A Basic Binary Option Trading Strategy

Strategy is pretty important when it comes to trading binary options.  While specific strategies can be helpful once you understand the process of trading more fully, a beginner’s guide to strategies is helpful when just getting started in binary options.  It will give you the basics and get you ready for more advanced topics such as specific trading strategies, money management, and trading psychology.  Your trading strategy will help determine how you approach your trading, how you handle making money from your trades, and how you handle the losses that will also occur when you trade binary options.

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In the most general of terms there are two basic approaches to strategy in trading – fundamental strategies and technical strategies.

 

Fundamental strategies are important for getting a higher level view as they are concerned with how real world events such as economic data, earnings, geopolitical events, affect prices of assets.  It is good to have this high level view, but it isn’t as important to binary option trading as the technical strategies are.

 

Technical strategies use price data that is visually represented on charts and it attempts to predict future price movements based on past price movements.  It does this through the use of various averages, oscillators, measurements and comparisons, trend lines, support and resistance levels, and candlestick types.

Types of Trading Strategies

A strategy is simply some plan of action that is put in place to achieve a goal.  When talking about trading binary options the goals we’re looking for from our strategies are to make profits and to avoid losses.  Using a consistent strategy also improves your trading by taking the guesswork out of your entries and hence potentially lowering your risk.  Most trading strategies use technical analysis, and since many use a combination of analysis tools there are literally thousands of strategies in use.  However, almost all of them fall into one of the four following categories:

 

  1. Trend Following Strategies – These look to identify trends in the market and then profit through multiple entries in the direction of the trend.
  2. Price Action Strategies – These strategies look to identify price patterns that frequently follow the same movement and indicate a highrobability of success.
  3. Long Term Momentum Strategies –These look to profit from longer term movements in the market, typically those that can be seen of daily time frames or even longer. They can take a long time to develop and signal few trades, but those are usually stronger signals.
  4. Short Term Ranging Market Strategies –Because markets spend a good portion of the time range-bound, these strategies look to identify support and resistance areas to profit from short term trends within these ranges or reversals from those support and resistance levels.

Technical Analysis Tools

Japanese Candlesticks – These are the most frequently used type of price candle because they are easy to read and clearly show the open, high, low and close of prices.  They are commonly used with price action strategies, but can also be helpful in providing signals from other strategy types.

 

Support and Resistance – These are levels where price has historically stopped rising or falling.  Resistance happens where prices stop rising as sellers step in to take profits.  Support occurs when prices stop falling as buyers step in to snap up assets at what they consider to be bargain prices.  Support and resistance are often shown as a horizontal line on charts, and are often areas where price can potentially reverse direction.

 

Trend Lines –These are lines drawn on a chart that follow the course of an uptrend or downtrend.  They can be used to indicate support and resistance and are often good entry points for new trades.  An uptrend line is drawn by connecting a series of higher lows on a price chart, while a downtrend line is formed by creating a line connecting a series of lower highs.

 

Moving Averages – A moving average is an average of prices for ‘x’ number of days or periods that are then drawn as a line on a price chart.  There are several kinds of moving averages that can be created including simple, exponential, weighted and others.  While the moving average line itself can indicate support or resistance, often two or more moving average lines with different timeframes are used, with entry signals being generated when the moving average lines cross.

 

Oscillators –There are many types of oscillators being used for technical analysis, including the RSI, MACD, stochastic, and many others.  They use various mathematical calculations and averages to display price action, momentum, trend direction and strength and other market characteristics to help determine entry signals.

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Other Components of Trading Strategy

Psychology – The psychology of trading is often underrated or ignored, but it is a critical part of the trading game.  Poor trading psychology can lead to missed trades, improper trades, excessive risk and a host of other trading issues.  Traders should be mindful of their own psychology as it relates to trading and strive to improve their thinking.

 

Money management – This is another frequently overlooked component of trading.  While strategy is one half of risk management, the other half is money management.  Strategy can help you identify good trade opportunities and manage your risk that way, but good money management will keep you from risking too much on any one trade.  It should be clearly defined in terms of trade size, future growth, stress, and risk management.

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Trading binary options involves substantial risk and may lead to loss of all invested capital

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Binary Options trading carries high risk and is not suitable for all investors. You can lose your entire invested capital. Please ensure you understand all associated risks.