Having completed the binary options trading related lessons, we believe that you have gathered enough knowledge to trade in the market without inhibitions.
However, before doing so, an effective trading strategy is required to succeed in the binary options trading.
Almost 90% of the trading strategies are basically an extension of the below explained 3 basic methods of entry and exit from the market.
- Support and resistance:
Trading based on support and resistance is the most simple, but effective way of capitalizing on the price movements in the market. In the case of binary options, a trader should purchase a put option or similar contracts when the price hits a major resistance. Likewise, a call option should be purchased when the price bounces off a major support level.
While taking the above mentioned steps, it is also a must to see whether there any major news announcements associated with the asset being traded. When the price is trading near a resistance, any overwhelmingly positive news would enable the asset to break above the barrier. In the same manner, strong negative news announcement would enable the asset to break below the support level. Thus, a trader should purchase a call or put option contract near the support or resistance levels, after taking the news announcements into consideration. The expiry period of the contract should be lower than the time frame of analysis. For example, if the time frame of analysis is 1hr, then it is better for the expiry period to remain within 30 hr.
- Channel based trading:
To identify whether the price trend of an asset, invariably all the traders use an ascending or descending channel. As long as the price moves with in an ascending channel, the asset is considered to be in an uptrend. Similarly, when the price moves within a descending channel, the asset is considered to be in a downtrend. Of the two bands that make up a channel, one of them will act a resistance, while the other will act as a support.
In the equity, Forex, and commodity markets, when the price hits the band which acts as a resistance, a short position is taken with a stop loss order above the band (after taking the implied volatility into consideration). A long position is taken when the price touches the band, which acts as a support. The stop loss order can be placed few notches below the band.
In the case of binary options trading, a put option can be bought when the price hits the band which acts as a resistance. A call option can be purchased when the price hits the band which acts as a support. For positive results, the trading time frame should be lower than the time frame used for analysis.
- Indicator based trading:
It is quite common to see an equity, commodity, or Forex trader to use a technical indicator for trading (buy/sell) decisions. Usually, an oscillator such as a relative strength index or stochastic is used in combination with a momentum indicator such as MACD (Moving Average Convergence Divergence) to determine the entry and exit. When the RSI/Stochastic indicator enters an oversold region, then a call option is bought as long as the MACD (main line and signal line should be rising above the zero line) is indicating an uptrend.
Similarly, a put option is bought when the RSI/Stochastic indicator enters an overbought region. In this case, the MACD (main line and signal line should be falling below the zero line) is indicating a downtrend.