Trading binary options using Martingale strategy

One of the most discussed strategies for binary options traders is whether it is possible to be profitable using a martingale system for losing trades. Martingale strategy is based on the idea that for each losing trade a trader should increase the stake for the next trade in order to recoup the losses for the previous number of trades and also gain a small profit. This is often based on the idea of ‘doubling-up’ each losing stake and until a winning binary options trade is made. For binary options traders, this has been considered as a potentially profitable way to eliminate losses due to the fact that binary options are considered as all-or-nothing investments.

What is required to trade binary options with martingale?

Martingale strategies require, alongside nerves of steel, very deep pockets and the ability to finance a long run of losing trades. Unlike a regular streak of losing binary options trades, martingale magnifies each loss as the stake increases. The rationale behind this is that no losing run can go on for ever and eventually a successful trade will be made which will cover all previous losses. The basis for this, however, is flawed by the fact that a losing run can go on for a considerable amount of time as there is no reason why the market will be required to offer a profitable trade. Whilst it is unlikely that a losing run will continue infinitely, with the increasing and losing of each stake even a short run of several losing trades is likely to deplete a normal trading account.

Why trading with Martingale should be avoided

The Martingale strategy is not only flawed in requiring binary options traders to have a large amount of capital to trade, but the design of binary options returns are also not be suitable for this strategy. In order to work effectively, Martingale ideally relies on a 50-50 outcome with equal returns. Given that binary options returns are usually around 80% of the investment, the higher losses will require the trade size to be increased even further to account for the larger winning amount required to cover the losses. This will not only require an even larger trading account, but also means that many traders would find themselves investing considerable amounts of money with only a few losing trades.

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What are the alternatives to Martingale for binary options traders?

Martingale is not a suitable trading strategy to combat losses for those who do not have very large trading accounts. Despite this, a movement has emerged which is considered as the ‘anti-Martingale’ strategy whereby traders increase the size of their trades with each winning trade and returning to standard trade size following every losing investment. Although this creates a positive spin on the Martingale strategy, it is still likely to suffer from some of the same issues as the original strategy.

Those trading systems which, historically, have proven to have very few losing trades may benefit from scaling-up positions to cover these losses. However, for those who can accept losses as part of binary options trading, the use of a solid trading strategy to limit the number of these is the most effective alternative to Martingale. The risk of depleting a trading account through a period of poor results is too great for many traders to consider trading with martingale.

3 things to take in to account trading binary options

Binary options is based on the very simply decision of whether price will close higher or lower than the current market price at a chosen expiry time. Although this seems like a very simple decision, with a 50-50 chance of success, there are a number of things to take in to account to try to ensure a higher probability of making the correct decision.

Trade with the highest payout

If the chances of being correct, higher or lower, are 50-50 then it would be reasonable to think that even random trading decisions would yield an equal profit to loss ratio over time. However, this also assumes that the winnings would be equal to losses and that options expiring ‘in the money’ would profit from the same amount as a position ‘out of the money’ loses. Unfortunately, this is not the case as most binary options brokers will provide pay-outs of around 80%, whilst losing positions will often wipe out 100% of the investment.
There are two ways, however, to mitigate this automatic edge that the brokers have by choosing to only trade binary options with brokers offering an ‘insurance rate’ for losing trades. This rate is usually up to 15% of the investment value which is returned to the trader on positions closing out of the money. This means that, with winnings of 80%, losses would be limited to 85% which will positively affect a trading account in the long run.

Choosing a binary options market

All traders need to ensure that they have as many factors on their side as possible when looking to be consistently profitable. It may seem straightforward, therefore, to point out that binary options traders should choose the market/s that they are going to trade very carefully. Getting to know how a market moves can be very helpful when investing in binary options and a good understanding of when markets are most active is essential for planning the expiry time with binary options.
For those trading in their spare time, during the morning or evenings or with other commitments throughout the day, trading forex and commodity markets is likely going to be preferable to stock markets. Expiry times can be set from as low as 60 seconds to a number of days and selecting the appropriate market based on a traders preferred time of day can be essential to protect trading capital. For those fortunate enough to be able to monitor positions throughout the day, using mobile apps provided by almost all brokers, binary options can be closed early, allowing profits to be take, or rolled-over when a positions begins to look risky.

Limit trade size

Over trading is a common way to deplete a trading account alongside the size of the investment made on each binary options investment. Despite the temptation to over-invest in a ‘certain’ trade setup, professional traders will always advise to limit potential losses to a percentage lower than 5% of the total trading capital available. This may seem like the boring options when returns of up to 80% can be made in just 60 seconds, but it will prevent the ability to blow a trading account within just a few large binary options trades.

Trading binary option Pairs

There are a number of innovations in binary options trading that no longer simply make it about trading a single underlying asset higher or lower. Conventional binary options are making way for new ways to trade which are equally as straightforward but potentially much more rewarding. For those with some market knowledge and insight in to the short-term direction of price, features such as ‘range options’ as well as One Touch  allows traders to use this knowledge to spot profitable opportunities. In addition to this, another new form of binary options trading has emerged and is likely to become increasingly popular throughout the next few years.

Understanding Pairs options

This new form of trading is called Pairs binary options and allows traders to pit two assets against each other in terms of relative performance. This works in a similar way to traditional binary options but in the case of Pair Options trading a trader will, for example, select a pair of stocks and predict which one of these will outperform the other over a set period of time. The time period is flexible, as with normal binary options and the pay-outs are also similar with most Pair Options brokers offering in the money options up to 85% profit.

How to trade with Pairs Options

It is easy to see how Pair Options will be attractive to those traders who specialise in trading a single asset class such as stocks or currencies. Using their knowledge it becomes highly profitable to be able to spot those pairs where outperformance by one of these has a high probability. There are two ways to trade the relative performance of these asset pairs and this is provided by fixed pair and floating pair binary options. Fixed pair options allow traders to simply plot one asset against another over a fixed time period; usually a number of hours or over one day. Performance is measured from the start of the investment and at the expiry time the asset which has performed better will be determined.

Floating pairs, on the other hand, can run on for weeks or months and traders can cash-out of these options early. They are priced based on the start of the chosen time period, such as the beginning of a given day, unlike Fixed Pairs which measure performance from the moment that the trade is opened. For this reason, it is not uncommon to see highly divergent pairs offering huge profits of up to 500% to those traders who back the underperforming asset within the pair.

Where can I trade Pairs Options?

There are a number of emerging platforms which offer Pair Options alongside regular binary options and the demand for this feature is clearly growing. There is also a dedicated platform, StockPair, who specialise in offering markets for these options as well as the more conventional binary options.  With a huge range of asset pairs to choose from, Stockpair has quickly become the industry leader in Pairs trading and is a good choice for both new and experienced traders looking to profit from relative performance of stocks or currencies.

Getting started with binary options

For those unfamiliar with binary options trading, and the huge number of platforms available to trade, getting started with binary options can seem a bit daunting. Just the name alone can be confusing as the world of options used to be reserved for bigtime traders and involved complex transactions in stock market trading pits. Thankfully, options trading and binary options in particular has moved on quite a way since then and getting to grips with how to begin trading can be explained in just a few steps.

1. Understanding the concept of binary options

Binary options are purchased by investors who simply think that the price of an asset (e.g a stock, currency or gold) will be higher or lower than the current price in a set period of time. The periods of time are flexible so this could be in 60 seconds, one hour or up to one month. It doesn’t matter what the price does before this expiry time, but binary options will either expire ‘in the money’ or ‘out of the money’ depending on if you have chosen correctly for the price to be higher or lower at the precise moment of expiry.

2. Using a binary options trading platform

Binary options trading platforms are the web-based programmes where traders can invest in binary options. There are many of these companies available including some of the most respected in the industry.  Setting up a binary options trading account takes about 5 minutes and can be completed online. Once the account has been registered traders can deposit funds in to their account and begin trading binary options with real money. Alternatively, many binary options platforms provide a demo account which traders can simulate their trades until they feel confident enough to trade with real money.

Binary options platforms are considered to be one of the most straightforward trading experiences available. The interface of the most popular brokers provides the price of the assets that it offers (traders can view the asset list of their platform to see the full range) and a simple higher or lower option which when selected will allow binary options to be purchased.

3. Purchasing binary options

Binary options are considered one of the most sensible ways to trade due to the fact that a trader knows exactly how much they are set to win or lose before the trade is placed. Both the profits and losses in binary options are therefore predetermined as a percentage of the amount a trader is willing to invest. With a profit rate of 80%, for example, a $100 investment will return $180 if it closes in the money. Purchasing the binary options is very simple through the trading platform once an asset has been selected to purchase higher or lower. A window within the platform will allow the amount of investment to be entered and will automatically configure the level of profit and loss that a winning and losing scenario will offer. A timeframe for the expiry of the binary options can be chosen and the ‘strike price’ (the price that the options are purchased) will be set as soon as the binary options are purchased.

In order to add to the possibility for profits for traders many platforms allow traders to close their positions early or ‘roll-over’ (extend the life of the binary options) which can be very useful for both winning and losing positions.

Trading binary options using pivot points

Pivot points are one of the most popular ways of ‘mapping’ financial markets and create key psychological levels that traders observe for price action. Pivot points are formed as horizontal lines on a price chart, both above and below the opening price with those below described as support and those above as resistance. The calculation for these areas, which can also be used as key levels of both support and resistance for binary options traders, include the key data from a previous period of time. This data is typically the high, low and close of the time period, which generally includes that of the previous day but which can also be weekly or monthly. Pivot point calculators are available free on many websites and the levels that these generate can be applied to a price chart using the tools provided by most platforms.

How can pivot points be used in binary options trading

Once pivot points are applied to a price chart they provide a ‘map’ of price action which can be used by binary options traders in several ways. Since pivot points are used by a large number of traders, they tend to create areas where price action can occur and which traders can observe for profitable trading opportunities. One of the reactions when price reaches a daily pivot point may be rejection, known as support or resistance, which often creates reversal patterns on the lower timeframes. Binary options traders can then buy or sell binary options at these level in order to pre-empt that the pivot point will create a reversal once a reversal pattern of set of candlesticks has formed.

Continuation trades and pivot points

Additionally, the pivot point may be breached by the price and this would tell binary options traders that a movement beyond this is highly likely. Since pivots points are used as zones of support and resistance, where many traders place their orders looking for a reversal, the failure of these zones to act in this way can be used as a good signal to purchase or sell binary options in the direction of the trend. Many binary options traders will look for price to close beyond the pivot point before entering in the direction of the trend. This maximises the probability that price will not reverse at these levels and provides a good continuation signal.

Not all pivot points are made equal

Not all pivot points can be considered as equal. A typical pivot point calculator will provide a central pivot point and several higher and lower than this level. As the pivot points move further from the pivot point their influence often becomes more likely to create a short-term price reversal. This is because every market has an average range of movement each day and, when this range has been reached, the market orders placed at those zones furthest from the central pivot point become more influential on the price. Binary options traders can observe the effect of price at these levels before deciding if a continuation or high probability reversal is likely.

Using candlestick charts with binary options

Although binary options trading is one of the most recent ways to make large profits speculating on the future direction of markets, some of the techniques which inform our decisions have been around for a considerably longer time. Candlestick charting analysis, for example, has been used for literally hundreds of years with Japanese rice traders successfully using the method from as far back as the 1600’s. This time-tested technique is not only one of the most straightforward and effective ways to analyse price charts, but the fact that so many traders observe candlestick patterns makes it especially reliable.

Candlesticks can be powerful individually or in groups forming patterns

Candlesticks refers to the shape of the price bars on a price chart, forming a ‘body’ with the open and closing price of the bar and two ‘wicks’ showing the high and low of the bar.  The information that these candles individually and collectively convey, allow binary options traders to predict the short-term direction of the market. Successful trades can be taken when just a single candle suggests that a price reversal may be about to occur. These individual candles usually occur at the end of a move higher or lower, when the market is overstretched with buyers and sellers moving in to create popular reversal candles such as shooting star.

Candlesticks can be at their most powerful when a group of candles creates a pattern indicating a potential trade setup. This is where the age and reliability of candlestick trading can really be taken advantage of as the cyclical nature of financial markets means that these patterns will have occurred previously and traders know exactly what to expect following the pattern. There are many setups available for binary options traders to learn and these can be grouped broadly in to continuation and reversal patterns. Learning to distinguish between these will open up a world of potentially very profitable trades.

Why is candlestick analysis good for binary options traders?

Due to the fact that binary options trading is often simply about whether an underlying asset will move slightly higher or lower during the life of the binary options, candlestick analysis can be a particularly effective trading method. Whilst forex traders are consistently focused on the degree of the price move (i.e. how many pips), a binary options trader simply needs to side with the majority of traders in the market for a small movement in one direction. Therefore, reversal candlestick patterns, for example, only need to provide a momentary correction in the market rather than a full-on reversal, in order for the options to expire in the money. Similarly, continuation patterns formed on a candlestick price chart will only need to provide a short-term continuation in the trend, for the lifetime of the binary options, in order to be successful.

It is not necessary to learn every candlestick pattern available, but just focusing on two or three, and being able to spot these in live market conditions can help to improve the chances of success in trading binary options.


Trading binary options using a Moving Average crossover strategy

One of the first trading strategies that any new trader will likely learn is some variation of a moving average crossover strategy. The main reason why this is so popular with traders across all assets is that it is both reasonably reliable but ultimately very simply to execute. Binary options traders have successfully employed the crossover strategy in the same way that both forex and stock traders have previously done, allowing for relatively low risk trading and the comfort of a high probability that the trade will be successful.

How to set up the MA crossover trade

If keeping is simple is the golden mantra of trading then this strategy is just about as simple as it gets. The Moving average crossover strategy relies on just two individual indicators in order to generate higher or lower trading signals which can be interpreted as purchasing binary options either short or long. Since Moving averages can vary, choosing the number of bars to be incorporated in the moving average is critical to generating accurate signals. It is generally assumed that binary options traders will need a ‘slow’ moving average such as the 20 or 22MA and a ‘fast’ moving average for which the 5 or 6MA are considered good examples. When these two moving averages are applied to any price chart, on any time frame it is instantly recognisable that they often come together and move apart as the price rises and falls. Looking closely, the MA’s also cross over, with the shorter MA weaving in and out of the slower MA line. It is these crossovers between the slow and fast MA’s which generate the buy or sell signals.

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Applying the crossover strategy to binary options

For this strategy to be most effective, binary options traders are encouraged to use the crossovers of the 5MA with the 20MA in order to find potentially profitable trades. It is worth bearing in mind that a moving average is also a ‘lagging indicator’, meaning that it will often be behind the market and therefore the entry signal may occur after the market has moved higher or lower. Whilst it would be ideal to be able to enter the market before an initial move up or down, a quick look at any price chart will show you that price will often stay consistently above or below the entry price as the options expire in the money. Remember, unlike forex trades, we are not looking to find the perfect entry in order to gain as many pips as possible but only for the price to remain above or below the entry price until our options expire.

Tips to make the MA crossover strategy more successful

Some important factors to take in to account when trading an MA crossovers include choosing the correct time frame. Whilst the sixty second binary options may be the most exciting option, this strategy works best with the higher time frames such as the 30 minute or 1 hour charts. Additionally, waiting for a confirmed crossover will mean waiting for the previous bar to close before purchasing options in the direction of the crossover. This is helpful because moving averages are lagging indicators and will only become fixed once the current bar has closed.

Straddling as a binary options trading strategy

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.

Binary options Bollinger band strategies

Bollinger bands are one of the most popular tools for technical traders looking to find out when markets are overstretched and ripe for reversal. They consist of 2 bands forming a widening and narrowing channel around a central band. When the channel is wide, price is likely to be volatile and swinging between the outer bands and when these form a narrow tunnel price is likely to be moving sideways and with no particular direction.

How to apply Bollinger bands

Trading Bollinger bands with binary options requires a separate charting package to that provided by many binary options which are, to put it bluntly, often fairly basic. Luckily, almost all charting packages and online charts will have the option to apply Bollinger bands and most binary options traders will find these easy to come across without having to pay for any additional software.

The general idea behind Bollinger bands, and which can be seen from any historic chart, is that when price moves outside of either of the outer bands, it has a very high likelihood of retracing back to at least the central Bollinger band. This can be described as the market being overstretched and it is visible on any timeframe and all currency pairs, commodities and stocks.

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Applying Bollinger band strategies to trading

As we know, binary options have the beauty of not requiring traders to apply stop losses, unlike all other forms of trading. This gives binary options traders a very distinct advantage in highly volatile markets where wild swings in price can easily trigger a loss and wipe-out a trading account. For those who prefer to trade short timeframes such as the 5 or 1 minute charts, the more volatile the market makes for enhanced trading opportunities using short expiry binary options. Currency pairs such as the GBP-JPY offer these conditions for traders but are certainly not for the feint-hearted. This pair can swing wildly in either direction and, although trading without a stop-loss is great here, the unpredictability of the pair make quick gains preferable to longer term investments when using Bollinger bands.

Applying a lower risk strategy in volatile markets

A fairly conservative strategy when trading Bollinger bands within volatile markets would be to wait for a close outside of the outer band. Look back at how often price has reversed, even short-term, following a closure outside this level. Additionally, an excellent technique would be to apply an additional band with a slightly higher deviation than the first band (for example using a period of 50 and applying 1 and 2 deviations to two different sets of bands). Waiting for price to close outside the first band and at least touch the second would be an entry signal for purchasing binary options for a reversal.

What are the best market conditions for Bollinger band strategies?

The markets that traders should look for the lowest timeframes (such as 60 second binary options trading) should be volatile as we have already discussed. However, these markets should also be indecisive and without a strong trend. A strong underlying trend can result in price continuing higher or lower even if it moves far beyond the outer Bollinger bands. Indecisive markets will, on the other hand, see this as an overstretching of price and increase the likelihood of a short term reversal.

Binary options versus stock trading

Binary options trading has emerged as a leading industry in speculating on increases and decreases in the value of shares. Like its traditional counterpart, binary options traders can identify company shares and make long (upward) and short (downward) calls on future price movements. Unlike traditional stock trading, however, there is no actual transaction of equity and a binary options trader will never actually own any stake in the company during the lifetime of the options. Whilst this may seem detrimental to longer term value investors, it provides the short term benefit of a fast derivative market where binary options in a company may only be held for a matter of hours, or even seconds, before the position is closed.

Binary options favour short term traders

Binary options work on the basis of a simple, higher or lower call, with traders speculating if an option will expire above or below the current price when a deadline is reached. This type of speculation does not necessarily favour a long-term perspective on a stock’s performance and many binary options brokers provide expiry times for these options as low as 60 seconds. The benefit for this form of short-term trading, even against day traders of stocks, is that whilst the expiry times may vary, the levels of profit and the required capital to purchase the options remains the same. Stock traders typically have to increase their capital and leverage their positions heavily in order to ensure that tiny price movements generate profits. Binary options traders, however, will generally receive 75-85% profit on all ‘in the money’ options regardless of the amount of time they are held.

Binary options can be profitable in both volatile and flat markets

As stock traders are all too aware, the volatility of the market in their favour is the most important variable in generating short-term profits. Binary options, however, have the added advantage of simply requiring price to move fractionally higher or lower than the purchase price in order to provide a fully profitable return. Without actually owning the stocks, binary options also provide interesting markets derived from the underlying share price. This allows traders to utilise tools and facilities such as ‘One Touch’ and ‘range’ trading where options are purchased on bets of how far price may, or may not, move during a period of time. This allows for binary options trader to be equally profitable in both volatile and flat markets each of these features serving to allow for profitable opportunities to be found in both scenarios.

Binary options do not require a huge capital outlay

Although a significant number of traders day-trade stocks successfully, the necessity for a large account makes this a difficult form of daily speculation. Most retail stock traders will look to invest in a company’s performance over time, rather than buy and sell throughout the day. Binary options allow access to these markets for a fraction of the cost and also with high returns on all investments. Many binary options traders when given the choice of binary options and stocks will choose binary options because they provide profits of up to 80%. Finding this level of return on a single stock portfolio may take several years as opposed to several minutes.