put button; and
- Now that the trade is placed, you simply wait for the outcome. If the trade expires ‘in the money’, you make a profit. If it expires ‘out of the money’, you will lose.
Process Flow in a Binary Options Trade
- Deciding on the Underlying Asset – Some traders elect to focus on one particular asset, or one market, while others trade several options simultaneously. Classes of assets could include Commodities (Gold, Silver, Wheat, Coffee, Oil, Sugar, Platinum), Stocks (Apple, British Petroleum, Google, Coca Cola), Currencies (GBP/USD, USD/JPY, USD/CAD, EUR/JPY) and Indices (DOW, S&P 500, NASDAQ, DAX, CAC, FTSE 100;
- Deciding on the amount to invest. The amounts you devote to trade should being dictated by your risk management plan. IQ Option has a low minimum of just USD10;
- Deciding on the Desired Time Frame. Binary options are short term investment instruments by definition. The time frames available can run from one, two, five minutes to a week, depending on the trading platform;
- Deciding on the Type of Trade. Above/Below is the most popular type of binary options trade, most traders will use this type most of the time. Above/Below options expire in-the-money when the trader correctly predicts that the price of the underlying asset will move above or below the predetermined strike price by the time of expiration.
Advantages of Binary Options
- Simplicity – Trading Binary options is very simple and straightforward, all you need to do is decide which of the two directions the asset will move, up or down;
- Risk control – With binary options the return on initial investment is fixed. From the beginning, thus the amount of possible profit or loss is well known. Which means that you will never lose more than what you expected and can determine your risk as completely as is possible;
- Short-time trading (minutes, daily, hourly) – with Binary Options, you decide what the expiry time of the option will be. If you are a fan of long-time investments, you can choose “end of the week” and “end of the month” expiry times. However, most traders would prefer shorter time frames;
- Low minimum amounts – Binary brokers have low investment minimums, thus allowing you to start with small amounts.
Disadvantages of Binary Options
- The main disadvantage of trading Binary Options is the level of “fee” that is paid to the broker. It is relatively higher than in other investment areas.
Trading Binary Options is fun and exciting and money can be made. However, you must also keep in mind that like with any other options trading there is the risk of losing. When trading Binary Options, you should not risk too much money on any given trade.
Good money management calls for adopting a conservative investment strategy that means that you should never risk your entire capital.
You should not use more than 5% of your capital on any single trade.
Technical Analysis as a Tool for Binary Trading Success
Trading Binary Options, of course, requires a thorough analysis of the appropriate market. By means of technical analysis, the development of underlying asset can be predicted to some extent.
Technical analysis is the studying of investor behaviour as well as its influence on the price action of financial instruments. The primary information which we must carry out our studies would be the price histories of the instruments, along with time and volume data. All these allow us to make our predictions, depending on objective data. In technical analysis, we use charts to predict asset price movement and develop our strategies, therefore it is extremely important that you will be knowledgeable as to the various charts types that are being used in technical analysis.
The Babypips Course has a comprehensive section on Technical Analysis that you can access here;
Take time to improve your technical analysis knowledge, this will help you to sharpen your strategies!
Binary Options Strategies and Entry Signals
Strategy Number 1 – Trading the News Strategy
The market is influenced by news events and by learning how to take advantage of these events you can improve your profits and prevent expensive mistakes. Many beginner binary option traders come to recognize the significance of news events only after seeing a perfectly profitable trade becomes a loss in a few minutes, while skilled binary traders foresee the move and add to their daily gains in a regular manner. Economic news reports usually initiate solid short-term moves in the assets markets which could create trading opportunities for traders. Announcements about corporate profits, a change in management, rumours of a merger, are all events which could result in a corporate entity’s share price to move significantly up or down. Interest rates, unemployment and export rates, or the central bank’s policy changes, can lead to a serious change of an exchange rate.
So how can you trade this strategy? simply follow the news closely and act fast. A good news event is a buy signal while a bad news event is a sell signal.
Learn more about News Trading here;
Strategy Number 2 – The Moving Averages Strategy
Moving averages gives you a hint as to the direction of the market, this is useful in identifying a trend. A trend is a good entry signal. Moving averages are the most basic and most utilized technical indicator. They are used for smoothing the price movement. Moving averages are used as a trend line which adapts to price changes, not just as a regular trend line. The Moving Averages strategy gives you the following signals:
If the closing price moves above the moving average – this is a buy signal.
If the closing price dips below the moving average – this a sell signal
Moving Averages on IQOPTION
Strategy Number 3 -The Moving Average Convergence Divergence Strategy (MACD)
The MACD strategy is another indicator that is useful in identifying trends. This indicator takes advantage of the relationship between two moving averages of prices. Most traders use the difference between a 26-bar exponential moving average (EMA) and the 12-bar. This difference is then plotted on the chart and oscillates above and below zero. A 9-bar EMA of the MACD, called the “signal line,” is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
The MACD strategy can be used in various ways, however the most popular is to use the signal line for entry signals as follows: When the signal line crosses the MACD from below – that’s a buy signal. When the signal line crosses the MACD from above – That’s a sell signal.
MACD on IQOPTION
Strategy Number 4 – The Williams Percent Range Indicator Strategy (Williams %R)
The Williams %R strategy was developed in 1966 by Larry Williams. Its purpose is to help identify overbought and oversold positions in the market. This indicator is categorized as an “oscillator” because the values vary between zero and “-100”.
The indicator chart usually has lines drawn at both the “-20” and “-80” values as alert signals. Values between “-80” and “-100” are interpreted as a strong oversold condition, or “selling” signal, and between “-20” and “0.0”, as a strong overbought condition, or “buying” signal.
The Williams %R strategy gives you the following signals: When the indicator has a value above 80 – that’s a sell signal. When the indicator has a value below 20 – that’s a sell signal.
Williams %R on IQOPTION
Strategy Number 5- Relative Strength Index Strategy (RSI)
The Relative Strength Index strategy is another overbought/oversold signal. It was created by Welles Wilder. The goal of the Relative Strength Index (RSI) is to determine the comparative changes that occur between the higher and the lower closing prices.
The index is used by traders to determine overbought conditions and oversold conditions which then provides them with highly useful info to help establish entry points and exit points of the underlying asset. The RSI is an oscillator and its line oscillates between the values of zero and one hundred. The values of 70 and 30 are viewed as significant values since above and below them are the overbought and oversold areas, respectively. Just about any value above 84 is regarded as a very strong overbought situation and produces a sell signal, while every value below 15 is regarded as a solid oversold situation and produces a buy signal.
The Relative Strength Index Strategy gives you the following signals: When the RSI crosses the 70-line, overbought-zone, from above – that’s a sell signal. When the RSI crosses the 30-line, oversold zone, from below- that’s a buy signal.
RSI on IQOPTION
Strategy Number 6- The Bollinger Bands and Channels Strategy
Bollinger Bands incorporate a moving average and two standard deviations, one above the moving average and one below. The main thing to understand about Bollinger Bands is that they consist of up to 95% of the closing prices, according to the settings.
Trading Bollinger Bands can assist you to fully grasp several characteristics of an asset such as the high or low of the day, whether a stock is trending, as well as whether it is volatile or stable. Sometimes while trading Bollinger bands, you will notice the bands coiling tightly which indicates the stock is trading in a narrow range. This is the trigger to look at for a price breakout or breakdown. Often large rallies start from low volatility ranges. When this occurs, it is termed as “building cause”, which is “the calm before the storm”.
The Bollinger Bands Strategy gives you the following signals: When prices move above the upper Bollinger Band – that’s a sell signal. When prices move below the lower Bollinger Band from below – that’s a buy signal.
BOLLINGER BANDS on IQOPTION
Overall, to get started and venture into the exciting world of Binary Options Trading, register a Free Practice Account with IQOPTION below;
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