Binary options have caught the fascination of many traders who look to earn money faster than the conventional investment ways. Though they are considered somewhat risky, there is no doubt that these options are much more lucrative than any other form of investment or trading alternatives. Since not much money is needed to gain from these options, many people are now considering them as a convenient way to make money.
About Binary Options
They are aspecial type of variants of options. Options, as we know are derivatives. The investor or trader gets to buy a contract, in which if the predictions of the trader isright then he or she gets the sum agreed as in the contract, or nothing if his/her prediction fails. In contrast, conventional options contract allow the investors or traders to opt out of the contract if the price of anunderlying asset is not moving in the direction as anticipated by them or fail to reach the amount that they anticipated, absorbing fewerlosses in the process. In binary options, there is no way the buyer can mitigate losses from within the contract. The option buyer has to look at other strategies to play in this market and earn profits. The word “call” is for investment or buying, and the word “put” is for selling. If you are a beginner and want to know more about “what are binary options,” then you should certainly read the helpful guides to gain the comprehensive knowledge about binary options.
Binary Options Strategies
Over the years several strategies have been identified for earning profits from binary options trades. Some binary options traders are comfortable with sticking with one strategy whereas others prefer changing plans depending upon asset on which the binary option is based. Yet others combine these strategies.
Here are a few of the commonly used binary options strategies that traders use and which any newcomer desirous of trading in binary options should learn.
- Trend Strategy
As the name suggests, it is based on thetrend. If the market is moving upwards, it indicates the trend upwards, and betting on the asset’s price moving upwards is more likely to fetch profits. The trend lines are straight lines tracing the candle graph of the asset’s price movement on theexchange. If the slope of this line is minimal, trading in binary options needs to be avoided. The rule is to buy a “call” binary option if the trend is upwards and opt for “put” binary option if the trend is downwards.
- Pinocchio Strategy
This is a more complex strategy and needs more study. Here too charts of asset price are examined. The movement is referred to as pin bar or wick. Usually, when the pin bar moves downwards sharply, the price of anunderlying asset is likely to move up. Vice versa, if it is moving down gradually with short wicks, then it is liable to continue to be on adowntrend. Similarly, when the asset’s price is moving upwards, shorter spurts in prices are indicative of anupward trend, whereas sudden sharp spurt upwards indicates thelikelihood of the asset’s price slipping. This strategy is so named because the longer nose of Pinocchio and longer candle wick are anindication of alie regarding direction. Though it is a good strategy, it may not always be perfect. It requires stop loss that is significant and speed in taking decisions. Effectively when the wick is down “call” or “buy” direction is to be selected, and when the wick is up, “put” or “sell” binary option is to be selected. From a newbie’s perspective,much practice is needed in following this strategy, though once mastered, it can be quite fetching.
- Straddle Strategy
Traders use this almost in every market. But usually, this approach is applied when the market is anticipating some news related to the underlying asset of the binary option. What the traders do is, use “put” when the price is high, and use “call” when the asset price is low. This, of course, is the standard policy. But traders also use the reverse of it also immediately and alternately following the sale, anticipating sharp reversals of the trend. Any of the two trades could be bringing you the good results.
- Risk Reversal
This is similar to straddle strategy. Calls and puts are on the same asset. It is basically a defensive strategy meant for reducing risks if any. Profits are also lower. The difference between the two is that straddle is a continuous process, whereas risk reversal is done simultaneously.
Unlike risk reversal method, in hedging, two different assets are used, and calls or buys apply to one asset and puts, or sellsare applied to the other asset.
- Research and Analysis of the Fundamentals of the Asset
This is acrucial aspect of any trade, be it in thestock market, commodity market, or forex market. This is the most reliable part of the information and comprises almost 20% of the asset’s price movement probability.
There is no denying that binary options are a risky proposition. But risks can be reduced by setting aside the capital to be used for this. Effectively, that money may be deemed lost. Not more than 5% should be employed for each binary options contract. At the most, this may be extended to 10% of that allocated capital. Not more than 25% of capital should be invested in trades at any point in time.