Binary Options Strategies
All successful binary options traders use a strategy. Those strategies are carefully developed and then constantly assessed, improved, and updated over time. You will also need a strategy to profitably trade binary options as you can’t make money regularly by adopting a haphazard approach. The assets you trade, how you trade, and when you trade all have to be clearly defined. In this guide, we’ll explain more about binary options strategies, and we will outline how you can create one risk free.
In particular, we will focus on the following:
- What binary options strategies look like and why you need one
- The types of strategies that exist, with examples
- Risk-free ways of finding and developing a successful strategy, including the top binary options demo accounts
After reading the guide, you will know more about binary options strategies and what they can do. You will also be in a better position to choose the type of strategy that best suits your trading style and objectives. With this knowledge, you will be able to start developing that strategy. This will give you a solid platform for success for when you begin trading for real.
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Binary Options Strategies Explained
In simple terms, a binary options strategy defines what you should trade, when you should do it, and how much. In other words, the strategy identifies opportunities and details how you should respond. This makes decision making more analytical and clinical by removing the need for taking guesses.
You won’t have just one part to your strategy however. Most successful binary options strategies have three parts:
- Strategy for trading – This is the part of the overall strategy that identifies opportunities.
- Strategy for managing money – This defines how much you should trade and when to ensure you don’t overexpose your balance to risk.
- Strategy for analysis and improvement – This is about becoming more profitable over time by looking at trades that worked in the past and those that didn’t.
You need all three parts if you want to be successful. Leaving out even one of them will result in losses. This might not happen immediately, but you will not achieve consistently profitable results unless your strategy has all three essential parts. Having a complete strategy is the most assured path to success.
This is challenging for many binary options traders, although it is particularly problematic for new traders. This is often because there is so much to learn and they are so eager to get started. However, all binary options experts will tell you that it is important to spend time getting the strategy right. That means putting in place all three essential elements.
Why Binary Options Trading Strategies Are So Important
Consistent, long-term profits cannot be made with binary options trading if you don’t have a complete strategy in place. Let’s look at each of the three elements in turn to explore why they are so crucial.
Developing a trading strategy involves defining situations where there is good potential for success. There is a practical side to it too, though, as the strategy means you can repeat the process without limit.
Without it, you might miss opportunities that have been successful for you in the past. In addition, you might not even know why opportunities are successful, so you will not even try to repeat them. Identifying opportunities that work repeatedly is crucial to success.
To explain this, let’s look at a practical example where you place 100 trades over a fixed period of time. You might end up in a profitable position after those 100 trades, and you will know how many of them were successful. You will even know your win rate, but without a trading strategy, you will not have one critical piece of information: why you gained or lost money.
You will know this with a strategy, plus you will be able to adjust and refine the strategy to improve it.
So trading strategies clearly define the parameters of your trading opportunities while also making your trading patterns repetitious for easy analysis, but they have another function as well. That other function is to remove emotion from your trading decisions.
When you don’t have a strategy, you don’t have clear reasons why you are making a trade. You might remember that something similar worked in the past (or didn’t work), and you might have a hunch, but neither of those things can be verified or analyzed. In fact, they are not much more than a guess. If you are feeling cautious on a particular day, you might miss profitable opportunities, while on days when you are feeling aggressive, you might place trades with a low percentage chance of winning.
Emotions are unreliable in binary options trading, and trading strategies help to keep them in check.
Why Money Management Strategies Are Important
There is an element of risk in binary options trading, so you can lose money. In fact, it is impossible to trade with a 100 percent record, so losing money is inevitable. You will have a profitable trading career if you win more money than you lose. To do that, you cannot lose too much money on any single trade. Also, you must be able to handle losing streaks, where you lose several trades in a row. This is why money management strategies are so important.
Money management strategies are concerned with the balance in your account and the amount of risk you want to be exposed to. The idea is not to become over exposed by investing too much in any single trade.
As an example, imagine placing a trade valued at 50 percent of your overall account balance. If that trade loses, it would take a 100 percent gain just to get back to an even position. If you lose twice or three times in a row, several double-up wins are required to get back to where you started from. It is easy to see that an approach like that can easily spiral out of control.
It is even worse if you vary the amount of money you trade depending on hunches, guesswork, or panic.
A money management strategy handles the risk so that you can successfully get through loss-making periods with your existing budget largely intact. You can expect to achieve higher profits in a shorter period of time as a result.
Why Analysis and Improvement Strategies Are Important
Nobody is perfect at anything the first time they try it. This applies to work, sports, hobbies, and investments. It applies to binary options trading too. There isn’t a single trader in the world who has come up with a binary options trading strategy in one go and is now making their fortune with no need for adjustment or improvement. It simply doesn’t happen.
Strategies require consistent critical analysis, where weaknesses are dealt with and strengths are amplified. This is the only path to long-term profitable results.
A lack of focus is the cause of failure for many unsuccessful traders. The pattern of events is familiar: They find a successful strategy that makes them money, but instead of refining it to make it better, they move on to something else, chasing the next trend or promise of bigger returns. In effect, they spend their entire trading careers (which are inevitably short lived) at stage one instead of advancing by perfecting a single strategy.
An analysis and improvement strategy keeps you focused on making improvements that lead to real success instead of stagnating or jumping from one new strategy to another.
Types of Binary Options Trading Strategies
A binary options trading strategy identifies a trade, tells you how much to invest, and gets better over time. Within that broad definition, however, there are a number of options. As a result, there are a number of different overall strategies.
Types of Trading Strategies
Trading in binary options involves predicting price movements in the very short term. Understanding how an asset will move in price over the medium or long terms is of little use. This sort of understanding and analysis works with other types of investments, but it doesn’t work with binary options.
You therefore have to develop a strategy that can correctly predict price movements over short periods of time. For example, will the price of an asset increase or decrease over the next hour? There are two main ways of doing this:
- Monitoring the news and events
- Looking at historical trends and price movement patterns
For new traders, the first option is the easiest to grasp. This is because it follows a fairly simple philosophy—if the news about a particular asset is negative, the price will fall, but if it is positive, it will rise. You can then make predictions that result in trades.
Calendars are crucial for this type of strategy to work. You need to know when earnings are due to be reported by companies. You also need to know when government and central bank data is published. This includes things like monthly unemployment information, interest rate changes, and inflation numbers. Other factors, such as government budget announcements or elections, can also influence asset prices. With a calendar, you will know where your attention should be focused at any particular time.
While this is an easy-to-understand strategy and one that is straightforward to learn, it does have its downsides. This is because the market can often react to events in ways that are hard to predict. In addition, there is no way of knowing for certain how long a rise or fall will last. Even if you get the prediction right, you might still not be able to capitalize on it.
Some traders can still make money using a strategy that analyses events in the market and the news, despite its failings. There is another strategy available, however, that can make accurate predictions regardless of what is happening in the world.
This strategy involves deep technical analysis of an asset’s past performance. In other words, it is an analysis of trends and patterns. When this is applied to current and future asset price situations, movement predictions can be made.
It sounds complicated, but the reality is we do this sort of analysis throughout every day of our lives. Driving a car is a good example. If you see a pedestrian standing on the side of the road waiting to cross, you subconsciously calculate the chances of him or her stepping out onto the road in front of you. You do this from your past experience of encountering pedestrians on the side of the road and apply that to the situation you currently face. If the person is an adult, you will probably predict that they will wait until you are safely past before attempting to cross. If the person is a child, however, you will be less certain. This unpredictability means most people slow down just in case the child steps onto the road.
A technical analysis of an asset is similar, although it predicts the movement of prices instead of the reaction of a pedestrian crossing a road.
There are lots of practical ways of doing this, depending on the situation. This includes using price analysis techniques. An example is candlestick formations. You can also analyze technical indicators, trends, or a combination of methods. The objective is to develop a strategy that accurately predicts what is going to happen next based on existing data.
Which one is best for you—the event/news-based approach or one involving a technical analysis of trends? There is no right or wrong answer to this as it depends on your personality and what you want to achieve. The recommendation, therefore, is that you try both. You can do this without risking any money by opening a demo account. This lets you test out the various methods and develop a strategy that works for you.
Types of Money Management Strategy
The precise structure of money management strategies varies, but they can be broadly categorized as one of three options:
- No change – Essentially, this is where no real strategy exists at all. It means your trades stay at the same level regardless of whether you have just lost a trade or a series of trades. It also doesn’t take into account your current balance.
- Increase on a loss – This is also known as a Martingale money management strategy. Under this strategy, you would double the value of a trade immediately following a loss. So let’s say you place a trade valued at $10 and you lose. Your next trade would be $20.
- Decrease on loss, increase on gain – This is also known as a percentage-based money management strategy. The value of trades is based on a percentage of the money in your account balance. If you lose, your account balance falls, and the value of each trade falls with it. Similarly, if you win, your account balance increases along with the value of each trade.
Which is the best option? It doesn’t take an expert to see the potential problems with the no change strategy. After all, you will have losses when you trade binary options. As that is inevitable, you need a strategy that protects your balance and helps get you back to a profitable position as quickly as possible. Making no changes to the amount you trade does not achieve these objectives.
The Martingale money management strategy is also dangerous. It might work in other types of investment, but it is not suited to binary options trading. This is because losing streaks, where you experience multiple losses in a row, are common. Using the Martingale money management strategy in this situation will leave your account balance in an irrecoverable position. In fact, it doesn’t take a particularly long losing streak for you to lose all your money.
The best option, therefore, is the percentage-based strategy, where the value of your trades increases and decreases depending on your account balance. In other words, you are taking exactly the same percentage risk on every trade you make. So long as you use a trading strategy that delivers more wins over time than losses, you will be able to survive any losing streak and, over time, end in a profitable position.
The exact percentage you choose will depend on your attitude toward risk, but it is recommended you keep it below five percent. If you are happy taking risks, you can set your trades at five percent of your balance. If you would like to lower your level of risk, you can drop that to two or three percent.
Let’s look at an example of a trader with a percentage-based money management strategy set at three percent. If they have $500 in their account, each trade would be $15. If the account balance increases to $600, the trades they make would increase to $18. However, if the account balance fell to $400, the amount bet on each trade would fall to $12. Essentially, the trader’s balance is protected.
This is about investing at an affordable level rather than gambling more than you should on an outcome that is far from guaranteed. It is the way good traders make profits consistently over the long term.
Types of Analysis and Improvement Strategy
The method of analyzing your trading and money management strategies and how you make improvement decisions will depend on your situation. There is one common feature that all successful traders use however: a trading diary.
This can take many forms. Some like keeping notes in a notepad, while others like complex spreadsheets filled with data. The key is to keep track of results in as much detail as possible so you can identify elements that work well and those that don’t.
Those patterns won’t be immediately visible, but over time you will see trends. For example, you might find that a particular asset performs better when a technical analysis strategy is used instead of one that analyzes the news and events. You might, therefore, consider making changes to your new strategy, or you might drop it completely.
However you do it, the best approach is to make incremental improvements. For example, imagine a situation where you look at your diary and you spot two patterns in the results that could be improved. As a result, you make two adjustments to your trading strategy and then continue monitoring. After a period of time, you notice that you are no better off. Did both adjustments fail? Or did one work while the other didn’t? Is one actually doing very well while the other one is failing terribly? You probably won’t know because you did too much in one step to accurately test and analyze.
So by keeping detailed records of your results, critically analyzing them, and making incremental improvements, you can improve your strategy and make more money.
Remember that you should look at everything. This includes the money management strategy you use and your exposure to risk. It also includes things like the assets you trade: Is there one that makes you more money than any other or one that consistently loses you money? Is there a time of day or day of the week when your trades are most profitable, or is there a broker that is no longer performing?
Ask these questions and more when doing your analysis. Finally, keep emotions out of your analysis and decision making. After all, this is about winning and making money. All other factors, including gut instinct, emotional attachments, and comfort levels, are irrelevant.
Trading Strategy Examples
The sections above have concrete examples of money management and analysis strategies, but there are no firm examples of trading strategies. Here are some of the strategies that are commonly used to help you get started.
Trading Strategy Example One: Trends
If you have looked at the price graph of any asset, you will know that it never moves in a straight line. The graph might move generally up or down over time, but it gets to that position by zig-zagging about. For example, a graph that generally moves in a downward direction will gain value repeatedly, but it will lose more than it gains. It is a bit like the old saying: one step forward, two steps back.
Zig-zagging prices make predictions possible. You have two main options:
- Following the whole trend – This is the simplest option and involves identifying a trend and then trading on it over however long it lasts. Depending on the market and the overall trend, this could be a significant period of time.
- Following each zig-zag – This is harder, and there is more risk involved. However, there is greater potential for return, not least because you will make more trades. It still starts from the point of spotting a trend in the price of an asset. Instead of trading on the overall trend, however, you trade on each zig-zag movement. For example, if the trend involves an asset increasing in price, new highs are likely to be higher than previous highs. In addition, the next low will be higher than the last low. The situation is reversed for assets with a decreasing price trend. In both cases, the price is moving in a predictable way.
There is no reason you can’t do both, and most successful traders that use trend-based strategies do.
You also have other options in a trend-based trading strategy. This includes deciding on whether the trend is up or down and betting that that situation will continue. You can also use a riskier strategy to make more money. This involves not only predicting the movement of the price but predicting the price the asset will reach. Obviously this is much harder, but the returns are greater too.
Trend-based trades are one of the most popular strategies used by binary options traders because of the options available and the potential for success. It is easy to build and improve trading strategies using this method, and you can adapt it to suit your trading style. This includes selecting assets you are most comfortable with, levels of risk, timeframes, the value of trades, and more.
Trading Example Strategy Two: News
We have already discussed how you can base a trading strategy on news and events. This could be predicting that an asset will fall in value whenever a company publishes disappointing results. Another example is predicting that an asset will rise whenever a government publishes favorable economic data.
We have also already discussed the main challenges with this method of trading. Specifically, it is hard to predict by how much an asset will rise or fall in price. This is very different to the previous strategy, where the mathematical model gives you that information.
There are still ways you can build successful strategies based on news and events. Here are three of the most common.
- Trade a boundary – This strategy works when you don’t know in advance the content of the news and cannot predict which way the market will move. If the news is good, it will go up, and if it is bad, it will go down, but you don’t know which event will happen. You do, however, know that the movement will be strong either way. You therefore create two price targets: one above the current price of the asset and the other an equal amount below it. Your trade wins providing the market hits one of those price targets.
- Trade the breakout – Trades on binary options have short expiration times, but when you trade the breakout they are even shorter. In fact, they can be as short as 30 seconds. Timing is everything with this strategy however. The basic premise is that the market’s initial reaction to a news story or event is the strongest reaction. A trade the breakout strategy is all about making the most of this immediate reaction. To make it work, you first make your prediction about which way the market will go. You then have to initiate your trade as soon after the news event as possible. Finally, you should set the expiration for between 30 and 300 seconds.
- Trade a high or low option – In many respects, this is the simplest strategy to understand, although it can be one of the hardest to make work. In this strategy, you predict whether the price of an asset will rise or fall in the immediate aftermath of a news event. The reason it is often hard to make work is because markets usually expect certain news events. For example, a company reports a profit figure. While the profit figure is positive, it is also expected, so the market doesn’t move. If the market doesn’t move, you don’t win your trade. The only situation where you are almost guaranteed movement is when the news is unexpected, for example, a company reporting profits that are above market expectations or losses that were not anticipated. If you can capitalize on this, you will have a successful strategy.
There are other strategies you can use in place of the three explained here, or you can use a combination strategy. Your choice should be based on your knowledge, level of skill, and attitude to risk.
Trading Strategy Example Three: Candlestick Formations
Candlestick formations have already been mentioned. In fact, strategies based on candlesticks are among the most popular with traders new to binary options. This is because they are straightforward to understand and the analysis involves studying detailed but easy-to-use graphs.
The graphs use candlestick formations to show the movement in price of an asset over a set period of time. They are different from line graphs, which have to pick a price within this time period, giving you only one reference point. With a candlestick representation, you will know the high, low, opening, and closing price at a glance.
This gives you enough information to build a successful strategy. There are loads to choose from and too many to describe here. By way of example, however, we will describe one—the gap candlestick formation. This is where the candlestick shows the price jumping, leaving a gap in price between. This usually results in one of three outcomes:
- The price will start to move toward the gap – This is common when there are high volume trades and sideways movements. This is known as a breakout gap, and this is an indicator of a potential new trend. If you spot it, you can make a prediction.
- The current price movement will strengthen – This happens when there is an existing upward or downward trend and the direction of the gap corresponds with the general trend. This is an indicator of the trend strengthening, which you can profit from.
- The gap will close again – This usually happens if the gap is created during slow periods when there is not much trading volume. An example would be just before the market closes. It is often a mistake, and provided there are no other reasons for the gap, it will usually close again at the next opportunity. You can make profitable trades if you know this and can recognize when it happens.
This is all about patterns and identifying them as the market moves. You can use this type of strategy in any market and on any asset.
How to Choose a Binary Options Trading Strategy Without Losing Money
After reading this article, you will understand more about binary options trading and about creating a strategy. You will even have knowledge of several strategies being used successfully by traders right now. Despite this, you are probably still not any closer to selecting a strategy that is right for you.
You can try opening an account and giving some of the strategies a go, but this is risky as it can cost you money. You might not be able to make the strategy work, or you might be uncomfortable with it. You don’t want to learn those lessons when you have real cash at stake.
There is another option that allows you to test out various strategies without risking any money however—opening a demo account with a binary options trading platform.
Demo accounts give you full functionality using real-time data and actual trading strategies. You can operate in all available markets and trade on any asset. In fact, the only difference is you are not trading real cash. This means you can’t generate a profit, but crucially, you can’t lose anything either.
As the objective at this stage of your binary options trading career is to find a profitable strategy that you can use and improve over the long term, this is an easy compromise to make.
Not all brokers and platforms offer demo accounts, so make sure you choose one that does. You can then test various strategies until you get one that works and that you are comfortable with. This is the stage where you can move to trading real money and making a real profit.
This article has explained what binary options trading strategies are, why you need one, and why you need a complete strategy with all three main elements:
- Money management
- Analysis and improvement
There is no shortcut around this, and every successful binary options trader follows a similar path. It takes time, but if you are smart, you can do it in a way that costs you nothing and puts none of your cash at risk. At the end of the process, you will have a strategy that makes money.