Every trader who sets off to explore the world binary options is searching for the best possible way to forecast financial markets, and therefore obtain stable returns. One of the worst and most common mistakes that novice traders make, however, is regarding options trading as a sort of gamble, which makes them rely solely on their luck without really considering or analyzing the current situation on the market. They may be lucky at the beginning, however, luck does not tend to last long, and losing all money on one’s account won’t be a big surprise. So what should the trader do instead? Your first, and, probably, most useful tool is a good trading strategy – the one that fits your trading style and shows stable long-term results. A clearly formulated trading strategy will help you remain in control of the situation and manage your trading account.
Find such a strategy requires a certain amount of effort and time. The internet can offer a wide choice of free information on the topic, based on various indicators, technical analysis, and fundamental analysis; in addition to that, there are custom algorithms available from premium providers. It is quite easy to get confused by this variety, so to make it clearer we have subdivided this topic into pattern strategies, indicator-based strategies, and fundamental strategies, based on their underlying principles. Below we will describe the advantages and disadvantages of each, as well as offer you some advice about selecting the strategy that is suitable for you.
Graphical methods are based on the basic principles of technical analysis translated into visual patterns on price charts; the majority of professional traders use graphical strategies as their primary trading instruments. The main premise underlying this type of market analysis is the recurrence of price patterns: if a certain combination of price movements leads to a particular action on the market, this correlation will, quite likely, persist in the future. Over time traders have identified a great number of patterns (of varying predictive power), which, when appearing on the graph, may indicate the direction in which the market is most likely to develop.
Just like all other groups of strategies, this one has two types of visual objects: trend and counter-trend signals. The former are used to confirm an existing price trend, i.e. direction; in other words, such patterns imply that, despite minor fluctuations, the current trend will continue its development. Counter-trend paterns are used to identify the moments when a trend is reversed, for example a growing price (bullish trend) is followed by a decline (a correction, or a bearish trend).
In order to execute profitable trades based on visual patterns, one needs to spend some time observing the markets in order to develop a “recognition system” – it is not always easy to spot a correct pattern at the right moment and to enter the market in time to capture its effects. Professional traders note that, as most skills, this one comes with experience, and after some practice you will get better at using patterns to forecast market developments, resulting in more stable trading profits.
These strategies are based on technical indicators – mathematical algorithms that derive predictions from past prices, volume, or other historical market data. This type of market analysis is considered to be relatively simple and suited for traders with any level of experiece because most indicators need much less visual interpretation than patterns. This, however, is only partially true, because before using an indicator to trade, one needs to understand its structure, its mathematical mechanism, and the underlying principle behind the signal.
It is also important to be aware of the timeframes at which a particular indicator performs best, to avoid significant losses from improper usage. In order to start trading with the help of indicators, you will need to either make sure that the broker you choose has them available on their trading platform – or use an external source of data instead. Some indicators are licenced as paid services by a third party and thus need to be set up separately. Most technical indicators have one or more adjustable parameters (for example, time intervals for moving averages), which can be left at their defaults or set to specific values when fine-tuning your strategy.
In order to increase the efficiency of your trading strategy, it is highly recommended to test it on a demo account – or on a real account using smallest possible trade volumes. This will help determine the strong and weak sides of the system, as well as adjust it to the real market by changin the input parameters for the indicators and reviewing your “indicator mix” itself – all without risking too much money. If you manage to invest enough time and effort into optimising your indicator strategy as well as adapting it to your trading style and risk tolerance, with some discipline and persistence you should be fairly certain to achieve positive results.
The third approach to trading binary options discussed here is fundamental analysis. This set of strategies is based on looking at external factors which influence prices through economic mechanisms. These include market interest rates, financial results of large corporations, global economic and political developments, as well as any version of rumours about any of the above. Each asset is influenced by its own set of news: in the case of private companies, the cost of their shares will depend on each company’s inner policies as well as industry dynamics. Currency pairs and commodities will mostly be influenced by wider economic factors which, in turn, depend on key decisions made by central banks and governments.
In order to trade with the help of fundamental analysis one can use an economic calendar to follow the news and evaluate their significance. Expert predictions and expectations are often available for most of significant events, such as central bank interest rates or large company financial results – the key is to determine whether the actual figures, when they come out, will differ from the consensus predictions – and if they do, you may see a dramatic change in price of your asset. When used well, fundamental analysis will help you use financial news to open the right trades with the right expiration dates, all leading to higher trading income.
How do I choose the right strategy?
After having looked at the three main types of trading strategies, it is time to decide which one is a better fit for you. This will depend on your risk tolerance, trading time frames, as well as personal preferences and beliefs. It is important to understand that no matter what strategy you choose, it will still need thorough studying and testing. In order to understand the market and make it work for you, you are going to have to invest a certain amount of time and effort into choosing a strategy which, in the long run, will show stable results.
An indicator or a trading systen that would guarantee success in 100% of cases do not exist, which is why it is important to clearly understand the success rate and the limitations of your strategy. Professional traders make profit because they have spent a lot of time trying things out and gaining experience – a stable strategy that is profitable in 55% of trades is better than chaotic trading based on “gut feeling” or random signals.
Find your strategy, fine-tune it to match your chosen market, test it on historical and real-time prices, and remain disciplined and calm – you will find that profitable trading is a craft that can be learned, rather than a lottery.