Retail traders come to the binary options industry attracted by the fabulous returns. For any given trade, binary options brokers offer above 70% rate of return.
Who wouldn’t want such a profit for a trade? The answer is that many fall prey to this illusion. The binary options brokers offer a rate or return much below what a serious Forex trader uses. As part of any money management system, the risk-reward ratio should be at least 1:1. Realistic ratios look like 1:2 or 1:3. Only this small comparison tells you that binary trading is riskier.
Binary Options Tips to Make in This Industry
Trading a financial product should be the result of a proper analysis and a money management system. Traders must understand that taking losses is part of the process. What matters the most is to make sure the account grows in time. Therefore, money management rules and systems were invented in the first place.
If there was a holy grail in trading, everyone would have used it to make money. But there’s not. As such, traders adapt their strategies to various market conditions. In the case of Forex trading, risk reward ratios help traders survive in the long run. In the case of binary options trading, it all comes down to the expiration date and the size of your trade.
Avoid Short-Term Expiration Dates
The most profitable trading products for the binary options broker are the short-term expiration dates. Anything between one minute and five-minute expiration dates fit in this category. There’s no time frame small enough to give you the proper technical analysis for trading such small expiration dates. However, retail traders active in the binary options industry get attracted by these expiration dates.
It is similar with retail traders in the Forex market. Almost all of them end up being scalpers. Scalping refers to traders that keep a position open for a very short time. They trade multiple times a day, going in and out of the market, trying to profit from every single market swing.
This approach is time-consuming (traders end up being glued in front of their trading screens) and exhausting (they’ll focus on not missing even a swing). Scalpers use lower time frames, the one-second, one-minute and even five-minute charts. While for the Forex trading industry this still makes a bit of sense because of the higher risk-reward ratios that can be used, for the binary options industry this is a deadly approach for the trading account.
Therefore, if you want to learn how to trade binary options like a pro, the first thing to do is to avoid short-term expiration dates. They simply don’t make sense for the financial products offered by binary options brokers.
Trade with Oscillators when the Market is in a Range
Every trading platform offers trading indicators. They’re designed to help traders make the right trading decisions. Mainly, they’re split into two categories: trend indicators and oscillators. Trend indicators appear on the actual chart, while oscillators in a separate window below the chart.
Almost all oscillators show one simple thing: overbought and oversold territory. When the price reaches the overbought territory, traders should sell. In the case of binary options trading, traders buy a put option. When in oversold territory, traders buy a call option as the price will rise. However, this doesn’t happen all the time.
This holds true only when the market is in a range. When it is trending, there’s no oscillator that works. In other words, the key is to find out when the market ranges. For that, here are some tips and tricks to use:
- Choose a currency pair/financial product that is expected to range for the period ahead. For example, in a Non-Farm Payrolls week, the jobs data in the United States comes out Friday. This makes the whole week a ranging week, almost always. Hence, trading binary options with an oscillator, buying put options in overbought and call options in oversold territories should do the trick. The time frame and expiration dates matter here too: use the hourly and four hours and end of day expires.
- Ahead of a dollar driven economic news, trade crosses, rather than majors. Trade EURGBP, EURJPY or AUDJPY ahead of a dollar event, for example.
- Use the Asian session for range trading. There’s Low-volatility in Asian sessions. Use this opportunity to trade the ranges with oscillators.
Don’t Put All Your Eggs in the Same Basket
Binary options trading has one big advantage when compared with other trading possibilities. The outcome is calculated percentage wise. As such, traders can split the original amount to trade in various smaller units. Because the outcome is a percentage, the result is the same. Any binary options “how to” guide should start from splitting the risk as much as possible. This is called diversification.
In a portfolio, investors would want to diversify the risk on various asset classes and strategies. The same in binary options trading: the idea is to split the risk to offer multiple entries and therefore reducing the risk of losing all the invested amount. If your analysis shows that the DJIA (Dow Jones Industrial Average) will move to the upside for the period ahead, they you’re interested in buying call options. How about the expiration date?
This comes from the time frame the analysis is made. If your analysis comes from the four-hour or daily time-frames, the expiration date should be bigger than the end of the day: End of the week, end of the month or even end of the quarter, if possible.
However, you’ll want to have multiple entries, as picking a bottom is a risky business. Therefore, split the amount in multiple entries and you’ll end up having more chances to make a profit than trading one single option.
Avoid Trading Correlated Products
Latest binary options tips refer to avoiding correlated products. Because the market moves based on what the HFT (High-Frequency Trading) industry does, many financial products move in a similar manner. For example, the Canadian Dollar is directly correlated with the oil price. Therefore, when oil moves to the downside, the Canadian Dollar falls too.
This happens because the Canadian economy is an energy driven one. There are many jobs in the oil sector and the price of oil strongly affects the Canadian GDP (Gross Domestic Product). Having said that, it doesn’t make any sense to trade oil and the USDCAD pair at the same time. It is like taking to trades on the same financial product. This is overtrading.
There are plenty of correlated products to consider. The DJIA and the USDJPY pair is another example. While the correlation is not that strong like in the previous example, it is risky to trade the two products at the same time.
Other correlations to consider:
- Risk-on vs. risk-off moves. In a risk-on move, the EURUSD, AUDUSD, NZDUSD, GBPUSD move to the upside, while USDCAD falls. The other way around happens in a risk off move.
- Gold and the Australian Dollar. They enjoy a strong, direct correlation.
If you do decide to trade correlated products, at least do it from different levels. This means that first, you’ll split the amount you want to trade with and then have different striking prices for your options.
Ideally, even the expiration dates will be different. In this way, the risk gets split in various ways.
Make Sure You Avoid Important Economic News Releases
One of the biggest mistakes binary options traders do is they get swallowed in intraday trading because of swings created by economic news. This, coupled with the fact that retail traders prefer short-term expiration dates, is deadly for a trading account. The financial markets we trade today depend on what high-frequency trading robots do. These supercomputers buy and sell in a millisecond multiple trades, and they own the market.
As such, retail traders can only follow what robots do. This is the reason why the best investors in the world do not trade or own a position for a few hours or so, but for many weeks/months or even years. This is called investing, or macro-investing. The main advantage of it is that, as an investor, one can still have its own view about an economy and act on it.
If the time horizon would be smaller, the trading algorithms will kill the trading account. Any binary options academy should have at least one section dedicated to algorithmic trading and how trading robots affect today’s markets.
A retail trader involved in binary trading cannot be an investor. I mean, if you’re willing to put your money on hold for several months or even years, there are other markets you can trade. However, as mentioned earlier in this article, retail traders have little or no chances to make it with short-term expiration dates binary options. In other words, the right path is somewhere in the middle.
Adapt to the Economic Calendar
All traders know that the red events in the economic calendar are the ones that move financial markets. Therefore, try to avoid them as much as possible. By avoiding them, it doesn’t mean not trading them. A spike into an economic news or a dip because of a news can easily give a great entry for a binary option. The key here is to use a bigger expiration date.
Is the news coming on Wednesday? Use end of week expiration. Is it coming in the second half of the month? Use end of the week and/or end of month expiration date.
Before starting to trade, any trader should “graduate” a binary options school. There’s plenty of information out there. Look for information related to how to pick the right binary options broker. We gave some great piece of advice here.
Moreover, look for what moves the financial markets and how to avoid being trapped in the wrong direction.
But above all, look for having a money management system in place. Not any money management system works, especially when trading binary options. Risk diversification is key. Try to split the risk among various asset classes. Split it when it comes to the amount traded, the financial products, the expiration dates, and the technical or fundamental reason for taking a trade.
In doing that, you’ll end up having a system that will prevent you lose your capital. Believe it or not, the first mission of a trader is to make sure he/she doesn’t lose the capital. After that, the focus shifts to making money.
It all comes down to you as a trader and what your expectations from trading are. If you keep them within real means, trading will be fun and profitable. Moreover, in time, you’ll end up understanding how the financial world functions and this, in turn, will open the gates to other trading opportunities.