As an investor with some experience concerning binary options, you probably know how a good trading strategy can help you reduce risk levels and make more lucrative trades. But the global financial market is very extensive and one winning strategy is not enough to inform a successful trading career.
To help traders acquire knowledge about the financial market and earn higher returns, BinaryOnline has outlined three strategies
Markets trade erratically on a daily basis even though they are still trading in an uptrend or downtrend. Anticipating the price action of stocks is easier said than done. This outlines the need for a trend indicator for a greater level of analytical sophistication.
Invented by John Bollinger in the 1980s, Bollinger Bands are one of the most popular technical indicators that can be applied to any financial market. The technique is based on an exponential moving average center line with two trading bands above and below it. The bands determine the overbought and oversold levels by simply adding and subtracting a standard deviation calculation. By definition, standard deviation is a mathematical formula that measures volatility. In this case, it shows how a stock price can vary from its true value.
This means that, in effect, Bollinger Bands adjust themselves to market conditions, making them infinitely handy for traders.
How to use Bollinger Bands
Bollinger Bands are easy to use for trading. All you have to do is use a chart, which is in line with the expiry time you selected. For example, if you make a trade with BinaryOnline’s Classic Binary Options tool and select an expiry time of 30 minutes, Bollinger Bands will work better if you select a chart made up of 30 candlesticks.
The Rationale of Bollinger Bands
Bollinger Bands are derived from the 20-day moving average of an asset with an upper and lower band based on two standard deviations above and below the 20-day moving average respectively. Asset trades between these prices with oversold levels reach the lower band while overbought readings reach the upper band.
When prices move above bollinger bands, the market is deemed overbought and a pullback might be on its way.
When prices move below bollinger bands, the market is deemed oversold. A hammer could be on its way.
For successful binary option trades, if the market is in an uptrend, investors should use overbought readings generated by Bollinger Bands to buy calls depending on the trader’s conviction and his risk profile. When the price hits the upper band, traders should look to take some profits in the expectation of mean reversion or digestion of overbought conditions. Conversely, in a market that is in a downtrend, binary option traders can use the same strategy but buy put options.
A collar is a protective options strategy that an investor can implement by purchasing an out-of-the-money put option while simultaneously writing an out-of-the-money call option. With a little effort and information, traders can use the collar concept to manage risk and, in some cases, increase returns.
How to use the Collar Strategy
For the purpose of this article, assume that you are want to place $100 on an option for a stock because you believe it could trade a bit higher over the next six months. However, you also want to protect your downside in case it doesn’t. A collar option strategy can help you earn a bit of extra profit while simultaneously capping the downside risk.
This is accomplished by buying a put option with a strike price at or below the current price of the asset, as well as writing a call option with a strike price above the current stock price. The put option is a cash outlay and caps your downside at whatever the strike price of the put option is. To cover the cost of the put option, the call option caps your upside on the stock position to the level of the call strike price.
Stop-Loss Take-Profit Strategy
Each investment type includes the elements of chance and risk where chance is the profit on your investment and risk is the loss of some or all of your investment. Proper capital management is important to preserve your capital over time, enable you to trade more calmly and minimise damages you incur in losses. This is the essence of the Stop-Loss and Take-Profit strategy where
- The Stop-Loss factor indicates how much money a trader is willing to lose per trade
- And the Take-Profit factor indicates when a trader should exit a trade
How to use the Stop-Loss and Take-Profit strategy
All investments carry a certain level of risk. For this reason, traders need to determine what proportion of their capital they are willing to lose per trade. This Stop-Loss strategy is important to get out of an adverse market position at a predetermined level if the market swings against you
The Take-Profit Strategy
Knowing when to exit a trade is equally important as outlining a Stop-Loss strategy. Implementing a Take-Profit strategy requires the trader to set a desired profit level. This should be based on a dollar amount and ideally should be in a ratio of 1:3 where for every dollar that you invested, you should be getting $3 in return.
In summary, turning knowledge into profit by doing market analysis is important for binary options traders to earn profits and minimise risks. In addition to identifying trends and understanding the value of technical indicators, risk management and capital management are also important for a successful trading career.