Investing > Best Binary Options Strategy

Best Binary Options Strategy

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Binary options trading is fast becoming one of the most popular ways to play the stock market, especially since there are now a couple of different choices for US binary options traders. But while many are enamored with the idea of getting rich quick using these apparently transparent options, far too few take the time to conceive and implement solid strategies.

Do yourself a favor and slow down – there’s still plenty of time to take advantage of binary options and make some cash! Instead, before you head into the market or sign up for a broker, consider figuring out what the best binary options strategy for your goals might be. Chances are, it’s somewhere in the guide below.

Why Use a Binary Options Strategy Anyway?

In all honesty, not approaching any kind of market trading without a strategy in place beforehand is foolhardy at best and stupid at worst. Placing your money at the hands of the market without an entry and exit plan and without a clear monetary goal in mind is essentially giving fate a license to screw with your bank account. It’s also contrary to the intention of the market; traders are supposed to be making informed decisions using the wide variety of tools and information available.

Illustration of a man who's happy because of a successful trading strategy.
A good trading strategy can be a shortcut to massive profits, so it’s always good to have one.

Having a trading strategy in place can stop you from making emotional decisions, too. For instance, everyone’s heard a story about a trader that went crazy with greed and tried to bet too much of his or her money on a short winning streak. Having a plan in place can prevent you from going overboard when hesitancy is actually what’s called for.

You should also have a trading strategy because you can benefit from repeated trades and practice. Figuring out a strategy and sticking to it over time can result in greater gains than if you flipped from idea to idea.

With binary trading, it’s even more important to have an excellent strategy in place. Binary trading usually attracts inexperienced traders or those without a lot of capital because of its advantages. But that doesn’t mean that you can’t lose a lot of money by betting on the wrong kinds of options or making poor decisions.

Not sure what options are? See our comprehensive guide to options trading.

Three Elements of Each Strategy

Regardless of what kind of binary strategy you plan to employ, each long-term tactical outline has three shared elements.

Binary Option Signals

Firstly, each binary options strategy will involve the creation or recognition of signals. In this sense, a signal is an indication that you can use to determine whether the price of an underlying asset for a binary option is going to move up or down. It’s a tool you can use to predict whether you should buy or sell an option based on several factors or key pieces of information. 

Signals are made in two main ways: using news events or technical analyses.

Many binary options traders locate signals via news events, especially when they’re starting out and don’t have a lot of experience. Just look at what happens on the news and pay attention to other publicly available information, like industry announcements or company CEO decisions.

You can use this information to determine whether the prices of assets are going to rise or fall. Positive news usually leads to prices rising and the reverse is true for negative news.

While stocks and options have many differences, they also share some similarities — especially when it comes to investing strategies. That’s why you can trade binary options based on technical analysis.

In a nutshell, you’ll try to predict the movement of asset prices by focusing on information relative to your asset rather than wider market movements. Naturally, this is more advanced compared to the other signal creation tactic. It involves things like looking at how the price of an asset has moved in the past to predict its pattern in the future.

While it sounds too complex for comfort, human brains already do this every day. The trick is training yourself to look for the pieces of information that matter and forming signals based on those points.

All in all, both types of signal creation are similar to what you already do for any kind of trade in any kind of situation, not just in the stock market.

So which should you use?

Try to figure out which one you’ll be most comfortable with and generate your signals using that strategy for a long time. Sticking with one method will allow you to better your proficiency with the method in question. We’d recommend using news sources if you aren’t very experienced, with some technical analysis mixed in if you have a little experience playing the stock market.

Trade Amount

The next common factor that all strategies share is determining how much you should be trading. It’s kind of like a money management strategy. There are two basic strategies within this shared strategy concept: Martingale or percentage-based.

We’d almost always recommend using a percentage-based strategy whenever possible. This system is much less risky; all it requires is that you make an amount to be invested in a trade based on what you currently have in your account.

This results in you investing less money the next time you make a trade if you lose, but it means you should have money in your account at all times to make a tactical full withdrawal. The reverse is true if you win; you can bet more after each success and potentially earn even greater profits. It’s a great way to ensure that you realize steady profits over the long-term.

Martingale price decisions just have you focus on recovering losses as soon as you can. As you can imagine, this can lead to catastrophe if you don’t have a lot of experience trading binary options and invest increasingly more amounts of money trade after trade on a streak of bad luck or bad decisions. You can easily empty your entire bank account by using this method.

Strategy Improvement

Finally, all binary options trading strategies should leave you room to improve those strategies. You want to improve your strategy over time, preferably by using a journal or diary and keeping track of any successes or mistakes you make. Doing this over several weeks or months will allow you to see trends in your decision-making and determine if the strategy you are currently employing is working out or if any apparent success is smoke and mirrors.

Illustration of a magnifier focused on binary options chart
If one strategy fails, it’s best to learn from mistakes and create an improved strategy.

Focusing on improving your strategy is also important if you want to recover from losses and truly realize profits using binary options. To make long-term success a reality using these options, you need to win considerably more than 50% of the time. This is, mathematically speaking, very difficult, and essentially impossible if you don’t have a good strategy in place.

What Should You Look For When Buying an Option?

In general, you want to look for an option that has signals that adhere to the carefully tailored strategy that you developed beforehand. This means only looking for options to buy (or sell) that match the signals you decided to look for in the first place. Don’t be swayed by options that are particularly attractive but outside your strategy or plan; this is especially true if you are learning the ropes.

For instance, if you’re following a news-based strategy for your signals, you should always look for binary options that will be easily affected by the news. You can then focus on these and buy or sell options depending on the type of news you receive.

Naturally, what exactly you should look for in an option will depend on the strategy you employ and how you focus on signals.

What Is the Best Strategy for Binary Options Trading?

The “best” strategy for binary options trading is always the one that makes you money consistently and with the least risk possible. Below, you’ll find a guide to some of the most common and effective binary options trading strategies we’ve seen (and used). What’s right for you will be determined by:

  • your temperament
  • your trading history
  • your strategy and financial goals
  • the market you choose to focus on
  • What signals you use

Which Option Strategy is Most Profitable?

The best trading strategy is not always the most profitable over the short term. This is a common pitfall you should avoid whenever looking for a long-term strategy in a binary options market. Strategies that let you profit again and again are most profitable over the long term, so focus on the strategy that works best for your personality or trading interests. 

Trading the Trends

Trading the trends is arguably the most common and well known binary options strategy across the markets. This also makes it a great choice for beginners.

Picture of a keyborad with orange TRENDS button
Trend trading is a great choice for beginner traders.

The price of underlying assets for binary options usually move according to trends, moving up or down in price with associated assets as market speculation shifts with real-world events and speculation.

However, trends don’t usually follow a straight line up or down; instead, they typically maneuver in a zigzag pattern with general momentum either toward higher prices are lower prices. This allows you to predict whether an option will be generally higher or lower in price at the end of your expiry date.

Trading by the trend gives you two options: trading with the overall trend or trading with every swing. 

Trading with the overall trend is safer and it’ll have you focus on the overall trend direction for a longer period of time. Most binary options that benefit from the strategy expire on a daily or weekly basis rather than an hourly basis. You also have multiple opportunities to profit from such a trend.

The “swing” described here is riskier, and focuses on trading when the market zags when it normally zigs. You’ll have to think about highs or lows; for instance, when a zag comes back and the market reaches a new high, someone who placed a swing bet on a binary option having a higher price by the expiry date will have a higher profit than someone who rode the overall trend.

Example

Look at the trend lines of a given chart. If the trendline is flat, don’t touch anything. If the trendline is going up, you should always call the asset in question because it’s likely that the price of the asset will be higher. The reverse is true if the trendline is going down; you should put in this case.

Trading Based on News

Trading based on the news is an actual strategy you can use, particularly if you get your signals from the news as well. This is also one of the easiest strategies to grasp overall, though it does require that you take in a lot of information all the time.

Pick up newspapers, news stations and as many other sources of news is you can and start watching and listening. You’ll need to understand as much as you can about the underlying assets you are buying or selling binary options for in order to evaluate whether a given piece of news is positive or negative.

Illustration of a hand holding newspaper
Following the most recent news can help you stay updated and create trading strategies.

But you’ll also need to understand human behavior; will a piece of news that you take to be positive also be taken as positive by the general population?

The trick to the strategy is that you don’t actually know how much an asset price can go up or down or how long the movement will last because it’s fundamentally based on human perception. To increase your chances of success, you can:

1. Use boundary options. In a nutshell, if you know that an asset price is going to move, try to buy or sell options that are at the theoretical maximum that it could increase or drop. This gives you the opportunity to profit even if you don’t know if the asset will go up or down.

2. Trade the breakout. In this case, the breakout is the short window of time right after a piece of news is released and it impacts the market. It can be anywhere between a few seconds to a few minutes.

With this strategy, you’ll want to bet big because significant price movements for an asset usually occur within this breakout window. High/low options are a good idea if they come with very short expiration times.

3. Make intelligent high/low trades. If you have a mind for analysis, you can play the long game and determine whether a piece of news is actually positive or negative even if the general public reacts the opposite way. You can then make binary options trades based on your real understanding of the situation and profit later down the road.

Example

Let’s say that you know that a tech company has an annual roundup where they invite all their investors and have a tech demo where they showcase a new gadget. It’s coming up in one week, according to their recent announcement.

You can use this information to buy options, believing that the reveal of their new gadgets will cause the value of some underlying assets to increase. When the tech demo is revealed and everyone loves the stuff, your options make you money.

Candlestick Formations

The name of this strategy refers to the chart appearance you’ll focus on. Most investing charts have lines that show the price across a set number of points in time.

Picture of a candlestick chart
Candlestick charts provide you with crucial info on changes in asset values within a certain timeframe.

Candlesticks show up on an asset chart over time with much more information for you to utilize. The bottom of the candlestick is the low price that an asset reached during a certain time and the upper is the highest price it achieved.

You can see the opening and closing price between both of those points. It’s essentially the price range that the asset flitted between during that time window.

Over time, you can recognize candlestick formations and predict the price movement of an asset. Say that there was an asset with a chart with candlesticks that were high on either end and a gap in the middle. This may indicate that the asset price drop for several reasons; it’s up to you to decide what that reason is and whether you can use the information.

Example

Say that, over many months, the candlesticks of a given asset are described as above: there are normally two “mountains” of candlesticks on either side and a valley in the middle. You can use the upcoming time frame to predict whether another valley is arriving soon or, alternatively, if another mountain is about to approach.

You can then base your binary options on these predictions, and you should already know the appropriate price ranges. This really works if it’s for a particularly stable asset, like corn or soybeans (stock foods that will never go away but whose prices might fluctuate on a pattern).

Straddle

This strategy is ideal if you apply it during a volatile market, and right before important news is about to be released.

In a nutshell, you want to put an option when an asset’s value increases over the short term but you know based on your own predictions or signals that the value should likely drop soon. Then, as soon as the value of the asset begins to drop (not when it reaches its lowest point), you can call your option(s), expecting it to rise back to higher levels. One way or another, you’ll make some money.

As you can see, you’re “straddling” the natural wax and wane of an asset’s price. It’s a way to make consistent profits even during a volatile market, but it does require good analysis and some experience.

Example

Say that there’s an option for the price of gold after a recent gold mine explosion. The cost of gold is currently fluctuating because investors don’t know whether the overall price will go up or down, especially as companies are still scrambling about the news and no one knows who’s going to make up the production. Using a straddle strategy here will allow you to benefit matter what the overall news ends up being in the long run.

Pinocchio

A so-called Pinocchio strategy refers to deliberately playing against the current trend. In essence, if an asset is currently on an upward trend, you place a put option and expect it to fall.

The reverse is true if an asset is decreasing in value; you call if you believe the price is about to go up. This is best done if you have good knowledge of the asset in question and can make safe predictions, or if you believe that the current trend is just part of a pattern and it’s due for a swing relatively soon.

Example

Let’s say there’s an option for heating oil, which is currently low. But you’ve seen the weather reports and know that a huge cold front is about to hit Central Europe.

You place a call option, thinking that the heating oil price is about to rise exponentially as people demand more to stay warm. You end up making a profit when your weather prediction comes true.

Hedging

A hedging strategy can also be called a “pairing” strategy. In essence, you place both calls and puts on the same asset at the exact same time.

Picture of a road sign with word Hedging inscribed
Hedging is a crucial part of any risk-management strategy.

It’s similar to the straddle strategy, as you get income regardless of which direction the asset actually moves. It just requires that you calculate the cost of both options so you don’t actually owe a little bit of money in the end. Think of it as “hedging your bets”.

Fundamental Analysis

This strategy is actually most often used as a tool to better allow traders to profit in the future. You use it when you’re focusing on one or a few central assets for your binary options, allowing you to get intelligence and increase your accuracy in the future.

To start, you have to conduct an in-depth review of every financial aspect in regard to the company or asset. Then you place a trade and see what happens; this should usually be low risk in case you lose.

Example

If you’re unfamiliar with a particular asset, you can place a trade as a call or put depending on the trend or your own strategy. The goal here is not necessarily to win but to gain information, particularly when it comes to a volatile market or short-term binary options.

Range/Range Breakout

Remember the boundary setting we discussed in relation to trading based on the news?

With range trading, you develop those boundaries and grab boundary binary options, setting upper and lower values based on how you expect the market to react by the time the expiration time or date arrives. You play the boundary using multiple options and try to make a profit regardless of where the actual price ends up.

Example

Say that you know the price of oil will be between $20 and $50 by the time the expiry is called. You can grab options for both of these ranges and end up making a profit either way if you calculated your costs correctly.

Tips You Can Use to Successfully Implement Your Strategies

While all the above strategies are great, you should also keep the following tips in mind as you implement these strategies.

For starters, it’s best to utilize one of the top options brokers on the market. This involves finding a regulated broker for binary options; if you’re in the US – your choices might be very limited.

Regulated brokers are much safer, particularly for inexperienced traders. You should also find brokers with a trustworthy reputation and reasonable fees. If low fees are one of your top priorities, a review of eOption might be worthwhile.

Additionally, don’t get caught up on dreaming about making it big with binary options.

Remember that most people who play with binary options end up losing money in the long term. Making money in this particular kind of market means figuring out a solid strategy and slowly profiting through repeated success, over and over.

Finally, practice. None of the above strategies are going to make you rich overnight.

In fact, the opposite is more likely true, statistically speaking! You need to stick with the strategy over the long-term and develop your analytical skills before you can see any real success.

Let us know if you end up trying any of the above strategies and which ones worked for you!

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on TheTokenist.io. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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