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Binary Options 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

Jun 24, 2024

Using a binary options trading strategy is key to successful trading. Whilst no strategies are risk-free, a robust plan will help give you the best chances. Popular binary options trading strategies use technical analysis tools like candlesticks, momentum indicators and oscillators. Other techniques follow news signals or leverage arbitrage software.

In this tutorial, we break down the top breakout and fundamental binary options strategies, helping beginners to take positions on the financial markets. We have also compiled a list of the best brokers for trading binary options below.

List all Binary Options Brokers

The Importance Of A Binary Options Strategy

Binary options are a form of fixed-odds financial speculation. Depending on the outcome of a simple “yes/no” condition, there are two results for the trader: either they receive a fixed payout or they lose their stake. Typically, the bet is placed on whether the price of an asset will be over or under a set strike price at expiry. If the trader is successful, the option is said to have expired “in the money”.

As a simple example, suppose a trader bets $10 that the share price of Apple will be above $150 by 12:00 tomorrow. The broker offers them a payout of 80%. If the investor is correct, they receive $18 from the broker, otherwise, they lose their $10 bet. Some types of binary options strategy involve a specific type of contract that can be closed before the expiration date with a reduced payout.

Clearly, if a trader places trades based on random choice or intuition, they will have a roughly 50/50 chance of being successful. In this situation, they can expect to make a long-term loss as the payout is less than the loss, after all, binary options brokers are businesses looking to turn a profit. Therefore, it is important to trade using a binary options strategy, which can turn the odds in your favour and hopefully increase your capital.

No binary options betting strategy is ever zero risk but the most effective techniques will win more trades than they lose at a payout that more than covers the losses. A strategy can help to simplify your trading, minimise risk and avoid guesswork.

Types Of Binary Options Strategy

There are hundreds, if not thousands of strategies that you could use, often categorised by risk, tools or timeframes. Here, we consider two types of strategy, technical approaches and fundamentals. Below, we have outlined each form, alongside three further subdivisions.

Fundamental

A fundamental binary options strategy looks at the overall picture of a company, markets and the economy (trading ‘fundamentals’). Analysis of these is important in almost all areas of trading. However, as most binary options trading is done over short time periods, (usually less than a day, sometimes as little as one minute) the fundamentals tend to have less impact on price movement. On long-term options, however, an effective binary options strategy will likely incorporate the fundamentals. Some brokers offer long-term options lasting one or two months.

Technical

Technical analysis using charts and indicators can be a vital part of a binary options strategy, with technical approaches looking for patterns in the data to make educated guesses about future price movements. Technical analysis indicators are mathematical formulae that convert price action into an intuitive description. Common types of indicators include moving averages, trendlines, support and resistance, oscillators, and Japanese candlesticks. Technical analysis is a necessary part of any winning short-term binary options day trading strategy.

Types of technical binary options strategy include:

• Scalping: This binary options strategy uses short-term price action and trends to identify bullish or bearish opportunities. Once entered, scalping approaches will close the contracts as soon as it becomes profitable, even for lower payouts, reducing the risk of falling victim to forex market reversals.
• Directional: Directional, or trend-following strategies, target assets that are trending strongly to accurately time profitable entries.
• Range-Bound: These types of binary options strategy are best applied to short-term binary options. Often, an asset is trading within a range rather than trending in a particular direction. Range-bound strategies utilise short-term trends, support levels, resistance levels and reversals to predict asset price movement.

Top Binary Options Strategies

Best Binary Options Strategy For Beginners: Candlestick Analysis

Japanese candlesticks are a popular chart type as they are easy to read and contain a lot of information. Candlesticks can be used to build effective binary options trading strategies. Additionally, candlestick analysis can be used on short- and long-term binary options trading, with 60-second up to yearly charts.

Each candlestick represents the opening, closing, high and low points of an asset’s price over a set time period. Open and close positions are represented by the thicker part of the candlestick, known as the ‘real body’. If the close was higher than the open, the candlestick will be green/white, else it will be red/ black. The thin ‘wick’, or shadow, denotes the highest and lowest prices over the period.

Candlestick charts regularly show formations that repeat over time. Often, charts will show spaced-out mountainous groups of long candlesticks separated by valleys, regions of short candlesticks. These patterns can be used to formulate an easy winning binary options strategy: if the price is experiencing a peak, it is likely to fall soon.

There are many other basic principles of candlestick analysis within a binary options strategy. For instance, the size of the real body can indicate pressure: a long green body often represents strong buying pressure. Shadows, on the other hand, may show whether buyers or sellers were stronger at the close. For example, a long lower shadow with a small upper shadow indicates sellers tried to push the price down but were ultimately unsuccessful.

All-Round Binary Options Strategy: Moving Averages & Crossovers

Moving averages plot the average values of an asset’s price, taken over a set number of periods. Moving averages are used in a binary options strategy to spot trends, determine entries and provide targets for support and resistance levels. They can be applied to multiple timeframes.

One use of moving averages in binary options day trading is the crossover strategy, which utilises two moving averages of different lengths (for example, 10-minute and 50-minute periods). When the shorter MA crosses above the longer MA, it shows buying is picking up, meaning it may be a good time to buy. This forms an important part of the rainbow pattern binary options strategy.

Binary options traders have a choice of moving averages to use, each with distinct advantages. The exponential moving average gives greater weight to recent trades, making it good at identifying trends. Alternatively, the simple moving average weights all trades equally, which some argue makes it less accurate. Different types of moving averages can be used together to create accurate indicators for binary options trading.

All-Round Binary Options Strategy: Money Flow Index

Some types of binary options strategy use the Money Flow Index (MFI) indicator to inform trading decisions. It is generally considered a good strategy for short-term (perhaps 5-minute) binary options trading.

Short-term market fluctuations are influenced by simple supply and demand – whether investors are buying or selling. The MFI compares the number of assets bought to the number of assets sold, giving a number between 0 and 100, where 0 denotes everyone selling and 100 everyone buying. If too many traders have bought an asset, the demand will go down and prices will fall. Likewise, if too many traders have sold, the price will rise.

The MFI can therefore be used to design a simple but effective mathematical binary options strategy. If the indicator rises above 80, the asset is overbought, which will lead to a fall in prices. Conversely, if the MFI goes below 20, the asset has been oversold and the price may start to rise. This information can be used to time entry in short-term binary options trading with less risk.

How To Get Started With A Binary Options Strategy

Step 1 – Choose A Provider

Sadly, online scams are all too common in the world of binary options trading. It is important to choose a trustworthy broker to protect your capital and ensure fair trading conditions. Before signing up with any new platform, check their name on blacklist sites or guides like this. In addition, read online reviews of the broker: proceed with caution if it seems the platform has prevented clients from withdrawing funds. It is often best to choose a regulated broker, though note the UK’s FCA has banned the sale of retail binary options contracts.

It is worth comparing several brokers on pricing, customer service and the range of assets available. Some platforms will allow new customers to open a demo account, which can be a good way for inexperienced traders to get to grips with the basics.

Step 2 – Do Your Research

Before getting started ensure you have planned out your binary options strategy, which allow you to codify decision making and remove emotions from your approach. Even a simple strategy is generally better than guessing based on intuition. Strategically trading will also help to improve your skills by making your actions repeatable.

When trading binary options short term, it is vital to have a basic grasp of technical analysis tools. Useful charts and indicators include candlesticks, moving averages, momentum, RSI and Renko indicators, plus the MFI. These will form many good binary options day trading strategies.

Step 3 – Deposit Funds

Before you can get started following your daily binary options strategy, many brokers require a minimum deposit, whereas others allow you to sign up with smaller payments. As always, never bet more than you can afford to lose. Initially trading with smaller amounts of capital may be advisable.

A good money-management strategy is just as important in binary options as a trading approach. A simple money-management plan is the percentage strategy: never risking more than 2% of your total funds. This ensures that you should never run out of capital and that your profits will grow alongside you.

Step 4 – Take A Position

Once you have chosen your broker and underlying asset, you need to make your first trade. There is a range of expiry times available, from 60 seconds up to a week. A longer-term binary options strategy might be lower-risk but will reduce your trading volume. Note that a payout of 75% means that you need to win over 60% of trades to make a profit.

After you have decided this, you need to take a position: a “bearish” position means you think the market will move down, whereas a “bullish” position means you believe the price will go up. This will decide the contract that you choose to purchase. Timing your entry point is crucial for winning, which should be dictated by your chosen binary options strategy.

Final Word On Binary Options Strategies

Sticking to a binary options strategy is essential for successful trading, helping you systematically make decisions, reduce risk, understand the market and remove unpredictable emotions from your financial decisions. Given the high-risk nature of the assets, there are no 100% success-rate, perfect money-making approaches, all will involve some risk and get it wrong sometimes, though likely less than pure guesswork. A profitable short-term binary options strategy will often utilise technical analysis tools like candlestick charts, plus compounding and correlation indicators.

FAQs

Is There A Binary Options Strategy That Really Works?

A robust binary options strategy will be more effective than simple guesswork, which will statistically lose you money over the long term. Good money management and sticking to your rules are crucial, though no expert hourly strategy is perfect and all will suffer losses at times.

Are Binary Options Strategies Suitable For Day Trading?

Yes, using a binary options strategy is almost essential for day trading the contracts. A strategy that utilises technical analysis and indicators will help you to predict short-term price movements with lower risks.

Can A Binary Options Strategy Be Good For Beginners?

A simple binary options strategy can be very good for newbies. By making trading more systematic and repeatable they help you to better understand the market, gain experience and learn how to improve. Use the easiest tips and tutorials outlined above to get started.

What Is The Best Binary Options Strategy?

There is no holy-grail, risk-free binary options strategy. However, using a combination of technical analysis tools to refine your strategy may lead to effective and profitable binary options trading. There are also videos of strategy testers online that you can download for free and that trial alligator, ADX, Bollinger and Heiken Ashi techniques.

Is It Best To Use Moving Averages Or Candlesticks In My Binary Options Strategy?

No one technical indicator is best – an optimal binary options strategy will utilise a range of tools to avoid false signals and reduce risk. Additionally, some MT4 indicators and chart types, for example, are better suited to certain assets or the latest markets active at the weekends.