As we know, binary options trading strategies vary from those which provide relatively low risk entries, such as those in agreement with the current trend, to those which can be considered more aggressive or counter-trend. The reason why so many binary options traders choose counter-trend methods, looking for market reversals rather than the continuation of the current trend, is that there are a number of very popular trading indicators which are very effective in showing market weakness. These indicators can be used by binary options traders to show where put and call trades are likely to be profitable, especially after a strong movement higher of lower in price.
Identifying a good straddle trade setup
One strategy which can considered a reasonably aggressive reversal method is known as straddle trading. The idea behind this method is to enter the market contrary to the current price movement using the RSI as an indicator of strength and weakness. This can lead to a number of trades being placed, both call and put options, in a relatively short space of time as market uncertainty following a strong move makes price to move higher and lower on strength and weakness. The RSI shows traders that, above a reading of 70, the market is ripe for a short-term reversal whilst a subsequent move below 30 indicates that traders should consider a long trade.
An example of effectively employing a straddle trade would be after a strong movement higher results in the RSI indicating that the market on the 5 minute time-frame is now overbought (a reading above 70) and 15 minute options are purchased. As expected, the market falls sharply and the RSI moves below the 30 level, indicating that the asset may now be oversold and long options with a 15 minute expiry time can be purchased. In this situation, it is likely that there will be two open positions both ‘straddling’ the short-term high and low as indicated by the RSI. Unlike hedging, traders are looking here for both positions to expire one after another in the money. However, the two positions can act a s a certain hedge method if the market was to move sharply in one direction and result in one position closing out of the money.
The best time to use the straddle trade
The ideal time to engage in a straddle trade is at a time when there is no significant news releases planned for the market of choice. Ideally, traders want relatively calm market conditions in order to capitalise on the indecision and consolidations that result in the market straddling a support and resistance point as indicated by the RSI. Although there is a risk that a market can remain oversold or overbought beyond the length of the 15 minute options, it can also be useful to identify areas of previous support and resistance, as well as popular trading patterns, in order to reinforce the decision to undertake the straddle trade.
