Previously in the article “Binary Options, The New Investment Tool for the On-The-Go Investor” we discussed the origins and basics of Binary Options. In this article we are going to discuss the strategies you can use in Binary Options trading.
Typically, when trading conventional futures and options, traders use numerous strategies such as the Collar, Covered Call, Straddle, Spread, Protective Put, and more to minimize their risk of loss when the market is fluctuating up and down in an erratic manner; typically know as a volatile market. A loss in one CALL trade can be offset or even profitable by a PUT trade made on a different Asset in another trade made at the same time. Frankly, this type of strategy should be left to the experienced trader. I could go on for many articles explaining all of the different strategies used in trading, but it would only bore the experienced traders and would greatly confuse the beginning traders.
Simplified Trading At Its Best
The simplicity of Binary Options has enabled the person on the street to get into trading without having to learn the in-depth strategies of conventional trading. As a result, it has brought a lot of new money into the trading scene to the delight of the average on-the-street investor. The simplicity of the Price Up or the Price Down and two mouse click trading with as much as an 81% profit has caught the attention of a whole new segment of investors.
“RTSB” – The Simplified Strategy
Along with the simplified trading comes a simplified strategy for trading Binary Options. I like to call it “RTSB” which stands for “Read the Screen Bud”. Yep, that is right. Open your eyes, turn off the TV, stop texting your friends, close your chat room windows, and look at what is on the trading screen right in front of you. In addition to displaying the current price and trading period every Binary Options trading screen has a button that will allow you to display the chart of the previous trading period.
While “RTSB” is the visual cue to look at what is in front of you the analytical cue is for you to look at whether the price of the Asset is going Up or Down. The direction of movement is called the Trend Line and the question you need to answer for yourself is whether the Trend is going Up or is it going Down.
If the Trend is going Up then you would consider making a CALL trade. However, if the Trend is going Down you want to consider making a PUT trade.
The “DDSS” Strategy
The “DDSS” Strategy is also quite simple, “Don’t Do Something Stupid”. This strategy is best explained by an example. As you are looking at the charts for the Asset and you see the current price start to go Up then a few minutes later it goes Down by an almost equal amount, then a few minutes after that it goes Up again. If you look at the average price during this time period you should see that it remains almost the same. Some traders call it “Flat lined”, but the trading term is ” Sideways Moving”. This is where you apply the “DDSS” strategy and DO NOT make any Trades for that Asset. A Sideways Moving price is very hard to predict and most of the time your prediction will be wrong. Stay away from it and look for another Asset that has an obvious Up or Down Trend Line.
I must admit, the RTSB and DDSS strategies are really attention getters to highlight that you must pay attention to what you are doing as you can lose money fast if you do not do your own research before trading.
The Spread Strategy
The Spread Strategy is a real trading strategy that has also been simplified by Binary Options trading. In conventional options trading you use the Spread or Straddle strategy to buy CALLS and sell PUTS on the same Asset. However, in Binary Options trading you can’t place a Call and PUT trade for the same Asset unless you are using two different trading Brokers which is not recommended.
The basic idea of the Spread in Binary Options is to find two Assets where the Trend line is Up for one and Down for the other. On the Asset that the Trend line is up you place a CALL trade on it while on the Asset where the Trend line is down you place a PUT trade on it at the same time.
The Spread strategy is often called “hedging your bet”. If both trades end In-the-Money you could receive an 81% payout on both of them. A $100 Trade Price on each of the trades would result in a $162 profit. However, if one trade ends Out-of-the-Money you have minimized your loss to $19; $100 loss on one trade and $81 profit on the other trade. However, if both trades are Out-of-the-Money you would have a $162 loss.
In trading, Risk Management is a major process that you must adhere to. Fortunately, Binary Options are designed to have a fixed payout and a fixed loss per trade thus limiting your risk on each trade. However, the only limit on poor judgment and gambling fever on your part is your own will power to NOT trade when market conditions are poor or when you are consistently Out-of-the-Money on a majority of your trades. Take a break, step back, and analyze why most of your trades are Out-of-the-Money. Doing your own research in the Trend Line of each Asset is key to minimizing your risk when trading.
Watch for the next article in the Binary Options Trading series, “Which Market is best for Binary Options Trading?” We will discuss how you can determine if you should trade in the Forex, Stock, Commodity, or Index markets.
by Gregg Sterner