A binary options strategy or trading system consists of 2 core components.
1 A method for selecting options, that is when to call or put on what asset.
2. A method for deciding how much to invest per trade.
2. A method for deciding how much to invest per trade.
Take your time and start out small to try a few different binary option strategies and always be looking to modify and improve your system as you gain experience and data.
There are 3 main ways of selecting what option to take and when, they are fundamental analysis, technical analysis and trading on news. Let’s look at each individually.
Fundamental Analysis
Fundamental analysis is investigating and understanding the real underlying value of an asset to form an opinion of whether it is overvalued, correctly valued or undervalued. In the case of stocks this means analysing the company’s product, management, balance sheet, growth potential, strategies, demand etcetera as wellas the current price.
In binary options trading if you believe the asset is overvalued you can place a put option where you are wagering the value of the asset will go down. If you think the asset is undervalued you can place a call option that will win if the value rises.
Technical Analysis
Technical Analysis chooses investments based on market trends and market tendencies. People who use this method for selecting binary options assume that all the factors the fundamental analyst considers are already priced into the market but the value of the asset may rise or fall based on market mechanisms. This includes market activity statistics such as past prices and volume traded and any cycles that may be active.
For example if a currency is trading within a range from 1.04100 to 1.04900 someone applying technical analysis will make a call option for the currency to rise any time it is trading at the bottom of the range and place a put option for the currency to fall when it is at the top of the range.
Trading on News
This is a simple and easy technique that requires no special knowledge or skills to profit on. Simply find out what important financial news is going to be released such as unemployment figures, interest rates or a company’s annual report. Find out what key number the market expects, what range would be better than expected and what range would be worse than expected.
If the number that comes out is better than expectations the related asset will rise so make a call binary option. If the number is worse than expected the related assets will fall so make a put binary option. Related assets are things like Apple stocks for Apple corporate results or the US Dollar for US employment rates.
The week before writing this US unemployment figures were released and they were much worse than expected. This almost guaranteed that the EUR/USD would rise sharply and it did. We were able to make large investments on that with the standard 81% payout! Happy days.
Another way to trade news is to find out what stocks or assets the media is buzzing about or putting down and follow the short term sentiment.
Which Method to Use
The best traders combine fundamental analysis with technical analysis and are aware of the news. That is to say if an asset is undervalued based on its fundamentals and the market conditions make it likely to rise, that is the asset to invest in by making a call option.
Keep in mind that binary options are very short term investments of 1 month maximum. This makes them less suited to fundamental analysis as even if an asset is undervalued when you open your option it is most likely still going to be undervalued when your option expires. Technical analysis and trading on news can work very well for typical 10 minute options.
Binary Options Signals
A signal is somthing you believe can help to predict the direction of a market. If whenever XYZ happens the market goes up then XYZ is a signal you can watch for, then when it happens make a call trade! All the above methods use signals found in data so signals are almost always numerical. The exemption being trading on news or sentiment, for example if warren buffet says he loves a sock that could be a signal but it is not a data based signal.
How Much to Invest Per Option
Even well researched and timely trades that have a positive expectation overall sometimes lose. That is why we get 80% payout if we win. For that reason you should exercise bankroll management and only invest a small % of your bankroll in any 1 binary option. If you invest 10% you can only go on a losing streak 10 trades long before you go bust so that would normally be considered too high. 2%-5% is reasonable but it depends on your own risk tolerance and confidence of your selections. If you enjoy the risk and are very confident in your trades 5% or more could be appropriate. If you are not sure about your selections and do not want to have a risky strategy 2% or less could work for you.
What you don’t want to do is increase your stake after losing options to chase your losses unless you have a stop loss or are willing to lose your bankroll. This would be gambling not investing. You can read more about bankroll management and everything else you will need to have in place to support your trading strategy at our page How to be a Winning Binary Options Trader
Good luck and happy trading.
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