Piggy’s game: Binary options

Batanai Matsika

Piggy has noted that  Options are a relatively new tool in the financial markets.

Interestingly, this new investment alternative allows for low-cost entry where all trading is conducted over a web-based, real time platform on which one can trade with a simple click of the mouse. Until recently, Binary Options were hard to obtain, but a new generation of web-based electronic trading platforms, as well as several market innovations designed to simplify the trading decision are generating excitement and activity in retail binary options trading.

A Binary Option is in fact a prediction of which direction the price of the underlying asset (stock, commodity, index or currency) will move by a specified expiration time. With Binary Options, an investor does not purchase the asset – he or she is merely predicting the direction that the underlying asset moves. There are just two possible outcomes. A fixed gain if the option expires “in the money”, or a fixed loss if the option expires “out of the money.” The price of the asset is not important. The only thing that is matter is whether the prediction is correct or incorrect. It is that simple!

A Binary Options trade is executed in three simple steps;

First, you choose a trade expiration time, this is the time you want the trade to end. It could be any period between a minute and even one week;

Second, you choose Call or Put. If you think the price will end up above the current price: you click the Buy/Call button. If you think the price will end up below the current price: click the Sell/Put button; and

Now that the trade is placed, you simply wait for the outcome. If the trade expires ‘in the money’, you make a profit. If it expires ‘out of the money’, you will lose.

Process Flow in a Binary Options Trade

Deciding on the Underlying Asset — Some traders elect to focus on one particular asset, or one market, while others trade several options simultaneously. Classes of assets could include Commodities (Gold, Silver, Wheat, Coffee, Oil, Sugar, Platinum), Stocks (Apple, British Petroleum, Google, Coca Cola), Currencies (GBP/USD, USD/JPY, USD/CAD, EUR/JPY) and Indices (DOW, S&P 500, NASDAQ, DAX, CAC, FTSE 100);

Decide on the amount to invest. The amounts you devote to trade should be dictated by your risk management plan. IQ Option has set a low minimum investment amount of just USD10;

Deciding on the Desired Time Frame. Binary options are short term investment instruments. The time frames available can run from one, two, five minutes to a week, depending on the trading platform; and

Deciding on the Type of Trade. Above/Below is the most popular type of binary options trade, most traders will use this type most of the time. Above/Below options expire in-the-money when the trader correctly predicts that the price of the underlying asset will move above or below the predetermined strike price by the time of expiration.

Advantages of binary options

Simplicity — Trading Binary options is very simple and straightforward, all you need to do is decide which of the two directions the asset will move, up or down;

Risk control — With Binary Options, the return on initial investment is fixed. From the beginning, thus the amount of possible profit or loss is well known. Which means that you will never lose more than what you expected and can determine your risk as completely as is possible;

Short-time trading (minutes, daily, hourly) — with Binary Options, you decide what the expiry time of the option will be. If you are a fan of long-time investments, you can choose “end of the week” and “end of the month” expiry times. However, most traders would prefer shorter time frames;

Low minimum amounts — Binary brokers have low investment minimums, thus allowing you to start with small amounts.

Disadvantages of Binary options

The main disadvantage of trading Binary Options is the level of “fee” that is paid to the broker. It is relatively higher than in other investment areas.

Risk Management

Trading Binary Options is fun and exciting and money can be made. However, you must also keep in mind that like with any other options trading there is the risk of losing. When trading Binary Options, you should not risk too much money on any given trade. Good money management calls for adopting a conservative investment strategy that means that you should never risk your entire capital. You should not use more than 5% of your capital on any single trade.

Technical Analysis as a Tool for Binary Trading Success

Trading Binary Options, of course, requires a thorough analysis of the appropriate market. By means of technical analysis, the development of underlying asset can be predicted to some extent. Technical analysis is the studying of investor behaviour as well as its influence on the price action of financial instruments. The primary information which we must carry out our studies would be the price histories of the instruments, along with time and volume data. All these allow us to make our predictions, depending on objective data. In technical analysis, we use charts to predict asset price movement and develop our strategies, therefore it is extremely important that you will be knowledgeable as to the various charts types that are being used in technical analysis. Take time to improve your technical analysis knowledge, this will help you to sharpen your strategies!

Binary Options Strategies and Entry Signals

Strategy number one

Trading the News Strategy

The market is influenced by news events and by learning how to take advantage of these events you can improve your profits and prevent expensive mistakes. Many beginner Binary Option traders come to recognize the significance of news events only after seeing a perfectly profitable trade becomes a loss in a few minutes, while skilled binary traders foresee the move and add to their daily gains in a regular manner. Economic news reports usually initiate solid short-term moves in the assets markets which could create trading opportunities for traders. Announcements about corporate profits, a change in management, rumours of a merger, are all events which could result in a corporate entity’s share price to move significantly up or down.

Interest rates, unemployment and export rates, or the central bank’s policy changes, can lead to a serious change of an exchange rate. So how can you trade this strategy? Simply follow the news closely and act fast.

A good news event is a buy signal while a bad news event is a sell signal.

Strategy number two

The Moving Averages Strategy

Moving averages gives you a hint as to the direction of the market, this is useful in identifying a trend. A trend is a good entry signal. Moving averages are the most basic and most utilized technical indicator. They are used for smoothing the price movement. Moving averages are used as a trend line which adapts to price changes, not just as a regular trend line. So how can you trade the moving averages strategy? If the closing price moves above the moving average — this is a buy signal.  If the closing price dips below the moving average — this a sell signal.

Strategy number three

The Moving Average Convergence Divergence Strategy (MACD)

The MACD strategy is another indicator that is useful in identifying trends. This indicator takes advantage of the relationship between two moving averages of prices. Most traders use the difference between a 26-bar exponential moving average (EMA) and the 12-bar. This difference is then plotted on the chart and oscillates above and below zero. A 9-bar EMA of the MACD, called the “signal line,” is then plotted on top of the MACD, functioning as a trigger for buy and sell signals. The MACD strategy can be used in various ways, however the most popular is to use the signal line for entry signals as follows: When the signal line crosses the MACD from below – that is a buy signal. When the signal line crosses the MACD from above – that is a sell signal.