The end result of the binary options trading is predefined, and the trader can only be eligible for the profit if the prediction is right. Otherwise, the money used for trading is lost. In fact, many strategies have been developed over the years that can tilt the balance heavily for making profits from such options. These strategies are now universally recognized as ones that increase the probability of earning profits in binary options trade. Even so, traders prefer some strategies over another and some may combine one or more strategies. Yet others may use more than one strategy or use one strategy for one type of asset class and another strategy for another asset class. Knowing the comfort zone among these binary options strategies goes a long way in helping to earn from such trades.
Some Popular Binary Options Strategies
Here is a list of popular binary options strategies that traders use.
Candlesticks are actually technical indicators though they resemble the line charts of any asset’s price movement. Indicators apparently predict the movement of the asset price. The information that these charts provide include-
- Upward, downward, and sideways movement of the asset’s price;
- Indicate the pattern of movement in the asset’s price;
- Provide formations identified as island reversals, breakaway gaps, etc.
- Patterns are formed by multiple candlesticks indicating the bearish phase named as “falling three methods.”
These phrases dictate particular action to be undertaken by the trader; “star,” “abandoned baby”, and “dark cloud cover,” “shooting star,” “morning star,” “evening star,” etc. Based on such patterns, traders are able to decide whether to put or to call.
They can identify the market direction, trend and many other developments in the market, much before any charts or another technical analysis tool can do because they offer variation range and develop logical sequences based on historical movements. But it is necessary to be thorough in interpreting candlesticks and be quick in identifying patterns and formations.
They are easy to understand, especially the patterns of price action, which is very useful for binary options trading.
These analytical charts are based on the assumption that market value is an important aspect, whereas investors have personal views relating to some stocks, and those expressions cannot be visualized in these technical analysis charts. Investors’ apprehensions can play a huge role in the movement of stocks.
- Double up
In this strategy, the trader identifies the direction in which the asset’s price is likely to move and targets a particular price. Even as he does so, he may realize that the markets are likely to climb much higher or that the target is definitely achievable. If he had targeted 100 starting from 80, he might select double up strategy and wait for the asset price to double his profit as an investment is immediately doubled.
- Profits would be doubled through the open contract. In conventional calls and puts or even options, this is not possible;
- Offers greater flexibility in deciding how much to invest as the investor can take a call after noticing further pointers towards the anticipated direction, thereby reducing the risks of investment
- There are leverage advantages too.
- If the trend reverses or does not go as expected, losses too would be doubled;
- It is advantageous only when the margin difference is substantial.
One of the most popular binary options strategies is the straddle strategy. In this, the investor decides on a specific strike price. At that price he applies simultaneous put (sell) and call (buy) options moving in opposite direction though not necessary at the same time or even close to each other. Actually, for a smaller premium, on the cost of failed option, he is guaranteed a larger profit on the successful binary options trade. Note that strike price selected is the same, as is expiration date or period.
- Maximum loss is predetermined, and there is breakeven point on both trends, beyond which one would definitely fetch profit;
- Mathematically the probability of earning more from this strategy are more than focusing only on one of the trends;
- The touch option and boundary option within binary options facilitate better usage of this strategy and minimize risks while fetching better returns.
- Returns are lowered;
- It is ideal when markets are volatile, and not when there is a bull or bear phase.
- There is arisk of both the contracts failing because strike price is not reached either way and that doubles up losses.
- Gap Strategy
This “binary options” trading strategy is based on two principles. One is the supply-demand theory of economics, and the other is the gap in the asset price movement charts. At times the asset price may jump rather suddenly, creating a vacuum in between. Obviously, there may be day traders, willing to sell their holdings at the higher price, or at slightly lower price. Eventually, the price would reach to a level from where it had jumped or even lower. The gap also suggests that the trend would reverse soon enough, and usually, it happens.
The charts indicate such jump and such jump may happen overnight as well. As such, gap strategy allows traders to profit because of the demand supply gap in that asset for that particular price.
- It is one of the best ways to reduce risks and losses because it is the most reliable of all strategies.
- It is easy to identify.
- It requires substantial capital because gaps may not be much though they are easily identifiable.
- It requires swift action as gaps get filled because other traders also notice those gaps and initiate trades.
This list of strategies used for trading in binary options is not exhaustive. But it should give some idea of mitigating risks in binary options and earning from them. As mentioned before, it is necessary to find a comfort zone using the existing set of strategies for binary options trading. Once the specific strategy or set of strategies have been identified for earning profits from binary options trade,the chances of gambling are reduced. In all these strategies, one thing, i.e., research and study of the underlying asset is common as also their relationship with prevailing economic environment.