Only meticulous planning would enable a binary options trader to experience consistent success.
The following step by step process would enable a binary options trader to avoid pitfalls related to binary options trading:
- Select the asset:
It is the most crucial part of binary options trading. A trader should trade the right asset at the right time. Only then price movements can be capitalized. To select the right asset, a trader should first have a clear idea of the list of assets available for trade. Invariably, all binary brokers provide an asset index in their website.
From the list of assets available for trade, sorting of assets based on the time of peak activity should be done. During Asian market hours, the assets related to Asia (Hang Seng, Nikkei, Yen, AUD, NZD and Yuan) would be very active. The same rule can be applied to European and US market hours. Thus, it would wise to trade the Yen or the Aussie related currency pairs during the Asian session than purchasing a call or put option binary contract for the USDCHF currency pair.
Another important point to note is that volatility would generally hit a high when the trading hours of two different regions overlap. For example, the opening of the European market would see an increase in volatility in the Asian assets and also the European assets.
Finally, a trader should regularly monitor the economic calendar data. Economic data and Central bank announcements have a lasting impact on the price of assets (equity, commodity and currency markets). Thus, selecting assets which have occupied the recent news headlines would greatly increase the chance of success.
- Predict the direction:
Once the asset is chosen, a trader should predict the probable direction of price movement. This can be done through technical or fundamental analysis or a combination of both. Technical analysis would work very well for contracts with short-term expiry periods. For expiry periods longer than a day, it is better to use fundamental analysis to predict the direction. The reason is that market aligns with the fundamentals of an asset sooner or later. The short-term volatility or noise (as referred technically) is purely a result of imbalance between buyers and sellers.
It should be remembered that important news announcements such as rate hike by Central bank or GDP data will shift the trend in the direction of the news. So, a trader should wait for the news announcements, if any, before forecasting the direction of the price of a chosen asset. A lot of practice is needed to predict direction based on technical analysis. In this regard, a trader should use a demo account or do paper trading before trading on a real account.
- Determine the support/resistance levels:
A trader should not only determine the direction but also check out the probable price targets. Technical analysis always stands apart from other forms of analysis as far as price target calculations are concerned. While calculating the price targets, a trader should identify the minor or major support and resistance levels in the direction of price movement. It will enable a trader to visually assess how far the trade would be successful. If the trend is upwards, but with a strong resistance near the prevailing price, then the chances of break out before an expiry time of 5 or 10 minutes is very less. In such a scenario, the trader may lose even after identifying the direction of price movement perfectly. Thus, identifying the potential hurdles along the direction of price movement is a must before going in for the purchase of a call or put option binary contract.
- Determine the expiry time:
It is probably the most difficult aspect of binary options trading. Fortunately, most successful traders of binary options trading have given a simple way to select the expiry time. If a trade is taken against the direction of the primary trend, then a shorter expiry period should be chosen. On the other hand, if a trade is taken in the direction of the primary trend, then a longer expiry period should be chosen. The phrase shorter expiry period points to a time period, which is smaller than the time frame of analysis. If the trader uses a one hour chart to identify the primary trend, then a binary options trade against the direction indicated by the primary trend should be taken with an expiry time of less than one hour.
For example, let us assume that a trader uses one hour chart to identify the primary trend using support, resistance levels, channel lines and indicators. The trader understands that the primary trend is upwards. However, due to the presence of a minor resistance near the current price, the trader expects the price to undergo a technical correction (short-term reversal) for a while before going up to break the resistance. In such a circumstance, the binary options trader should purchase a put option contract with expiry in less than one hour. This will greatly increase the chances of success.
If the binary options trader enters in the direction of the primary trend, then an expiry time longer than one hour should be used.
Once a trader completes the above steps, all he needs to do is decide the investment amount before placing the order in the web based platform, which is usually simple and straight forward. A trader should never risk more than 2% of his investment in a single binary options trade. It will protect the account from a streak of losses, if any.