1 (edited by Minev 2016-06-13 10:30:38)

Topic: Binary options basics and trading strategies

Let's start from the very basic definitions and terms.
Binary (digital) options are financial instruments where the payout at the expiry is either predetermined profit or nothing. Profit can be cash or financial asset. For example, if you buy a binary option with a price of 10 pips and at the expiry, depending on whether the price is above or below the strike, it is worth either 100, or 0. This means that we have 90 (100-10) points (pips) net profit or loss of 10 points (the premium paid for the option). Binary options are similar to betting in some ways, and this makes many people define them as gambling. I prefer to treat them as financial instrument like any other. With binary options could be traded almost any strategy. You can trade also volatility, not only the direction of the price move of the underlying asset. Like any other options, binaries allows us to fine-tune the strategy according to the current state of the market and our expectations. Binary options are a relatively new financial instrument for the retail traders and are not yet regulated. So there are many brokers who are not very reliable and you should carefully select where you will open your account. Binary options can be hedged with vanilla options spreads. Now I will discuss the main types of binary options.

Basic terminology

Call (UP) - you expect the price to go up
Put (DOWN) - you expect the price to go down
Strike - the reference price
Premium - the price you pay when you buy the option
Expiry - the time when is determined the outcome of the trade
Payout - the profit you get if you are right
In-the-money (ITM) - when the settlement price is above the strike (for call) and below the strike (for put)
At-the money (ATM) - when the settlement price is equal to the strike price
Out-of-the-money (OTM) - when the settlement price is below the strike (for call) and above the strike (for put)

Re: Binary options basics and trading strategies

Welcome back Svetlin!

Binary options are a relatively new financial instrument for the retail traders and are not yet regulated. So there are many brokers who are not very reliable and you should carefully select where you will open your account.

I'm glad you brought this up, maybe you can find time to have a more detailed insight into this aspect.

Thanks!

Re: Binary options basics and trading strategies

footon wrote:

Welcome back Svetlin!

Binary options are a relatively new financial instrument for the retail traders and are not yet regulated. So there are many brokers who are not very reliable and you should carefully select where you will open your account.

I'm glad you brought this up, maybe you can find time to have a more detailed insight into this aspect.

Thanks!


I will get into more details about the binary options and how you can add them to your trading arsenal.

If someone is interested, you can enroll to my training course in Udemy (https://www.udemy.com/forex-trading-with-binary-options/) or read my posts here.

Re: Binary options basics and trading strategies

In the true pioneer spirit, I opened a demo account to trade BO...... made one trade and a profit.....!

I assume that reality will appear when I try the next trade. lol

I want to try to learn a manual approach as I learn from the BO tester, this is quite different from Forex trading...

My 'secret' goal is to push EA Studio until I can net 3000 pips per day....

Re: Binary options basics and trading strategies

I'm running a Binary Options Expert and have 21 Wins and 6 losses

http://s31.postimg.org/9azouxqc7/expert_advisor_input.jpg

Re: Binary options basics and trading strategies

Lots of videos on the GDMForex site re Binaries

http://www.gdmfx.com/en/education/video-tutorials

My 'secret' goal is to push EA Studio until I can net 3000 pips per day....

7 (edited by Minev 2016-06-13 18:19:55)

Re: Binary options basics and trading strategies

Blaiserboy wrote:

In the true pioneer spirit, I opened a demo account to trade BO...... made one trade and a profit.....!

I assume that reality will appear when I try the next trade. lol

I want to try to learn a manual approach as I learn from the BO tester, this is quite different from Forex trading...

You can adapt your spot trading strategies for binary options. What you have to keep in mind is that you trade with unfavorable risk/reward ration (5/4 usually), but only 0.1 pip price move is needed to make your trade profitable. R/R of 5/4 means that at least 56% of your trades should be profitable. The fact that only 0.1 pip makes your trade profitable puts the order flow based strategies on the first place on my list.
This is a very simple but efficient strategy

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Re: Binary options basics and trading strategies

This is a trade based on my own STE strategy which I have developed for spot trading a few years ago. Quote reading is used for confirmation of the trading signals.

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Re: Binary options basics and trading strategies

Svetlin,

I added a section below for discussing Binary Options brokers.

Please share with us your experience and opinion for the brokers you are using.

We are especially interested to know which brokers provide the highest Payout, which are correct and which brokers are changing the rules when a user starts winning.

Re: Binary options basics and trading strategies

What types of binary options could be traded? Binary put and call (Up/Down) options as well as their vanilla cousins make profit when the price of the underlying asset increases or decreases respectively. They have a strike price, which is usually the opening price for a given period of time (e.g. every 5 or 20 minutes after 0:00 pm) or the quote at the time of purchase of the option. When you buy a binary call option and the price of the underlying asset is above the strike at maturity you receive predetermined payout (usually 100 points). If the price is below the strike at the expiry, you get nothing and actually lose the premium paid). When you buy a binary put option, you make profit when the price of the underlying asset is below its strike at maturity. A great advantage of this kind of options is that you need a price move of only a few pips to get much better risk/reward ratio, while your risk is limited to the amount of the premium paid. You get a kind of leverage.
One touch (OT) options give a payout that is a predetermined amount (usually 100 points) when a certain price level is touched by the price at any time prior to maturity. If this level is not touched the buyer loses the option premium. This type of binary options are very good for trading volatility. However, you must have in mind that the price reflects the probability of a price level to be reached. Therefore somehow you have to beat the statistics. For example, you can analyze the volatility of the underlying asset and open positions with binary options in both directions when sharp increase in volatility is expected. You can structure long strangle when the volatility is expected to rise or short strangle when it is expected to fall. Since there are binary options with different specifications (strike, expiry), you can use those that are close to maturity. In this case, the cost will be lower, because the time value of these options is lower. Therefore, if you have chosen the right time to open the position when you expect a sharp price move, you will benefit from the increase of the delta and vega of the option. This will give you an opportunity by closing part of the position to cover the amount of the premium paid, or even to guarantee some profit.
Another case when the one touch binary options can be used successfully, is the release of important economic data or statements by central bankers. Be aware, however, that all future events are reflected in the price of binary options and you still need to find a moment of surprise. You should not necessarily wait until the expiry and you can book partial profits after the initial reaction to the event. The prices of binary options can get valuable information on what volatility is expected and if there is any market direction. If the prices of call and put options, with strikes at equal distance from the current market levels, are different, perhaps traders have any expectations about the direction of the price move of the underlying asset.
Ladders are similar to the one touch option. For this type of binary options is important where the price of the underlying asset will be only at the expiry. They are like barriers of European type. Since the probability of this to happen is less than that the quotes to reach a certain level, Ladders are cheaper than the one touch options. They can also be used for volatility trading, but only if you expect a large directional price moves (after volatility contraction) and sustained break of a price level. Brokers have different specifications for Ladders and you should read carefully the rules.
While the OT binary options are used for trading when a breakout is expected, "No Touch" options (NT) are most appropriate when the market is expected to stay within certain price limits. This kind of option makes profit when a level is not touched before maturity and you lose the premium paid when the price level is touched. One such option may have two barriers and then it is called Double No Touch (DNT).
DNT structures are American type options, because if there is a payout or not is determined by the touch of one of the barriers. Some brokers offer binary options, which are called Tunnel or Range and work at the same principles as DNT structures, but with European barriers. The payout is determined at the expiry depending on whether the price of the underlying asset is within predefined price limits. The tunnels are cheaper than DNT options as there is lower probability the price to be above or below a level at maturity than just to touch it anytime during the life of the option. However, if you are sure, that strong price move or sustained break beyond price level could be expected, it is better to buy the cheaper option.

Re: Binary options basics and trading strategies

When trading binary options, you have to be disciplined. This is what makes the difference between trading and gambling, not the financial instrument that you have chosen. Binaries, as well as all other types of options, have the advantage that the risk is defined at the outset and is limited to the amount of the premium paid (for long positions). However, the profit for binaries is also predefined, so we know what we can lose and gain in advance. Some binary options have very short maturities such as 1, 2 and 5 minutes. Due to this fact, we have more opportunities to trade. Some people may overtrade, and this cannot lead to anything good. For this reason you should buy a binary option only when the market conditions meet the conditions of your trading strategy. This requirement applies also to any other strategy and financial instrument. You must accept the fact that for your losses you can not blame either the financial instrument or the underlying asset that you choose. Whether you overtrade with binary options or leave a spot position without a stop loss, there will be no difference for the final result. When you are trading, you may blame only yourself, because you are the only one that can break the trading rules.