What is a Trading Strategy?
There are two major components which need to be aligned together in order to form a successful binary options strategy.
- First component is a trading system. This is a predefined set of rules about when and how to make the trades. Trading system can be based on technical analysis, news, fundamental analysis, or signals can be provided by third party services such as trading signals and robots.
- Second component is a money management system. Money management defines the system of investment into trades. Just a few examples are: linear money management, exponential money management, Fibonacci money management, martingale system, etc.
A successful binary options trading strategy absolutely has to consist of both parts, which are aligned with each other in a way to provide maximum output - low risk and high profitability.
A trading system can be very strict, defined by rigid rules, or it can be more flexible and adaptive to market changes.
Many traders trade based on their own 'feeling', and do not follow the predefined rules or exact systems, but they adjust their strategy from trade to trade (they go out of their strategy). They make each trade based on different rules or indicators. There is nothing wrong with this type of trading if it is utilized by experienced trader. However, for a beginner trader it is strongly advised to learn at least one complete binary options trading strategy with fixed rules and try to understand it and test trade it.
Each trading strategy can be built on different foundations.
By testing and trading different strategies a trader will learn to recognize different market conditions and will learn what works best in specific types of market. With deeper and more profound understanding of the market, each strategy can be additionally tweaked and personalized to suit different trading styles.
What is the Best Binary Options Strategy?
Binary Options Strategy Foundation
The best strategy is always the one you fully understand, because you created it by yourself.
If you know that something in the market should work one way or the other - you pursue the idea, research it, analyze it, shape it and re-shape it, and on the end you design it well - then it should work.
There are many great ideas and outlines for creation of robust and solid trading strategies. Especially with binary options, where there are many different instruments of trading - there are also many potential foundations - for short term trading strategies, classic options, touches, ranges, bubbles, ladders, and so on.
Binary Options Strategy Building Blocks
There are different building blocks, a complete set of rules and conditions, which are specific for each strategy.
For example a technical analysis strategy can be based upon:
- Type of asset you are trading (currencies, commodities, indices, stocks)
- Set of indicators and rules about how to use them to determine your entry and exit positions.
- Type of market in which you are trading (ranging, trending).
- Type of situations you are searching for (reversals - against the trend, breakouts - in the trend, following the trend, etc ...)
- Expiry times (Short Term - 1 to 5 minutes, Mid Term - 5 - 30 minutes, Intraday Trading - few trades per day with custom expiry times, End of Day Trading with expiry times at end of day, etc ...)
- Types of trades (Short Term, High/Low, Touch/No Touch, Boundary, etc ...)
- Money management system (What percentage of total account balance you enter per trade, do you use martingale scale or any other scale or system of investments, etc ...)
- Etc ...
There are many options for laying out a foundation blueprint for when you build your trading system. But the best insights to understanding the market will come from developing strategies for classic up/down (call/put) trading.
Why the market is expected to move in certain direction, when and for how long? If you manage to answer correctly 60 times out of 100 and do this consistently, you have a solid trading strategy.
Strategy Analysis and Optimization
The next phase in building a strategy is trading strategy optimization. Strategy optimization includes three main steps:
1. Backtesting analysis.
2. Several passes of filtering based on backtesting results.
3. Money management optimization.
In order to optimize a strategy you need strategy optimization tools. There are no such tools in the market except the ones which the traders created by themselves for themselves.
In the past 2 years I have been working on development of such tools and these will be offered soon on my website. If you are interested just sign up to my newsletter and I will inform you when they are ready.
Once you have your trading rules clearly and strictly defined and when you have confirmed profitability and defined risk margins - then trading discipline (which everybody says is the main problem with majority of traders) should not present a problem. Problems with 'trading discipline' in most cases originate from the fact that most traders do not follow the rules simply because they don't have them properly defined and confirmed by historical results.
Holy Grail Strategy
Traders are often looking for the 'best binary options strategy'.
In my experience, there is no 'holy grail' strategy, that would constantly produce over 68%-70% win rate with consistent stability. All presentations, claiming that a certain strategy (or signals) is producing over 72% win rate are a bit stretched or completely fake.
However, with binary options trading, getting a stable result at around 62% win rate or above, can bring extreme profit. Especially if the strategy allows making a decent number of trades (which is at around 70 trades per month or above). For example: 70 trades with $100 per-trade investment, 62% win rate and 75% average return on trades produces exactly $595 profit. To compare, 100 trades at same win rate produces $850 profit, and for example 100 trades with same win rate, but with 80% return produces $1160 profit.
To get a feeling about how much profit you can make with different win rate, return rate and trade size, you can play around with this simple profitability calculator. Simply click in any field under 'ADJUSTABLE VALUES' and set the desired values. Numbers of winning and losing trades and profitability amount is returned on the right side under 'CALCULATED VALUES'.
Among many strategies it is hard to pinpoint a single trading strategy as the best one, as there are many highly successful strategies used by different traders. A lot can depend on the market conditions, but a good strategy should be robust enough to withstand any market conditions. It is not just about the trading system, but a lot has to do with how how it is implemented. The best strategy is always the one which each individual trader finds to suit his trading style, produces stable results and long-term profitability.
A successful strategy should not be too rigid and strict, but should also not be too 'loose'. A good manual trading system should always allow a certain degree of flexibility to adjust it to slightly different market conditions. Even in case of very rigid and strict systems, each trader in practice usually finds his own way of trading it.
When you are looking for the best strategy the key is to understand it first and then test it, preferably on the demo account. When you get familiar with it, you can see if it suits your style of trading. You will often see some patterns emerge, and you will get ideas about how to improve it your own way. You can try to apply additional filters for the signal rules or you can play around with different money management systems.
You should always look for improvements and upgrades of your strategy and trading style. If you just follow some other trader's rules without understanding them, there is a big chance that a system which works for one trader won't work for you.
The key to success is always implementing your own experience and building upon the knowledge you already have.
Based on my own experience 60%-62% win rate strategy (trading system) is not so hard to develop. What makes the difference between profit or loss is how you implement it with money management, trading discipline and trading psychology.
Trading Strategy Types
Binary options strategies can be categorized by specific criteria. If we look at the main baseline types from which we can derive trading signals, we can split these into four main categories. Each category presents a bit different base for implementation of almost infinite number of trading systems.
Technical Analysis Strategies
Technical Analysis is the type of trading in which you use the analysis of historical stock market chart movements to predict the future trends for the traded assets.
When trading with technical analysis you use live Forex charts or stock market graphs and technical indicators to determine your trades.
There are many systems of trading with technical analysis. Some are very simple and easy to understand, others are a bit more complex and require advanced understanding of trading indicators.
When you learn how a few simple trading systems work and you understand the basics of simple trading indicators, you are on a good way to develop your own trading systems. If you implement a good money management strategy and trading discipline, you can make profit even with a simple technical analysis trading systems.
You can trade different systems suitable for different types of markets. You can make just a few trades per day or you can make many. You can develop your own profitable trading style.
If you learn how to use the technical analysis indicators and charts, you will be forever independent in your trading and you will be able to trade at any time you want. Learning the basics of technical analysis trading is highly recommended for anyone who wants to become a serious independent trader.
Fundamental Analysis Strategies
Fundamental Analysis is the type of trading strategy where you use short and long-term technical analysis of the specific asset and take into account the impact of economic news and forecasts, to predict future trends and market moves.
On the technical side, the indicators that most commonly come in play are major horizontal support and resistance levels, pivot levels, Fibonacci levels, trendline support and resistance levels and trading pattern formations.
Besides technical approach, fundamental analysis takes into account major news impacts, which often cause stronger market moves. When such situations occur, a well defined layout based on technical analysis can give us solid levels where we can predict future market moves, such as pullbacks, reversals or breakouts.
You can trade stocks - like Google, Facebook, Amazon, Apple etc., commodities like gold or oil, or you can trade currencies. You can find predictions and ready-made fundamental analysis of stocks or currency market movements on various specialized websites.
On the other hand, you can research the companies or other markets which you trade by yourself. If you know, for example that Apple is going to launch the new iPhone sales and you can predict that Apple stocks will rise, you simply enter the trade which follows the trend and take the profit.
There are quite a few good websites that offer free fundamental analysis information. You can get daily analysis for the most traded currencies, commodities and indices.
News and Forecasts Trading Strategies
News trading is the type of trading where you use the economic and business forecasts to predict the future trends for the traded assets.
Every day a lot of economic predictions and news releases are published and many speculative traders are buying and selling the underlying assets based on the news predictions.
For example, if the statistical news about US unemployment rate is predicted to show results that there is less unemployment as compared with previous analysis period, many traders will buy the USD, since lower unemployment rate is good for the national currency.
As a consequence, the impact will reflect on EUR/USD pair and as the USD will go stronger, the EUR/USD forex chart will go down. This is an opportunity for binary options traders to take the speculative trade prior the news release, based on the prediction.
The other option is to wait for the actual release and try to catch the developing trend, as many traders will still buy the USD after the release, if the forecast was correct and news is positive for US economy (USD).
News trading offers wide variety of strategies and approaches for binary options traders.
Strategies Based on Trading Signals
Signal trading is a favorite type of trading for beginners. You simply subscribe to trading signal service and you make the trades according to the signals they send.
Especially beginners, who find the technical analysis or economic forecasts too complicated, but still want to make profit, often use signal based trading. This is the easiest type of trading where no experience or additional education is needed.
Not all signal services are good, however there are many possibilities of system development and upgrades with additional filtering of the signals. Signal services usually offer advice about what trading strategy and money management to apply, however once you become more familiar with their system, you can always find your own way of optimizing it.
There are numerous signal providers that offer different types of signals.
You can receive the trading signals by sms or e-mail and enter the trades based on the exact instructions on what asset to trade at what level and when to set the expiry time. Some signals are based on algorithmic calculations, others are provided by experienced traders. You can also follow live trading of professional traders and copy their trades on your own account.
Each signal service has its own system of use and profitability statistics. There are many providers to choose from, so you can find a signal based service or a system that suits your own needs and profit goals.
If you are looking into signal based trading, based on third party signals providers, it is advised to be cautious and always test the service with smaller investment amount, or on the demo treading account. There are many fake or 'scam' signal services, which will only make you lose your investment.