Earlier in the article “Binary Options, The New Investment Tool for the Investor on the Go”, we discussed the origins and basics of binary options. In this article we are going to discuss the strategies that you can use in binary options trading.
Conventional Strategies
Typically when trading conventional futures and options, traders use numerous strategies such as Collar, Covered Call, Straddle, Spread, Protective Put and more to minimize their risk of loss when the market fluctuates up and down erratically; it is normally known as a volatile market. A loss on a CALL trade can be offset or even profitable by a PUT trade performed on a different asset in another trade performed at the same time. Frankly, this type of strategy should be left to the experienced trader. I could go on with many articles explaining all the different strategies used in trading, but it would only bore experienced traders and confuse novice traders to a great extent.
Simplified trading at its finest
The simplicity of binary options has allowed the person on the street to get involved in trading without having to learn the deep strategies of conventional trading. As a result, it has brought a lot of new money to the trading scene much to the delight of the average investor on the street. The simplicity of Price Up or Price Down and trading with two mouse clicks with a profit of up to 81% has caught the attention of a whole new segment of investors.
“RTSB” – The Simplified Strategy
Along with simplified trading comes a simplified strategy for binary options trading. I like to call it “RTSB”, which stands for “Read the Screen Bud”. Yes, that is correct. Open your eyes, turn off the TV, stop texting your friends, close your chat room windows, and see what’s on the trading screen right in front of you. In addition to displaying the current price and trading period, each binary options trading screen has a button that will allow you to display the previous trading period chart.
While “RTSB” is the visual signal to look at what is in front of you, the analytical signal is for you to see if the asset price is going up or down. The direction of movement is called the Trend Line and the question you have to answer for yourself is whether the trend is up or down.
If the trend is going up, then I would consider taking a CALL trade. However, if the trend is down, you should consider placing a PUT trade.
The “DDDS” Strategy
The “DDSS” strategy is also quite simple, “Don’t do something stupid.” This strategy is best explained with an example. As you look at the charts of the asset and see the current price start to go up, then a few minutes later it goes down by almost the same amount, then a few minutes later it goes back up. If you look at the average price over this time period, you should see that it stays about the same. Some traders call it “flat lined” but the trade term is “lateral movement”. This is where you apply the “DDSS” strategy and you do NOT place any trades for that asset. A sideways price is very difficult to predict and most of the time your prediction will be wrong. Stay away from it and look for another asset that has an obvious up or down trend line.
I have to admit that the RTSB and DDSS strategies really draw attention to highlighting that you should pay attention to what you are doing as you can lose money quickly if you don’t do your own research before trading.
The propagation strategy
The spread strategy is a real trading strategy that has also been simplified by binary options trading. In conventional options trading, you use the spread or straddle strategy to buy calls and sell puts on the same asset. However, in binary options trading you cannot make a buy and sell trade for the same asset unless you are using two different trading brokers, which is not recommended.
The basic idea of the Spread in Binary Options is to find two Assets where the Trend line is Up for one and Down for the other. On the asset where the trend line is up, you perform a CALL trade while on the asset where the trend line is down, you perform a PUT trade at the same time.
The Spread strategy is often referred to as “hedge your bet”. If both trades end in the money, you could receive an 81% payout on both. A trade price of $100 on each trade would result in a profit of $162. However, if a trade ends out of the money, you will have minimized your loss to $19; $100 loss on one trade and $81 profit on the other trade. However, if both trades are out of the money, you would have a loss of $162.
Risk management
In trading, risk management is an important process that you should adhere to. Fortunately, binary options are designed to have a fixed payout and a fixed loss per trade, which limits your risk on each trade. However, the only limit to poor judgment and gambling fever on your part is your own willpower NOT to trade when market conditions are bad or when you are consistently out of the money on most of your trades. Take a break, take a step back, and analyze why most of your trades are out of the money. Doing your own research on the trend line of each asset is key to minimizing your risk when trading.
Keep an eye out for the next article in the Binary Options Trading series, “Which Market Is Best For Binary Options Trading?” We will discuss how you can determine if you should trade the Forex, Stock, Commodity or Indices markets.