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Binary Options Reversal Strategy

Written By

William Berg

Written By

William Berg

William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.

» William Berg Profile Page

Edited By

Tobias Robinson

Edited By

Tobias Robinson

Tobias is a partner at DayTrading.com, director of a UK limited company and active trader. He has over 25 years of experience in the financial industry and contributed via CySec to the regulatory response to digital options and CFD trading in Europe. Toby’s expertise and dedication to financial education make him a trusted voice in the industry, including a BBC investigation into digital options.

» Tobias Robinson Profile Page

Updated

May 31, 2024

The binary options reversal strategy involves identifying when the price trend of an asset will change direction. The system can be applied to a range of different timeframes, from 30-second binary options to contracts that span hours or days. This guide to the binary options reversal strategy covers examples, availability in different markets, plus the pros and cons.

Reversal Strategy Basics

The reversal strategy is about predicting if and when a price reversal will take place. This is when the price of an asset, such as gold, moves in one direction and then starts trending in the opposite direction.

Multiple factors can cause price reversals, such as the overbuying and overselling of assets, news events, or large market orders from investors with significant capital.

There are two types of reversals:

• Uptrend reversal – The price of an asset stops falling and starts to rise
• Downtrend reversal – The price of an asset stops rising and starts to fall

The Reversal Strategy In Binary Options Trading

The short expiry times of binary options allow investors to capitalize on quick market movements. This is key as reversals are often signs of incoming volatility and can re-reverse quickly.

It’s also worth pointing out that the reversal strategy is prone to false signals that can incorrectly indicate an imminent reversal. However, the capped losses of binary options trades are well-suited to this strategy compared to other instruments such as forex, CFDs and regular options.

A major drawback of using a binary options reversal strategy is the cost of this reduced risk – capped gains. Correctly predicting a reversal using instruments like CFDs and regular options contracts can yield substantial profits – especially on a large swing. With a binary options reversal strategy, however, a large reversal yields no greater earnings than a marginal one.

Examples

There are various indicators and signals you can employ. To help you cut through the noise, here are some examples of traders implementing a binary options reversal strategy using different techniques.

Trader A wants to speculate on the price of the USD/TRY currency pair. They know that the Money Flow Index (MFI) indicator can help indicate overbought and oversold signals.

When an asset is overbought or oversold, there is likely to be a correction in the short-to-medium term. This is considered a potential signal when the MFI drops below 20 or rises above 80. The more powerful the value, the stronger the signal.

Trader A notices that after almost an hour of sideways trading, there is a dramatic plunge in the price of USD/TRY. The MFI also drops below 20, signalling that the market is oversold. They wait to see the next candlestick and MFI value.

At 21:55, the price drops to 18.55000, and the MFI value is 8.12, giving a stronger oversold signal. As a result, Trader A believes there will be a reversal and opens a 5-minute binary options contract going long/ up on USD/TRY at the current price of 18.55000.

5 minutes later, the reversal has materialized and the price has risen. The binary options trader wins a payout.

Trader B prefers the volatility of the crypto markets and is monitoring Cardano for a trading opportunity. They believe the Fibonacci extension graphing tool can provide accurate support and resistance levels on which a trend will reverse.

Following an earlier significant reversal, Trader B sets up a Fibonacci retracement overlay at 16:30. They plan to trade using short-term, 1-minute and 2-minute binary options contracts.

At 16:52, the price of Cardano falls below the first support/ resistance level. However, based on the bounces at 16:33 and 16:41, Trader B believes this can be used as a support level.

As a result, Trader B opens a long/ up 2-minute binary options contract at 16:54 with a current price of 0.3243.

2 minutes later, the uptrend reversal continues and the trader wins a payout.

Availability

Due to the wide range of indicators that traders can use in a binary options reversal strategy, availability and support is not an issue. Even the most basic proprietary binary options platforms will have staple indicators such as the RSI, MACD and Fibonacci overlays to help predict a reversal.

In terms of underlying assets, the binary options reversal strategy can be applied to any market, from stocks and indices to metals, energies, forex and cryptocurrencies.

Advantages Of The Binary Options Reversal Strategy

• Versatile – This strategy can be implemented with varying levels of complexity, on numerous assets and trading platforms and with a range of contract lengths
• Short expiry times – Reversals can often happen quickly. The short expiry times of binary options suit the reversal strategy well.
• Choice of indicators – Traders can use many different indicators to generate potential reversal signals
• Capped risk – Binary options are well suited to reversal strategies due to their capped risk

Disadvantages Of The Binary Options Reversal Strategy

• False signals – Reversal signals are notorious for creating false positives
• No native indicators – Inexperienced traders may struggle with which indicators to use to create reversal signals
• Capped profits – When trading CFDs and regular options using a reversal strategy, there is the potential for almost uncapped gains. This is not the case with binary options fixed payouts

Binary Options Reversal Strategies

There is no shortage of ways to set up a binary options reversal strategy. We have summarized a few of the easiest techniques below.

Overbought & Oversold

Determining when a trading asset is overbought or oversold can be an effective way of predicting an upcoming trend reversal. Traders can use a range of indicators, such as the Money Flow Index (MFI), the Relative Strength Index (RSI) and the WaveTrend Oscillator.

Reversals based on overbought and oversold signals rely on the market correcting these trends. This is more likely when an indicator is at an extreme value, for example, an MFI or RSI value above 90 or below 10.

Overbought and oversold indicators can be used as part of a short-to-medium-term binary options reversal strategy, including 2-minute or 5-minutes binaries.

Support & Resistance

When a security hits an established support or resistance line, it could signal a reversal. As a result, if an investor can find reliable support or resistance levels, this is one of the easiest binary options reversal strategies to set up.

Traders can utilize tools such as the Fibonacci retracement and expansion and long-term moving average (MA) indicators for resistance and support levels. Alternatively, binary options traders can spot their own patterns and map them onto a chart using a platform’s available drawing tools.

A support and resistance-based binary options reversal strategy is best suited to a short-term contract, as low as a 1-minute or 2-minute binary option.

Hedging & Double Reversals

Spotting an imminent trend reversal after opening a conflicting binary options position can leave traders with little agency. This is because, with most brokers, there is no support to cash out a position early.

Nevertheless, many platforms will allow traders to hedge their positions with another binary options contract. However, as the payout for a correct prediction is usually less than 100%, the trade-off for the reduced risk is likely locking in a small loss.

While the best binary options hedging strategies are designed only for investors to mitigate risk, sometimes traders may create a profitable manual boundary contract.

For example, Trader C speculates on the crypto token Decentraland (MANA) and opens a long contract at 11:21 based on a bullish price crossover with the long-term Volume-Weighted Moving Average indicator (VWMA). This contract uses a 15-minute binary option and a strike price of 0.4194.

However, after 10 minutes, the Money Flow Index (MFI) indicator rises to 86, giving a strong sell signal. As the price at 11:31 is 0.4201, Trader C believes that the value of MANA will drop below the strike price in the next 5 minutes and wants to hedge their bet to minimize any losses.

They open a short contract at 11:31 with an expiry time of 5 minutes, covering all possible values for MANA with both contracts. However, if MANA is between 0.4201 and 0.4194 at 11:36, the investor will win both trades and receive a double payout.

While this bet inadvertently paid off in this example, betting on successive reversals is difficult and not recommended for beginners.

How To Set Up A Binary Options Reversal Strategy

Here is a short guide on how to get started trading a binary options reversal strategy:

Choosing A Broker

In terms of binary options brokers, traders should ensure that a firm supports their chosen markets or assets, such as forex and crypto. Also look at average payouts on the assets offered.

Tip: try a broker’s trading platform using a free demo account to trial the range of available indicators and tools.

Setting Up Indicators

Depending on your specific binary options reversal strategy, traders may need one, two or even more indicators or graphing tools.

First, navigate to the trading tab for your chosen asset on your broker’s platform. From there, enable the tools you need to generate signals.

Deciding On A Strategy

Whether you are trading overbought or oversold assets, trading based on support and resistance or using your own technical analysis, decide at this point what constitutes an actionable signal.

Also decide in advance your preferred stake and timeframe. This gives you less to think about at the point of trade and allows you to act on signals more quickly.

Monitoring The Markets

Most binary options platforms require investors to make manual trades. To implement a binary options reversal strategy, a trader must watch the markets patiently for an actionable signal.

Placing A Trade

Once you have spotted an actionable signal, it is time to place your trade. Open a binary options contract with your predetermined stake and expiry time.

Investors may want to monitor the markets further to see if a hedge contract is required or they can set up a manual boundary trade following an additional reversal signal.

Final Word On The Binary Options Reversal Strategy

Using a binary options reversal strategy can be a profitable and repeatable trading method. Investors can use various tools and indicators to create signals and open binaries with multiple contract lengths to suit their chosen analyses.

While potentially a winning binary options strategy, the lack of a native indicator for this trading method can leave inexperienced investors unsure of where to start. In addition, a significant reversal can be more lucrative for CFD and regular options traders due to these instruments’ leverage and uncapped gains.

Use our list of the top binary options brokers to implement a reversal strategy.

FAQs

What Is A Binary Options Reversal Trading Strategy?

A reversal trading strategy involves predicting a change in the price trend of an asset. Investors can use binary options contracts to speculate on these market movements with benefits such as capped losses and short time frames.

Does The Binary Options Reversal Strategy Really Work?

Binary options traders must win most of their trades to create a profitable, winning binary options reversal strategy. If an investor can do this, then binary options reversals can be a lucrative form of speculation.

Can I Trade Price Reversals Using 5-Second Binary Options?

A 5-second binary options strategy is usually too short for a data-backed reversal to manifest reliably. However, some binary options traders are profitable with these shorter-length contracts. Investors can experiment with different contract lengths using a risk-free demo account.