How to Trade Binary Options - Wisely and Accurately
Binary Options Biggest Trick
Binary options are tricky and difficult to learn to trade, however they do provide some of the best hedging trades, and also very high profitability of various directional and non directional trades. They are tricky because when you trade binary options you are actually trading probabilities of events. And probabilities tend to change very fast, because they follow the rule of exponential change. This is tricky and difficult to imagine, but it’s all about natural time limits. If given two mutually exclusive events, and a defined time limit. If one event takes too long to happen, as the time limit is exhausted, the probability favors that that event will not happen, and therefore the opposite event will certainly happen.
Even though binary options are new, the concept of time limits is old and well known among stock traders, forex traders and many other investors. Old wise forex and commodity traders always used time limits to evaluate their trades. And when an open trade took too long to make any progress, it was considered to be an advance warning that the market would move more against them, rather soon. So they took the warning and closed the trade early.
The reason why time limits do work, is because the market is a physical thing, it has inertia, and it cannot undergo massive changes at very high speed. Many theorists, traders and coders are working on this concept, in order to develop new trading methods and algorithms. One thing is certain, that the markets do obey some physical laws, where time limits can be applied successfully. Time limits are usually limits of several hours to few days, these are the limits old wise traders used.
Time limits in action: On the above GBPUSD daily chart, the first set of orange arrows indicates the elapse of 3 days, where the market was supposed to continue lower, instead it stabilized and rose slightly, hinting that the probability now favors a rally. On the second set the market moves again below its 200 day moving average, the limit hints more declining action ahead, but then 3 more days occur without progress on a short trade, and this now hints a likely rally day will occur. But if 3 more days occur now and no rally takes place, then the probability will again favor a decline.
This is the most important concept in managing trade risk, and you can use it to manage risk in sport forex trades. And to also trade binary options directly off these time limit signals. If you do trade binary options such as One Touch options, you can count days of price hesitation, and determine cases where the market may reverse or stop progressing, and therefore get out of the trade early, and possibly at partial profit.
More on Time Limits
Time limits are a concept which is still primitive, and little explored by statisticians, but there are formulas and probabilistic calculations you can use in your own research. In most cases however, without any calculations, you can visually confirm on the daily charts, that some markets have a time limit around 3 days, or 3 days plus or minus some hours. You may have to watch for a 3 day limit, and also watch the limit on the 4 hour or 1 hour chart, and determine the number of hours too.
I have used this method in actual trading tests, and especially in EURUSD, and it has helped me get out of losing trades very early, so early that my trades were still at breakeven point, or at small profit. The method works far more often than not, so it’s worth missing a profitable trade, and at the same time avoiding 7-8 surprise losing trades.
The concepts of support and resistance are okay to use, but most definitions of support and resistance are poor, it looks as though the market is always right no matter what it does. And it makes these support and resistance levels look right, no matter what happens. So it’s not very useful in trading, and above all, it doesn’t provide any advance warnings. Whereas time limits are about price inactivity over time, and this hints probability of event A or event B happening.
Binary options have their own time limits, but their pricing model is rather simple and fails to take into account chart patterns, patterns which the wise trader can detect and use to gain the upper hand over the pricing model. The time limits discussed here, as early warning signals are not taken into account by the binary options pricing model, that’s where the trader can really make a lot of money.
Do Not Be Afraid to Trade Binary Options
Binary options may seem intimidating because their value can drop too much in an instant, making you think that it’s unlikely that you will actually win. But that’s how probability is priced by the binary options model. And you have to realize that this pricing model is far from perfect, you can actually outsmart it, because the binary pricing model doesn’t take into account counting days, technical patterns, and other clues that you can actually detect. The binary pricing model works on simple statistical principles, and you can profit from it by being more farsighted than it is. And the good news is that you can really be more farsighted than this model. As with the above examples on GBPUSD, you can detect buy and sell signals, of high probability, which the binary pricing model is oblivious to! Which means you will be getting very affordable prices on various Call, Put and One Touch options.
More on Price Action
Markets tend to follow patterns, some of which do not provide clues of future direction, but do provide clues as to where a trend will stop, and these patterns can be extremely accurate. One such pattern is the pattern of price symmetry. A symmetry which tends to show up between two different legs, in the same trend.
On the first leg in the above chart, EURUSD rises slowly, and then after a period of consolidation it rises further, at a faster rate, but the two legs are actually identical in magnitude, notice the number of squares covered by price. It’s 3 entire squares of price, in both cases. So a binary trade in this case can be very accurate in price, but also in time, because the consolidation period is only slightly longer than the duration of the first leg, and this is very often the case.
It is methods like these, that allow some binary option traders to make very good money, using binary options having expiry times of few hours to few days. And in the case of days, they usually close out the trades, profitably, less than halfway through, so the premiums don’t get to decay too much due to time decay.
On order for you to be successful in your binary trading you need to focus on few markets, possibly just on one or two markets, and do a lot of analysis on volatility, momentum and levels where momentum is likely to stall, these can be identified using LSS daily pivots. By developing your strategy around these concepts, and applying the concept of time limits, carefully, you will be years ahead than many other traders. And you will be able to avoid many frustrating and losing trades.
It’s best not to use old indicators, such as MACD, RSI and many others, because these indicators are not proven to work. Rather stick to chart patterns only, and possibly to an indicator such as parabolic SAR. Not that Parabolic SAR really works, it doesn’t really indicate buy and sell signals, but it does indicate levels of likely reversal, and how other traders may react.
Be Your Own Boss
Binary options, when combined with serious forex or commodity trading, can offer you real freedom and serious profits. It’s not as easy as many binary brokers claim, it’s difficult, but it’s not impossible. And actual tests have proven that especially One Touch options and other longer term options can generate very high profits, when one knows their market well. I only recommend short term binary trading, such as 5 minute trading, in the case of forex scalping. This is the only kind of trading where fast binary trading really works. In all other cases it doesn’t really work.
It is possible to make $100,000 from binary options alone, not considering what one can do if they combine spot forex trading and binary hedging together, as one complex trade. This is known as hedging in finance, but hedging can have many shapes and forms. Typically a hedged trade makes zero profit if the market moves a little in your favor (that’s the price you pay for the protection you get). You make good money after the market has moved a lot in your favor, and if the market moves against you by up to an X amount, you stand to break even. If the market moves too much against you, by more than X, you start to lose money, but by that time you will have plenty of time to get out in time. So in reality, a good hedged trade is a kind of bet, where you either win, or you get your money back. Sounds impossible, but it can be done! By combing a spot market trade and few binary options. And in fact, most people think it’s impossible, but like many things in life, most people have uneducated opinions on things, and they are usually wrong.
People tend to be wrong about many problems involving tricky mathematics, exponentials and probability theory. Remember the famous wheat and chessboard problem, and how deceptive and tricky it is. That’s why it’s wise to do your own research, especially in trading where any breakthroughs are likely to be kept secret. And it is my guess that the best hedging trades using binary options are well kept secrets, nobody will ever publish them. The question is how much can we figure out through our own curiosity and research. I do know for a fact, that it is possible to hedge most of the risk, in some complex trades, all through carefully selected binary options.
Similar arbitrage and low risk trade scenarios exist in classic options too, and in trades combining CFDs, options and now binary options. And all these trading instruments come with different advantages and disadvantages. An arbitrage trade, or a low risk trade usually exists because the probabilities of events tend to overlap, or because prices meet certain criteria. It’s a field of trading definitely worth exploring.
But if you are a beginner trader, you can still use One Touch binary options, right away, as long as you understand the daily chart of any market. The accuracy of such a trading approach can be very high, and it has been tested and confirmed. It is possible to grow a small trading account to 10 times its original size, in less than 2 months, using One Touch binary options alone. So the idea does exist! Traders who fail, fail because they rush into things, without taking into account concepts such as the ones explained here. And they also fail because they rely too much on obsolete indicators and trading tips, which are all worthless. Good trading practices must arise from one’s own ideas, original ideas, and not from easy to use trading tips and good looking indicators. Because trading tips and good looking indicators are usually created by vendors, and not by real traders.
Finally, accuracy is not of great importance in trading. You can afford to be less than perfectly accurate and still achieve very good results. But you definitely need to be wise and curious, usually only the curious type of people end up becoming good traders. Traders who are lazy or not curious to explore, become complacent and cannot even use proven strategies and methods, because they cannot understand them properly. It’s not possible to be lazy, and to be smart at the same time, all profitable traders hate laziness and have a drive for exploration, and exploration requires some work.