Investors have moved in droves over the past few years from traditional investing and trading methods to test many of the new offerings in the investment marketplace. One of the most exciting new trading instruments that disposes with much of the complicated rigor required by most traditional methods is the binary option. They may also be called digital or all-or-nothing options, but they can be used to profit from currencies, commodities, stocks, and indices, as well.
Your decisions may have been cut to a bare minimum with the binary option approach, but that does not mean that you can just sit back and rake in the money. Many newcomers think that this instrument is the latest legalized casino on the web, but as with other trading modalities, if you rely on luck, then you will not be long for this new trading method. Binary options still require a disciplined approach to the market and a strategy applied consistently to the situation at hand.
It all comes down to the odds. For any instrument, the odds for an up or down movement are always "50/50". After accounting for brokerage fees and commissions, you need a winning dollar ratio of "55/45" just to break even. In the binary world, a 75% payoff, coupled with a 10% refund, equates to the same "55/45" requirement. If you are to succeed, however, the odds must ramp up in your favor to "60/40" over time to provide a consistent and successful track record. How do you tilt the odds in your favor? The only way to do that is by applying a strategy that has a better than average return.
There are already plenty of websites and video tutorials that can help in your quest for a repeatable winning strategy with binary options. While traders and brokers may be eager to share their "system," as with any investment strategy, it will only work under certain market conditions. Your task is to have a few strategies ready at all times, so that you can adapt quickly to changing market conditions, the basic goal espoused by all veteran traders.
Here are a few basic varieties, one each for currencies, commodities and stocks:
- Currencies: The keys here are timing and the range for the day. For the "EUR/USD" pair, the average daily range is roughly 120 pips. When the London session has only moved a portion of its average range, then you can expect the market to follow through after New York comes online.
- Commodities: Strategies work best when the item trends well and liquidity (trading volume) is up. For commodities, gold is a good choice, and look for the heaviest trading to occur during East coast business hours. The best strategies focus on candlestick reversal patterns and Fibonacci retracement levels. When a reversal is implied, your optimum touch point is between zero and the 23.6% level.
- Stocks: Stocks tend to react more to fundamental changes in the market. To take advantage of these wide swings, you might deploy what is called a reversal strategy. When headline news or an earnings release causes a dramatic rise or fall in price, there is always a tendency for profit taking that will result in a quick reversal. Have your Fibonacci tool ready to spot the key 23.6% retracement level. It will be a good target, but pick a touch point beneath it.
Binary option trading platforms rarely supply charting tools to predict reliable resistance and support levels, but knowing these is the basis for a repeating and consistent trading strategy.
Article by Tom Cleveland