Binary options trading is a lot different than a lot of other types of market trading, but that does not mean you cannot be successful with it or make money at it. Once you learn how to place binary options trades, they are actually much simpler to place and win on than several other types of trades.
There are some nice advantages to trading with binary options. For one, there is no middle ground as far as the payout goes; you either profit on the trade or you lose. The other really nice thing about binary options trading is you will know what you stand to win and what you could potentially lose, even before you place the trade.
There are a lot of statistical analyses and other elements that go into binary options trading, these all lead you to either wanting to place a put or call option with your trades. All binary options trades are somehow linked to asset price movement. If you are placing a put option you are predicting a price decline and if you are placing a call option you are predicting the price of an asset will increase.
To be able to make a profit on binary options trades, the underlying asset has to be above the strike price on a call option or below the strike price on a put option when they expire.
That is why it is so important to predict accurately the market conditions or trends when placing binary options trades. The market is said to be bullish if prevailing investor sentiment is favorable to making purchases, when this happens investors think the market will continue to rise. Under bearish conditions the opposite is true; investors see an unfavorable market as prices are in a down trend.
Bollinger Band analysis is a binary option analysis tool that was established by and named after popular modern day technical investment analyst John Bollinger. These bands are typically plotted two standard deviations apart from the simple moving average. They aim to show assets volatility by the location of the bands; if a Bollinger Band is moving away from the average it indicates that the market for the asset is increasing in volatility and if the Bollinger band moves closer to the averages then it indicates a much less volatile trend.
So how can volatility be used as a technical indicator for puts and calls when purchasing binary options? Volatility is often associated with risk and directly refers to the measure of uncertainty or risk about the range of changein a security assets value. Higher volatility indicates that anassets value most likely will be spread out over a broad range of values; this means that price change of an asset has the potential to change very dramatically in a short period of time upwards or downwards. An asset that has low volatility often tends not to change that much and often remains steady over a short period of time.
So when it comes to purchasing binary options, the trick is picking a volatile asset and whether you think it will trend upward or downward. Bollinger Bands are often the key technical chart that is used for this purpose.
Most investors who use Bollinger bands to make predictions think that when charted prices are staying between the middle and upper Bollinger bands, then the assets market will trend upward. If the opposite is true and the assets price stays between the middle and lower Bollinger band, this often signifies the market will continue to trend toward the downside.
How does one then make a decision on whether to buy puts or calls on binary options from this information? Most investors will buy call options when the price is in an uptrend and nears the middle Bollinger band and buy put options when the price is trending downward and nears the middle Bollinger line.
It is often also said thatBollinger bands help traders capitalize on oversold conditions by spotting asset prices that go below the lower Bollinger band and then trend back toward the center Bollinger band. If this correction is predicted at the right time it can be very profitable for an investor
While it is cautioned that as always there is no sure thing when it comes to predicting market trends, Bollinger bands seem to becoming one of the most popular technical tools used to spot potential extreme short term price changes in a security asset.
Among the best methods used to determine when and how to purchase binary options is with MACD Indicators. The term MACD simply stands for Moving Average Convergence and Divergence of a securities asset. MACD chart analyses differs from Bollinger band analysis because it does not contain upper, middle and lower bands; instead it uses two bands that when plotted often crosses both above and below each other. It is becoming by far one of the most used indicators there is around today.
How does it work? MACD is used to identify changes in the direction, strength, duration, and momentum of a current trend in an investment assets price.
A MACD line is simply charted by using the difference between a twelve day and twenty six day exponential moving average (current data is given more relevance than past data) of closing prices. Then a charted line of a nine day simple moving average, often termed the “signal line”, is added to identify potential buy and sell instances.
The information the resulting chart supplies is then analyzed on what is called a zero sub level. If an asset is near or below zero sub level then it is said to indicate a bearish market and calls for purchasing binary put options. If this same security asset is above zero sub level then a trader should look to place binary call options.
MACD is thought to be a powerful tool these days when it comes to making binary options market transactions. Many traders are even combining it with other method indicators to experience even greater returns on their investments. So once you learn how to use MACD and learn its strengths and weaknesses, you can become like many other traders and routinely make a return on investment on your binary option purchases.
When working with binary options there are several more exotic ways you can trade them other than the simple yes/no, in or out of the money trades. One of these methods is called range trading, also sometimes known as boundary trading. People who study investment assets such as stocks and commodities will tell you that almost 70% of the time these assets will stay in a so called ‘consolidation’ or ‘tunnel’ phase, where movement of the asset stays within a certain range.
When placing a range type of trade, the trader is betting that the asset will finish in or out of its normal predetermined consolidation (tunnel) range within a specified period of time.
Here is an example of how a binary option range trade works to help simplify it. You are looking at making a binary option range trade based on USD / EUR. The current trading for USD / EUR is 1.9 and the current predetermined range you are given to work with is .99 to 1.25. Based on your analysis you feel that when the option expires the new range will be about 1.29 so you take the ‘out of range option’. The option actually expires at USD / EUR 1.26 and out of the predetermined range so you finish the trade in the money and collect your already established percentage.
That is the beauty of trading binary options because they are so simple to see the resolution on and you already know your profit or loss at the time of the trade.
When betting that binary option will finish out of a range a lot of traders will tell you they like to see at least two areas of resistance on the chart and two areas of support before they will make this type of trade. The reason for this is that one area of support or resistance is not enough to make a confirmation that movement is about to take place. It is more often than not after a second area of support or resistance that price often exceeds the predetermined range. One has to be very careful with this when identifying this possible movement so they are not fooled into making a bad trade.
When trying to identifying ranges a couple of things must be determined. The first is to find the pattern of the previous trend before it went into its consolidation area. The second is to determine whether the move of this previous trend was bearish/bullish and impulsive or simply corrective.
Once these things are established you can then establish the amount you want to trade and the time frame you wish to trade in.
We have gone over a lot of different technical chart indicators. You have also been told that oscillators tend to be very useful when trying to predict where to place your binary options trades. One oscillator that is not quite as popular as some of the other analysis tools, but still very effective in its own right, is what is called the ultimate oscillator. Take a little closer look at it.
As we said, it is not the most popular indicator, but traders who do like to use it say it is very good at indicating both bullish and bearish divergences that price is making. Once you have this information it can then be used to place put and call options very effectively. So don’t make the mistake of being dissuaded to use the ultimate oscillator indicator based on popularity.
The ultimate oscillator was first developed and used way back in 1976. It was developed by Larry Williams. The primary reason to use this oscillator was to determine where the divergences occur within the indicator square as these often signal possible entry points for buying and selling options. We all know how important this is and what a significant role this plays in binary options trading.
The initial setup of the indicator is rather easy because it only requires doing two steps before you can consider the implementation of the trading strategy. The very first step is to insure that the asset which you are trying to identify entry points for has low volatility. Highly volatile assets tend to be extremely unpredictable. The last step is to examine the assets over a time frame of not less than fifteen minutes and not exceeding thirty minutes; the reason for this is signals outside this time range can sometimes hurt the accuracy of your analysis.
There are two things to look for as far as the signaling process is concerned; when the white lane indicator crosses a boundary box or there are strong upward or downward trends present. If there is a strong bearish trend then place put options and if there is a strong bullish trend then you should place a call option.
Trading with the ultimate oscillator can be very effective, especially if you combine its information with other indicators.
One of the most underused and least talked about analysis tools when it comes to binary options trading is that of moving averages. Sure, these are mentioned in many types of analysis tools, but they are rarely talked about in depth. What makes this all the more peculiar is that binary option trading is all about directional movement. Let’s take the opportunity to look at moving averages more closely.
In a lot of strategy scenarios it is very difficult at best to determine the correct movement trend of an asset every single time because of price fluctuations and other short term trends. That is where moving averages come into play; they are a great way of minimizing the effect of these short term trends that often keep you from seeing the correct trending direction. Moving averages are simply calculating the average price of an asset over a set period of time.
One of the nice characteristics about moving averages is that they can be determined using different time frames. The basic thinking behind them is the longer the time frame they are based on, the stronger their indication signal is. The time frames represented within moving averages are called bars. Some of the more popular numbers of bars used to plot moving averages are 9, 15, 30, 150 and 200 bar ranges.
There are three key things that moving averages help you spot that are critical to making successful binary option trades:
1) Trends – in order to trade successfully you have to know which way an asset is trending.
2) Wave Analysis – wave analysis can be a very effective tool in spotting potential entry points in which to make a trade. Several moving averages calculated by using different time frames and then plotted together on the same chart form the basis for wave analysis to take place.
3) Coincident Indicator – If you are not sure of anidentifying signal from other technical indicators, it is often a good idea to overlay them with moving averages for comparison.
As you can see, moving averages are extremely useful tools to keep statistical analysis in balance and to keep trends from looking too skewed. This helps you to be able to see the data more accurately and clearly, in turn, you should be able to make more successful binary option trades which are based on that data. So even though moving averages are often not talked about that much, they play a very large role in successful binary options trading.