July 23, 2017
GMT+2 10:31

Binary option trading

The trend following strategy of binary option trading

Many traders know the old wise saying “the trend is your friend”. It follows logical reasoning, not to go against the masses, but to follow the path of least resistance. The probability of a continuing trend is higher than that of a trend reversal (see also the contra-trend strategy). Based on this fundamental knowledge, this simple yet effective strategy can be easily implemented.

Why choose binary options?

Experience traders understand the timing issue when entering or exiting a trading position, like in the forex market. They identify an upward trend in a currency pair and want to benefit from it. They plan their entry and exit accordingly and then open the position. The forex market is currently highly volatile and subject to large fluctuations – especially when important news items are pending, like policy rate decisions by central banks or the release of labour market data.

Forex trading loss scenario: the early uptrend correctly identified in AUD/USD has been stopped. The profit target has not been reached. This can easily happen through a short course eruption of Stop-Loss and the trade ending in loss. In the worst case slippage (a worse version of Stop-order due to abrupt price movements) ensures that the actual loss is even higher than the loss calculated with by risk management.

Binary options: Clearly defined returns and risks

Binary options work around this problem elegantly by the fact that the risk is clearly defined from the outset. In classic Call/Put trading only the direction of the price movement is decided and bought depending on market assessments, either a rising call option or a put option on falling prices. A loss occurs only if the maturity of the option is out of money, i.e. the price is quoted lower (in the Call option) or higher (in the Put option) than when purchasing the option.

How it does during the run time is irrelevant. With most brokers the trader can define the risk themselves; you only need to use a minimum trading sum, which is only 10 euros with some providers.

Proving that the market assessment of the traders at the maturity of the option is correct, the exchange rate of the Australia dollar rose relative to the US dollar after the purchase of a call option on the AUD/USD currency pair, so the trader achieved a predefined profit on invested capital, which can be between 65% and 85% depending on the provider.

Binary Options: It is the same setup as Forex – with positive results. No stopping during the runtime – when the option is at maturity then the trader makes a profit in cash. A big advantage in trading with binary options is that it cannot be stopped by abrupt market movement, such important news items, as is often the case. In binary options billing doesn’t happen until the end of the option maturity, the so-called expiry date.

Practical Implementation

Firstly, an account with a binary options broker is required. With TradingArena, an account can be opened with as little a deposit as 100 euros and at 25 euros minimum trading amount per trade.

TradingArena also offers a demo account as well as a wide range of tradable assets such as various currency pairs or international equity indices. For very active traders, opening an account with different brokers may make sense for trading in binary options.

Secondly, it is time to identify an existing red and define an entry point. Trends are always based on a series of clearly visible higher highs and higher lows (an uptrend) or lower highs and lower lows (a downtrend). Additionally, the drawing of trend lines in recommended by connecting the low points or high points, in order to be able to identify trend reversals earlier. Longer sideways phases can be used as an early entry, as they often precede a continuing trend or a trend reversal. Moving averages (Simple Moving Averages aka SMA) can also be useful in trend analysis. In general, you should focus on the essentials, if possible, and try not to complicate it by wild combinations of various indicators trading.

Practical Implementation

Firstly, an account with a binary options broker is required. With OptionFair, an account can be opened with as little a deposit as 25 euros and at 25 euro trading amount per trade. OptionFair offers a free demo account as well as a wide range of tradable assets such as a various currency pairs or international equity indices. For very active traders, opening an account with different brokers may make sense for trading in binary options.

Additional functions with more flexibility

Some binary option providers offer useful additional functions that support risk management. The “Early Closure” function is available with many providers, allowing the premature closing of the position in order to secure an existing profit and avoid losses. On the other side, there is a “Rollover” function with certain options; an option can be extended in order to give the position more room for development.

 

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