How to Formulate a Successful Trading Strategy for Binary Options
True binary options trading is not dependent on luck, but on formulation of trading strategies that work not just once, but again and again. This article will examine the issues that must be taken care of when formulating a successful trading strategy for your binary options trading venture. Please keep in mind that is not an easy task for any trader and it usually takes time before one can really call his/her trading strategy successful and make money using it.In formulating a binary options strategy, several questions must be addressed.
- What time frame will be used for the strategy analysis?
- What asset is the strategy going to be used to trade?
- How long will the trades last?
- What brokers will be used for trading?
- What kind of analysis will the strategy be based on?
- How can you test the strategy?
Choosing the right time frame
The time frames refer to the periodicity of the chart used in analysis. We have time frame charts that start from 1 minute, and move up to M5 (5-minute), H1 (1-hour), H4 (4-hour), D1 (daily), etc. In each time frame chart, a candlestick length represents the length of time that trades on a particular asset have been going on for. So a candlestick on an M5 chart represents price action for 5 minutes, while a candlestick on an H1 chart represents price action over a 1 hour period.
The essence of time frame consideration is to take care of a unique feature of binary options trades, which is that all trades expire. They expire at different time frames. Some trades will expire in 15 minutes while some will expire at the end of the day. So the use of time frame charts in analysis helps to structure the strategy to be able to respond to the particular expiry time defined for that trade.
Choosing the assets to be traded
Different assets behave in different ways for the principal reason that they respond to different fundamentals. A stock asset will more likely respond to news pertaining to its parent company. We see an example of VW’s stock slide on Monday September 21, 2015 on news of allegations that a software was installed in its diesel-engine vehicles to rig emission tests. This sort of news does not affect an asset like gold, which will respond more to the state of the global economy with respect to economic returns from certain assets. So a strategy must be tailored to a particular assets or group of assets. In binary options, there is no cap that fits all.
Thinking about expiration times
Some strategies will work better for certain expiry times. This point is also inherently tied to the assets traded as well as the time frames used for the strategy. For instance, the stock markets only operate for a few hours a day, which is contrast to the forex market which is a 24-hour market with several times of maximum activity. Therefore, a strategy being developed for a stock asset may work best under intraday conditions while assets with movements that can trend for a long time may be traded with strategies for the medium or long term.
Choosing the right broker for your strategy
Many traders neglect this aspect of strategy formulation, but it is a very important component of strategy development. There are hundreds of brokers in the binary options market and there are some who offer proprietary platforms with trade types that are different from the more common turnkey platforms. Therefore, any strategy being developed must be suited to the trades found on the preferred broker’s platform. There are subtle differences in platforms and trade types, and using a strategy on the wrong platform can cause trades to unwind. For instance, the Touch/No Touch trade type on a certain proprietary platform has a minimum expiration of 3 days, whereas it is only a few minutes on a turnkey platform. If you use a strategy which is meant to pick out trade direction over a few minutes on a platform where the minimum expiration is a number of days, positive results cannot be guaranteed.
Choosing the type of analysis
Is the strategy going to be built on technical analysis, fundamental analysis or a mixture of both in a variety of ways? This is a question that a strategy must answer. There are strategies that are built on technical analysis in which case, all information must be provided by charts. Then there are those which depend on input from news trades. The best strategies are those which combine elements of both types of analysis. For instance, traders who want to trade the American-style news trades on binary options platforms have the opportunity to trade the news directly and also to trade assets associated with the news. For instance, trading the Non-Farm Payrolls (NFP) on NADEX or trading assets that respond to the NFP numbers would require a combination of technical and fundamental analysis.
Testing your strategy until proven to work
Seeing that many binary options platforms do not offer free and unlimited demo accounts, it is important to be able to test a strategy by using it on a live account. A trader can open a live account and fund it with little money for testing purposes. Even if the trader has access to a demo account, a demo account cannot adequately replace testing on a real money account under real trading conditions. This will allow the trader to have an accurate measure of how the strategy will perform on an account loaded with money. This will also enable the trader fix any problems with the strategy.
Formulating a strategy can be very painstaking and must be approached in a manner which addresses all issues as described. Once a strategy passes the stress tests, it can then be deployed on a real money account with confidence in its ability to deliver profits. There are plenty of professional signals and indicators that can be used in formulating a winning strategy. A resourceful trader should investigate various trading signals and strategies to see which one works best for him/her. There is no Holy Grail strategy that will be great for everyone.Published in Education