Binary options trading is not easy if you want to make money. To be successful it requires measured risk taking and someone who is willing to learn different strategies for different market conditions. Every stock moves in different patterns from other stocks, forex trades much differently than stocks do, and commodities also have their own trading personality.
Binary options traders must always learn and evolve if they want to keep a high enough winning percentage to make hefty profits. Here are some different binary options trading strategies that we use to make money.
Successful Binary Options Trading Without A Strategy
If you don’t have a trading strategy or if you are new to binary options trading, then you could try OptionRobot, the free binary options robot.
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Binary Options Strategies
There are hundreds of different strategies that traders use, but these are our favorites that give us the best chance to make money.
Scalping Based On Price Action
A lot of binary option contracts expire in one to ten minutes. A trade this short requires a scalping mentality. The fundamentals of the underlying security are probably not important to pay attention to here. What you want is to take advantage of short term patterns in price action. There are a few ways that you can do this well enough to make money. Here are some of the best binary option strategies to make money:
- Use a technical indicator based strategy.
- Use a signal service.
- Read the tape of a stock by looking at prints.
- Jump on momentum.
- Trade the news and take advantage of trader sentiment.
- Take advantage of a flat market by buying “in the money” options.
Use a Technical Indicator Based Strategy
There are many technical indicators to choose from. Examples of popular scalping indicators that we like to use for binary options include:
- Relative strength index – Also called RSI, this is a measure of how strong or weak a stock is taking into account it’s momentum, and its recent momentum relative to its previous strength or weakness. The math behind this is complex, but what it is meant to do is to look for overbought or oversold conditions, and identify that a reversal is likely to take place in the direction of the price movement. Most people use a 14 period time frame (but you can customize this depending upon you preferences), and a high and low threshold of 70 and 30 respectively. You look for a signal when the relative strength or weakness crosses past your thresh hold. Many people will take their position when the relative strength crosses past the set threshold, and then crosses back past it again toward the midpoint. For instance your indicator may drop to 25 (below your threshold of 30), and they will take a position when it fails to stay below 30 and crosses back and hits 31. There are many different strategies involving RSI, and it comes down to the trader preference. A lot of charting software will simply give an indicator automatically so the trader does not need to actually think about the level. RSI is useful for binary options because it can quickly identify points where a short term reversal in price action is likely to occur.
- MACD – This stands for moving average convergence divergence. Unlike RSI which is meant to spot a likely reversal of direction, MACD is meant to confirm that a price trend is likely to continue. While this is used more for swing trading than scalping, MACD is still useful for shorter time periods such as 30 minute or 1 hour binary options.
- Bollinger bands – These are bands mathematically calculated by looking at the standard deviation of the moving average. They are a volatility indicator, because the more volatile the stock is, the higher the standard deviation will be of the moving average. These are useful for short term trades because when a stock hits the upper or lower band it can signal that a reversal of direction may be about to take place. In other words because stock markets move up and down constantly, we can see when a stock is statistically at a higher or lower end of its range compared to its previous moving average. The way to trade this is to buy a put option when a stock hits an upper band, and a call when it hits a lower band. Many brokerages allow traders to apply the bands to a chart.
Each indicator has its benefits and its weaknesses and limitations. Ultimately it takes some knowledge and experience to understand how to use them to your advantage so that they give profitable buy and sell signals for your trading.
Most brokerages will give you the tools to use something called “back testing”, which allows you see how well a technical indicator would have performed over some past period of time that you choose. Use the back testing feature to your advantage and you can find the indicator or mix of indicators that work for your trading style and whichever security you are trading.
You should also be aware that certain types of market environments favor different indicators. A very choppy market probably favors a relative strength or bollinger band approach, and a more directional market probably favors using moving average based indicators. Here are some additional strategies you should read as well.
Use a Signal Service
There are binary option specific services out there, and there are other larger services meant for all types of traders. Our very favorite is marketclub, which we use to trade with fairly often ourselves, but we also like barchart, and Traderific who have both free and paid services. Signaling services can be very good if you need some trade ideas, but blindly following every single will does not usually equate with profitability. The best results come from combining signals from multiple indicators and services.
Before you use any signalling service, make sure to do your research. Many services simply do not work. You need to ask yourself, if a trader can make money with their own signals, why would they sell their winning trades to other people? Sometimes the answer is to spread risk or diversify revenue streams, but many times it is because their methods don’t work. Whatever service you choose, test your strategy with them many times before putting your money on the line.
Use a Tape Reading Strategy But Trade Binary Options
This involves using a stock trading software such as “Think or Swim” to watch the prints of a stock and trade based upon the buy/sell flow. If you spot a lot of activity in one direction, or you see unusually large transactions or orders on the book, you may get an understanding of which direction the stock is likely to head in the near future. Professional traders have long used the order flow of a stock to predict which direction it is heading in the short term.
The only problem is that binary options brokerages do not display this information like some of the professional equity trading platforms do. The key for traders will be to have two platforms open at the same time, placing trades in the binary option account but using information from the equity account. This strategy will not apply to commodities or foreign exchange trades but it can work well with equity trades.
Jump on short term momentum
A trader can see when a stock is picking up unusual momentum compared to how it usually trades. Momentum is characterized by large quick moves, and moves that are much more prolonged than is normal. Even if a trader does not predict the beginning of a momentum move, they can still make money. The goal is not to predict momentum before it starts, it is to jump in and ride the wave until it shows signs of slowing.
Binary option trades are uniquely suited to taking advantage of momentum trades because they are so short term, and a trader only needs to be in the money by a tiny amount in order to have the option pay out. Even if a trader gets in later in the momentum based move, as long as they are in the money when the option expires they will get paid. This could be a 30 second or 1 minute trade that is highly predictable and pays 60%-80% on the binary option contract.
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A binary options trader can easily make money using a momentum based strategy. Look for fast movement and jump in the direction of the move. This is a simple strategy, but it may take some time for a trader to hone their skills and understand what big momentum looks like so that they avoid moves that don’t follow through in the direction that they want a stock to go.
Trading the news can be a very tricky strategy, and it is not something that we would recommend to binary option beginners. News traders usually need to be in extremely quickly after news is released, because computers that can read news releases and act on the information before a human can read the first word are competing against people. A trader using a news based strategy needs to quickly read the release, asses what it materially means to the price of the stock, and judge how the stock is priced relative to where it should be given the new information. Traders who use news based strategies are often MBA types, or quantitative type people.
Even though news trading is complex, a binary options trader may be able to take advantage of the public reaction to news by capturing a small portion of the greater move. Remember binary option trading only requires you to be correct in your trade by one penny.
Remember when you are trading any news release that the direction that it will push the stock is not always apparent to an untrained person. You must balance what is released against what was expected by the market. Sometimes even if news is negative, but not as negative as the market expected, you will see the negative news make a security increase in value. Remember to always compare news against expectations before take a position. Expectations are not always readily apparent, and you should definitely test news based strategies in a demo account before you use real money. You will either get the hang of trading news, or decide that it is too hard to predict how news will affect the price.
Trade Correlated Pairs or Negatively Correlated Pairs
One strategy that many quantitative traders are taking advantage of is called correlated trading. This is largely done by computers, so you need to be fast, but a human can still make money if they are ready.
The way to make money is to find a pair of stocks, currencies, commodities, or some mixture of the two that either trade in tandem, or reliably move in the opposite direction of each other (negative correlation). An example of this type of trade would be Citigroup and Bank of America. On most days, when you compare the charts of these two stocks they will look very similar.
Let’s say that while watching the two charts, you noticed that all of a sudden Citigroup’s price moved up $.20 in one minute. Bank of America has not yet really moved. You quickly should take a long position (call option) in Bank of America, and often times after a very small delay it’s price will follow suite and go up. Usually you only have a few seconds to act before its too late, so be quick!
Of course this doesn’t work every time, and many times they move so closely together that you don’t even have time to take a position. Sometimes you will notice a lag, and these times with a slight lag you can make a lot of money with this strategy.
Trading Flat Markets by Buying Binary Options in the Money
This is a relatively new type of trade for binary options traders because brokerages are just now allowing clients to purchase binary option trades that are already “in the money”. These will trade at a discount proportional to how far in the money the price currently is.
If you have a read on the market that says that it will be flat for a while, you probably want to take advantage of this strategy. As long as the price remains in the money, the trader will receive the payout displayed when she purchased the option.
A good time to employ this strategy is during mid day trading hours (about 12 PM- 2PM EST) because the market usually does not move very much during this time. Another good time is on Friday’s after the morning is over, and Friday’s before a holiday weekend while volume is light.
Time of year may also matter, for instance trading is usually slower during the summer months than it is during the spring.
Long Term Binary Options Strategy- Trading Fundamentals
Another type of binary options strategy which is much less common is a long term trade. Brokerages will offer options, especially foreign exchange options, which may be a month or longer in term. Traders who think that a stock is fundamentally undervalued or overvalued may take a position here, assuming that they price will tend to move in the direction of the fundamentals over the longer period of time.
A fundamental analysis involves looking at what the price of a security should be given its underlying economics and the expected future growth. Some people may use a price to earnings analysis, or a Tobins Q, or they may look at a trade imbalance between two countries whose currency they want to wager on. There are many different types of fundamental analysis, but if you think that a security should be priced differently than it currently is, you may want to take a longer term trade with the thesis that the fundamentals will push the price towards the correct value.
Be mindful that once you enter into a binary options trade, you usually can not exit it. If market conditions change you will have to stick with your trade in most cases.
The Best Binary Options Strategy
There is not one “best” strategy. The best strategy is the one that makes you money. Different trades have different preferences, comfort zones, appetites for risk, and time horizons. Test different strategies in your demo account, and use the one that gives you the highest likely hood of making the most money. While this sounds obvious, it only works if you actually do it! Get started testing strategies today.