Strategies For Trading Binary Options

Strategies For Trading Binary Options

Submitted by adil on Mon, 03/03/2014 - 09:36

Strategies for trading binary options vary based on the focal action point or perspective with which a trader wishes to trade. There is no single best strategy for trading binary options because every trader has his  own preferences and way of doing things. Some are aggressive in their approach, whereas others are meek and cautious. Some traders are good at understanding a given asset’s subjectivities whereas others are not. All these factors work together to not only define optimal strategies individual for each trader, but also generate newer strategies.

Following are a few binary options trading strategies, briefly described, so that you may grasp the ideas on strategy formulation and objectives.

Long Up/Long Down: This is the simplest approach to trading binaries. In such a strategy you are looking to balance out between the cost of an option or upfront cost and the likelihood of the option to pay off. The higher or lower the strike price is, depending on the type of binary, the less likely it is to pay off. If you have a bullish view for an option’s market, you buy an up option, and if you have a bearish view, you buy a down option. If the market exceeds strike price at expiration you get a return.

Long In/Long Out: Some binary options brokers provide a boundary type binary option. The trader needs to define a range of price. If the bet is for the price to stay in the range, it’s a long in binary. If the bet is for the price to stay out of the range, it’s a long out binary. In a long in binary, the slimmer is the range, the highest is the payout, but price is less likely to meet the range. Similarly, in a long out binary, the wider the range there is, the payout is less likely to happen, but if it happens it is highest in amount.

You can always construct such a binary through option builder or manually by taking positions in call and put options binaries to define your ranges and reaction to price movement. The long in approach of trading is for stable market view, whereas the long out view is for unstable and volatile market.

Fundamental Approach: This approach is often also referred to as speculative approach. However, this approach is based on study of news and events, and in essence it is not entirely speculative. Rather this approach is backed by the probabilities of the kind of effects events have on price. It is a rough estimation of those effects. The stronger a news or event is, the greater is its effect. The weaker a news item or event there is, the more likely it is to dissipate without affecting anything. Turmoil in Libya affects oil’s prices, thawing of hostilities between different countries leads enhanced trade and affects respective currencies. To depend solely on this approach for trading is not advisable. Therefore, firstly always look out for big impact news or event, and secondly, back your analysis with a strong trend study.