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Binary Trading Strategies For Beginners

Binary options trading offers a simple way for beginners to get involved in the financial markets. Essentially, a binary option is a financial instrument that allows you to predict whether the price of an asset will go up or down within a specified period. If your prediction is correct, you earn a profit; if not, you lose your investment. Given the straightforward nature of binary options, many new traders are drawn to it. However, as with any form of trading, having a strategy in place can significantly increase your chances of success. In this article, we will discuss five beginner-friendly strategies for binary options trading.

1. Trend Strategy

The adage “trend is your friend” is evergreen in the world of trading. This strategy revolves around spotting and following an existing trend.

How to use it:

  1. Spot the trend: Use tools like moving averages to identify whether an asset’s price is trending upwards or downwards.
  2. Enter the trade: Once you’ve identified a trend, place your trade in the direction of that trend. If the trend is upwards, consider a ‘call’ option (predicting the price will rise). If downwards, opt for a ‘put’ option (predicting the price will fall).
  3. Use timeframes wisely: Trends can occur in different timeframes, so choose an expiry time that matches the trend’s duration.

2. Pinocchio Strategy

This strategy is named after the fictional character whose nose grew every time he lied. Here, a single candlestick or a bar on a chart represents the “Pinocchio nose”, indicating potential price reversals.

How to use it:

  1. Identify the Pinocchio bar: Look for a candlestick or a bar with a small body and a long wick. This suggests a potential reversal in the market.
  2. Trade against the nose: If the nose is pointing up, it suggests that the price might move down, so consider a ‘put’ option. Conversely, if the nose is pointing down, the price might go up, so a ‘call’ option is preferable.
  3. Confirm with other indicators: Before placing a trade, check other technical indicators to ensure the Pinocchio signal is valid.

3. Straddle Strategy

This strategy is ideal for volatile markets. Instead of predicting a specific direction, the straddle strategy aims to profit regardless of which way the market moves.

How to use it:

  1. Identify high volatility: Look for events or news that could cause significant price swings.
  2. Place both call and put: Just before the event/news, buy both a call and put option with the same expiry. This means you’re betting on both potential outcomes.
  3. Profit from movement: If the asset’s price moves significantly in either direction, the profit from one option can outweigh the loss from the other, resulting in a net gain.

4. Risk Reversal Strategy

Also known as the “protective put”, this strategy aims to protect against potential losses from a ‘put’ option by also buying a ‘call’ option.

How to use it:

  1. Buy a ‘put’ option: This is your primary investment, predicting the price will fall.
  2. Simultaneously buy a ‘call’ option: This acts as insurance. If the price rises instead of falling, the ‘call’ can help mitigate losses from the ‘put’.
  3. Balance the costs: Ideally, the profit from one option should cover the cost of the other, ensuring minimal loss or even a potential profit.

5. Hedging Strategy

This strategy aims to reduce the risk of adverse price movements in an asset. Essentially, it involves taking an offsetting position in relation to the initial position.

How to use it:

  1. Enter a primary trade: Start with either a ‘call’ or ‘put’ option based on your initial analysis.
  2. Place a hedge trade: If your initial trade isn’t performing as expected and looks like it might go against you, place a trade in the opposite direction with a shorter expiry time. This can offset potential losses.
  3. Monitor and adjust: Regularly review your positions to ensure that the hedge is effective.

Conclusion

Binary options trading can be a rewarding venture, especially when armed with effective strategies. While the strategies mentioned above can increase your chances of success, it’s essential to remember that all trading involves risk. Always invest an amount you can afford to lose, and continuously educate yourself to stay ahead in the trading game. With practice and a disciplined approach, you can navigate the world of binary options with confidence.