Binary options are very popular among novice investors because of the easier accessibility through online trading platforms and better returns which can be as high as 80%. As a binary options trader, you should follow certain effective trading strategies in order to remain a successful investor.
There are different kinds of trading strategies which can be followed based on your market expertise and experience level. You should choose the strategy based on your trading style and what works out really well for you. Choosing the right underlying asset is also very important when trading with binary options. Though you have lot of assets to choose from, such as stocks, commodities, Forex currencies and market Indices etc., you should only choose the asset you are most familiar with so that you will be able to predict its future price movement more accurately. Apart from adopting various trading strategies, it is also important to devise an effective trading plan that you should follow strictly.
Trend Trading Strategy:
This is a basic trading strategy adopted by both experienced and novice investors. It is also called bull-bear strategy and involves monitoring the trend lines of the underlying asset to see whether it’s rising, falling or having a flat trend. The strategy aims at helping traders make profits by trading on assets whose prices are either moving in downward or upward direction. The traders will choose a “Put” option if the asset is moving downwards and choose a “Call” option if the asset price is rising up. If the asset is following a flat trend line and is expected to rise, you can go for “No Touch” option. The important trick here is to know when to enter and exit the trade position and investing the right amount to gain maximum returns.
Breakout trading strategy:
This strategy is suitable for experienced investors who are always active in the market. A breakout refers to the asset price which moves far outside a resistance or support level. This strategy is suitable only if the underlying asset is highly volatile and is about to experience a major shift within short time span. You should follow the market very closely and monitor the support and resistance levels of these volatile assets. If you figure out that it’s going to experience a major shift below the defined support levels, then you should choose a “Put” option and if the asset is going to increase beyond the defined resistance levels then you should choose a “Call” option. You should choose the underlying asset based on how often they have hit the support and resistance levels in the past. Also you should make use of technical indicators, price-action charts and market signals to ensure that your prediction is accurate. Breakout trading strategy is one of the popular binary options strategies which are followed by highly successful investors to make huge profits.
Risk Reversal Strategy:
This is also a popular trading strategy among experienced traders and aims to minimize the risk factor associated with binary options. It involves placing both “Put” and “Call” option simultaneously on an individual underlying asset which is fluctuating very often. As you know each trade in binary options can result in two possible outcomes. Hence, if you trade the same asset by choosing both “Put” and “Call” option at different positions, it is guaranteed that at least one of the trades will result in positive outcome. Also your loss is capped to bare minimum since you will definitely win in at least one of the trades as you are placing them in opposite directions.
News Trading Strategy:
This is a simple and effective trading strategy used by both novice and experienced traders. This strategy involves following the market news very carefully and keeping the economic calendar always with you. You should read the financial reports and watch for important announcements like Interest rate hikes, jobs report, quarterly earnings reports of major companies etc. By doing a thorough fundamental analysis on the underlying asset, you will be able to predict its price movement very accurately. Suppose if you are trading against a stock whose quarterly earnings reports are very positive, then definitely you can expect its market price to increase and you can purchase a “Call” option against that stock. In order to implement this strategy successfully, you should understand how certain market news can impact the investor sentiment and price movement of the assets.
Correlation Trading Strategy:
The correlation strategy also called as Pairing strategy is suitable only for experienced traders and is based on the relationship between the prices of two different underlying assets. For example, there can be two stock pairs whose prices always move together in same direction and have positive correlation between each other. Similarly even assets belonging to different asset classes can also have positive correlation with one another like stock prices of large-cap companies and S&P Index or EUR/USD currency pair and crude oil prices. In order to execute this strategy, you should first choose the assets which have positive relation with each other based on their past movement by analyzing the price charts. Once you have chosen the asset pair, you can place the “Put” or “Call” option on one of the assets based on the movement of its paired asset.
You should be disciplined in making your investment and should not take any trading decisions based on emotions like fear and greed. You should choose your underlying assets carefully after thorough market research and fundamental analysis.