Binary options trading involves risk and it is therefore in the best interests of all traders to be decisive in the trading strategies that they employ. Although no method, or system of trading, can result in 100% profitable outcomes for each, traders can use high probability methods in order to reduce the risk of exposing their accounts to losses. Due to the fact that binary options have an average ‘in the money’ profit of around 80% for successful trades, whilst losses are between 85% and 100% of the initial investment, trading strategies are required in order to provide traders with an edge to make money in the markets.

What types of trading strategy can be used?

There are broadly two categories of trading strategy that can be employed. The first of these is the least recommended but that which also requires the least amount of knowledge of either binary options or financial markets generally. This category is based on purchasing binary options based on betting models which are applied to binary options. The second category is perhaps the most sustainable for those looking to develop their trading skills and trade binary options on a longer-term basis. This second type of strategy, however, requires traders to learn techniques how to spot indicators of market direction and areas of strength and weakness. Needless to say, these skills can be very useful in developing a profitable and sustainable trading strategy.

Does the Martingale strategy work with binary options?

The Martingale strategy is a method of covering inevitable losses with larger winning positions. This is done by increasing the investment immediately after a losing trade until a winning position allows all of the previous losses to be recouped. As losing and winning positions are something which all traders have to deal with, Martingale tries to use the frequency of winning positions to off-set the losers. The problem with Martingale, however, is the possibility for a trader to experience several losing trades in a row, each one a larger loss until an account is depleted. Trading with Martingale therefore requires not only a decent trading strategy with a high frequency of winners, but also a very large initial trading account to allow for a large drawdown. For trading binary options, Martingale should therefore be used with caution.

Momentum and high probability trading

For all binary options traders, the skill to see when the market is highly likely to continue higher or lower, or when it may be ready to reverse is one of the keys to successful trading. These skills can be developed quickly and easily, ranging from learning how to interpret a single trading indicator to looking at price-action on a chart. The ability to spot the high-probability situations which signal that purchasing call or put options has a high chance of success is the real key to success. Indicators which can help with this are moving averages, stochastic and MACD. Combining these with price action analysis such as basic candlestick analysis and the application of Fibonacci retracements on a chart will provide an excellent basis to make profitable binary options trading decisions.

Touch trading with binary options is distinct from the One Touch options provided by many binary options platforms in that it allows traders to set their own strike price. Touch trading simply refers to purchasing binary options when price touches a certain level based on the price-action analysis signalling a high probability that price will reverse. For binary options traders there are several key indicators and tools which can be used to identify touch trade reversals and one of these methods is the combination of the Fibonacci retracement tool provided by almost all charting software and the stochastic oscillator.

Using the Fibonacci retracement tool in identifying a touch trade

The Fibonacci retracement tool is a powerful identifier of ‘natural’ retracement limits following a strong down or up trend. In order to increase the chances of a touch trade being successful the Fibonacci retracement tool needs to be applied to the swing high and low of a recent, strong up or down trend on any price chart. Following any strong trend, price will very often retrace and form a correction before continuing in the direction of the underlying trend. The Fibonacci tool will show the important levels for traders to watch out for in order to observe the price action that will indicate that the retracement is over and that price will move higher or low, allowing for binary options to be purchased.

Applying the stochastic oscillator to define the strike price

Stochastic oscillators are one of the most useful tools for binary options traders looking for reversals in the market. Typically, a stochastic oscillator will show a trader that when price has entered the ‘overbought’ area of over 70 on the indicator index, or the ‘oversold’ area below 30, the underlying asset is very likely due a price reversal.

Applying the information provided by the stochastic oscillator, the trader can follow the price retracement following a strong trend and look for both the stochastic and the Fibonacci tool to demonstrate a high-probability trade. The setup for this trade strategy occurs when the price retracement touches one of the levels shown by the Fibonacci retracement tool. If the stochastic oscillator corresponds by showing the underlying asset as within the overbought or oversold zones (depending if the retracement is up or down) then this confirms a reversal trade in the direction of the main trend. The confluence of confirmation by both Fibonacci and the stochastic oscillator proves a high probability that the retracement is over.

Timing of the binary options touch trade

Timing of this binary options trading strategy will depend on the time frame which the chart analysis is being undertaken. The general rule will be to allow the binary options as much time as possible before expiry which, on the daily chary, may mean up to 7 days form the strike price. On lower time frames it is important to consider that trading these reversals should result in a larger move in the direction of the trend soon after the touch has been spotted, allowing plenty of time for the binary options to expire in the money.

There are a large number of technical chart patterns which appear every day on all time-frames and which can be traded profitably by binary options traders. Several of these can be considered highly reliable and, when they occur, offer an excellent probability of purchased options closing in the money. In order for a trader to effectively identify these patterns, it is well worth having a decent charting package to run alongside the binary options trading platform. Binary options platforms are currently improving the quality of the charts that they offer but quality charting software such as that provided by Metatrader will allow traders to recognise these profitable patterns with ease.

Using momentum and the 1-2-3 setup

We all know that price moves with demand which forms ‘trends’ which can last from several minutes to several years depending on the chart time-frame. We also know that price can never move continuously in a straight line up or down because of the fact that those taking profits from the price movement and counter-trend traders will always create corrections, consolidation areas and reversals. Binary options traders can use these periods of consolidation as a gauge of the market momentum, to monitor if the trend looks likely to continue and to hop back on when this is confirmed.

The 1-2-3 setup is a classic example of a chart pattern which informs traders that the current trend has taken a breather before moving on higher or lower. The pattern is formed by price moving lower or higher in the direction of the general trend. It then stops, perhaps pulling back two or three bars as if a reversal is about to occur, before surging on past the recent low or high. The pullback often coincides with the 38.2% or 50% Fibonacci ratio of the previous move and the prices failure to move beyond these to form a complete reversal allows binary options to be purchased at the recent low/high as it becomes highly probable that the general trend will continue.

Trading setups using the 1-2-3 chart pattern at a new high or low

When price moves to a new high or low and a pullback occurs it is highly probable that one of two situations will occur. The first is as described above, with a 1-2-3 setup occurring as price surges higher/lower than the recent high/low. The second possibility allows binary options traders to take advantage of a failed 1-2-3 setup through an additional chart pattern.

An example of this is if price makes a new low and pulls back to the 38.2% Fibonacci level before moving towards the recent low. However, instead of moving below this to trigger the 1-2-3 setup, it again moves higher towards the 38.2% Fibonacci level a new high probability trade setup has formed. If a price bar moves beyond the 38.2% level it will form a W shape on the chart and suggest a double bottom reversal has been formed.  Purchasing binary options to expire beyond this level is a high probability due to the fact that the downward trend is likely to be over and a reversal is underway.

Trading binary options successfully obviously requires a strategy which has an ‘edge’ and can be proven, over time, to perform successfully against simply selecting random higher or lower options. Equally important, however, is the way that a trader psychologically approaches the trade. Even the most successful investors say that in order to succeed a trader needs to master the psychological aspects of trading binary options. Initially, this can seem as though it is the simply a case of being executive in trading decisions to invest, or not, in any trading opportunity. However, there are other fundamental aspects to the psychology of trading binary options which also have to take into consideration once the options have been purchased.

Acceptance of being a binary options loser

Beyond the simple decision to invest in a trading opportunity, using a chosen method or strategy, a trader will need to consider the worst case scenario of facing a loss. Luckily, for binary options traders, a price movement in the opposing direction does not increase the losses that will occur and which have already been pre-determined before the purchase of the options. This essentially means that a trader should not be so emotionally attached to the trade as watching a forex trade accumulate a huge loss. Nevertheless, watching price move hopelessly in the opposite direction before expiring out of the money can initially be a depressing scenario for all new traders.

The temptation to try to claw this loss back with an unplanned gamble shortly after the binary options expire out of the money is a classic response which also often ends in failure. Rather than allowing it to determine your emotional state, a trader should instead take the loss as one of many which all methods, setups and systems will endure. Rising above this, knowing that the method or system employed is a winner over the longer term, will improve a trader’s ability to trade both rationally and profitably although this is often easier said than done. Those traders who are consistently successful understand that losing will be frequent, as long as the winning occurs even more frequently.

Temptations to use broker tools

Most binary options trading platforms have introduced new tools for traders beyond the traditional binary option format. Although many of these are marketed as tools to ‘assist’ the trader, some of these have been designed to take advantage of the psychological elements of binary options trading. One example of this is the ‘close early’ feature offered by many platforms and which allows binary options traders to expire their options for either a partial loss of profit. Although, on the face of it, this seems like a very useful tool, it creates a psychological dilemma for traders who are holding profitable positions.

Closing early taps in to the uncertainty and fear of incurring a loss from a profitable position but at the same time undermines both the trading strategy employed by the trader and the profit-to-loss ratio over time. If all trades are closed before reaching their predetermined profit target then it is very likely that the value of in the money trades will be significantly lower than out of the money losses. Platforms already know that by offering the temptation of early closure will require that a trader will have to also increase their frequency of winners in order to be profitable. Over time this will almost certainly benefit the binary options broker over the trader.

High probability trading setups happen each and every day for thousands of binary options trader who are able to spot these profitable opportunities. Both fundamental and technical traders are able to look through the noise generated by the markets to define their entry the best expiry time for their options. Whether a trader basis their analysis and rationale on a certain news release, chart pattern or support level, those who can develop their skills to recognise these increase their potential to become successful long-term binary options traders. By choosing one particular setup, and combining this with the patience to wait for it to appear, a trader can develop profitable trading habits.

Chart patterns and trading setups

Looking for high probability chart patterns is one of the most popular methods that successful binary options traders make profits in the markets. Just learning a handful of technical patterns and their meanings takes little more than a couple of hours but can be incredible useful for many binary options traders. Of the most popular, the so-called ‘reversal’ patterns which tend to indicate that price is about to swing in the opposite direction to its current trend are often some of the most profitable for binary options traders. These can be easily researched for free on line and include patterns such as ‘double tops and bottoms’, Head and shoulders and trend line breaks. Within a few minutes of learning how to spot these patterns, traders will be able to apply these to any price chart and see where the profitable opportunities lie.

Spotting profitable news trading opportunities

How many times have you been watching the markets and price suddenly leaps in one direction or another? The chances are that some significant information has hit the market and caused a huge demand to either buy or sell the underlying asset. News traders can position their binary options trades based on this news and those who are both quick to react and anticipate the direction of major news releases can generate substantial profits. Even for those who cannot purchase options at lightning speed, the momentum generated by the news release often provides time for traders to position themselves favourably for the market correction once the ‘news spike’ comes pulling back towards where it began. For binary options traders, the market correction following such a leap in price, even if only very subtle, can provide a quick 85% return on the initial binary options purchase.

Support and resistance offer high probability setups

Binary options traders have the distinct advantage that they can bet on price moving higher or lower without the necessity of a stop-loss. For support and resistance trading this can be particularly useful in betting on the probaility that price will reverse at these points. Spotting a strong support level, for example, allows binary options to be purchased at, or close to, this level in the opposing direction. The probability is that the support will be maintained and the options will expire higher than the strike price as price bounces up. However, if price crashed through this level, there is an even higher likelihood that price will return to test the old support level (which will now have become resistance to moves higher). When a support or resistance level setup fails, it very often provides the opportunity to close early at a minimal loss, or simply hedge the position in the opposing direction when price returns to the original strike price.

Unlike tradition forms of trading, binary options has the additional benefit of allowing traders to hedge their position. This allows binary options traders to purchase options both, long and short, on the same underlying asset. Whilst many may question how this form of hedging can be considered profitable, given that the likelihood is that only one position will close ‘in the money’, there are several ways in which traders can use this technique to both preserve capital and take advantage of profitable opportunities.

Preserving capital by hedging a position

Traders can use hedging a defensive method to prevent against losses where binary options have a very low likelihood of expiring ‘in the money’. Purchasing binary options in the opposing direction to options already purchased, as close to the original entry price as possible, can be a better way to preserve capital than using the close early function provided by many brokers. Positions which are hedged in this way will generally have one position close in the money and the other out of the money, allowing losses on the original position to be recouped.

Using defensive hedging techniques to increase profits

Using defensive trading techniques is only one way in which hedging in binary options trading can be effectively used to protect trading capital. Hedging can also be used to ensure profits on some of the highest probability setups and to effectively neutralise the risks inherent in binary options trading.

A good example of an opportunity to look to hedge a position is through trading range breakouts. Typically, when price spends a period of time within a close trading range, binary options traders will look for price to ‘break out’ in either direction to provide high-probability trading opportunities. Purchasing options in the direction of the breakout, using the positive momentum created by price moving out of the range, is ideal for short-term binary options traders to generate profits. However, whilst these breakouts are often genuine, they occasionally form a ‘false breakout’ where price reverses shortly after appearing to break out of the trading range. Binary options traders, however, can mitigate the possibility of losses by hedging their original trade when price reverses and returns to the initial entry price. This effectively neutralises the trade or at least reduces losses on those break out trades which fail. The fact that break out trades offer a high probability of success limits the requirement to hedge these but it offers an excellent insurance technique against losses in these trades.

Good entries are critical for hedging positions

Hedging offers an excellent opportunity to cut losses and run profits for binary options traders, however, it still requires that binary options are purchased as close to the strike price as possible to avoid the risk of both positions closing out of the money. For this reason, hedging is perhaps most effectively used when a momentum trade begins to turn negative and a trader is willing to take immediate action to avoid incurring losses.

Binary options have become one of the most popular ways to speculate on market price movements across a vast number of underlying assets. The growth in its popularity, from a fairly specialised trading derivative to one of the most popular investment tools used by both new and experienced traders is down to the potential for high profits to be gained from very short-term trading. Binary options therefore not only offer access to hundreds of different underlying assets but also the ability to make an average of between 75-80% return on an initial investment in as little as 60 seconds. The simplicity that binary options offer traders is also a major factor why many are leaving conventional forex and spread betting brokers to trade ‘all-or-nothing’ binary options. In their most basic form, binary options require that a trader simply speculates on whether the options will expire higher or lower than the current price, thus offering a very attractive number of profitable trading opportunities.

High returns even in slow markets

One of the most obvious advantages of trading binary options over any other form of trading is that they require very little market volatility to produce highly profitable outcomes. Trading currencies or equities, by comparison, require that markets rise or fall by a certain number or points in order for the trade to be sufficiently profitable. The profit and loss of these trades are determined by how far away from the purchase price the market moves and a certain degree of volatility is preferred. Binary options, however, only need price to move a single point higher or lower than the purchase price in order to be deemed successful or unsuccessful. This means that, even in the slowest of markets, profitable trades can still be made with returns of up to 80% of the initial investment.

Removing the necessity for stop losses

Similar to not needing market volatility in order to result in binary options expiring profitably, they also do not require the distraction of a market stop-loss or take-profit level. Basic binary options only have two, pre-determined, risk and return rates for each investment, these can neither be increased nor decreased during the lifetime of the binary options. The amount which can be lost is therefore s fixed as is the profit that can be gained. The advantages of this are that traders no longer need to focus on where to place (or extend) their stop losses and take profit levels. There is also no way that emotional decisions to extend risk during a trade can be taken which makes binary options particularly attractive to new traders.

No spreads with binary options trading

Unlike conventional forms of trading, including forex and spread betting, binary options trading does not include spreads. The entry and exit price will be exactly that quoted by the trading platform, and traders will not be required to pay the brokers the spread either side of this. For many traders, this is considered an excellent advantage and reason alone to trade binary options rather than other forms of trading. Removing spreads also allows traders to speculate on price movements during overnight and volatile periods which are traditionally times when spreads are wide and make trading riskier and difficult to profit from. Furthermore, it also removes the default negative position that all trades open with due to the fact that the trade must take account for the slightly worse entry price that spreads create.

Timing is not only the most important factor in binary options trading due necessity for the expiry times of the options to be precise; it should be considered in a number of diverse ways. By looking at timing in three distinct ways can assist new traders in their analysis of the markets and in pinpointing potentially profitable opportunities. Although these simple tenets seem fairly basic, including them as part of binary options trading analysis will help many newer traders form a cogent trading strategy.

Choosing the time of day and active binary options markets

Several binary options markets run 24 hours per day, including currency and commodity markets. This makes the decision of when to trade somewhat more complex than traditional markets offer. For those with the luxury of actually choosing when they can trade the dilemma is even more pronounced, and the temptation to trade less profitable market opportunities is ever present for this group of traders.

Choosing a time to trade will depend largely on geography but it should primarily be dictated by the existence of market opportunities. Pinpointing those markets which are going to offer a trader the largest number of reliable binary options setups is essential. This will initially avoid the frustration created by slow and inactive markets resulting in poor trading decisions. The available markets which are active and open at the time of trading should be the key focus. If this is outside the hours of the local markets then it is well worth researching which markets are globally the most active both before and after the local trading session.

Time frame and which charts to analyse

For technical traders, choosing a time frame to analyse binary options trading setups can be a bit of a headache. Whilst some experts recommend moving through several different timeframes and for these to be in agreement with one another, it is true that these opportunities can be few and far between. Far more important is to really get to know a specific timeframe and to keep a periodic eye on two higher timeframes in order to avoid trading in to a disaster area. An example of this for sixty second binary options traders may be to periodically look at the 5 minute and hourly timeframes in order to avoid key areas of support and resistance which may not be visible on the 1 minute charts.

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Timing the entry with binary options

If the expiry time is considered the most decisive part of binary options trading, then a good entry is the most important factor. Every trader has experienced the feeling of spotting a great opportunity only to purchase options at a poor price and resulting in a loss or a needlessly nervous expiry. One technique to help improve entry timing for binary options traders is to look for entries on higher time frames and pinpoint the entry on a lower chart. Alongside keeping an eye on the higher time frames to avoid trading in to poor areas, viewing these charts can also provide a good opportunity to get involved in powerful setups which will dominate the smaller time frames in the near future.

Binary options traders can therefore spot a setup on a higher time frame, and refine their entry using the lower time frames in accordance with this. An example of this would be trading the “pin bar” candlestick reversal pattern using the 1 minute charts. Looking for agreeable trades on the 1 minute chart in the direction of the trade setup on an hourly chart will substantially improve the likelihood that the trade entry results in a positive outcome.

There are a number of available trading tools to help binary options traders to increase their probability of success. Of these, perhaps the most important of are provided directly by the trading platforms themselves. These include the close early and roll over features which can be equally helpful for traders in situations where trades are looking both good and bad. Additionally, the relatively unique ability for traders to hedge their positions is also a key feature which can be exploited by those who feel that a trade is likely to move against them.

Indicators and binary options trading tools

Many new binary options traders naturally look to the wealth of charting indicators in order to enhance their trading strategies. The vast an exciting number of these indicators not only enlivens charts but also creates the appearance of reliability with any binary options trading strategy. Indicators can certainly improve trading profitability and some of the most reliable strategies use key indicators such as Oscillators, Moving Averages and Bollinger bands. Additionally however, the use price action techniques to spot profitable trading opportunities can also be successfully employed within technical trading strategies and using reasonable charting software such as Metatrader.

Using the Close Early tool

However, many traders initially overlook the tools available through their platform. These include several helpful features which can be very useful in difficult trading situations and can also help a trader in improving their long term profitability. The first of these features is the ‘Close early’ function offered by many binary options trading platforms. Close early allow binary options to be expired before their pre-agreed time and is especially useful for traders who fear that their position may be turning negative.

The costs of closing early are a lower percentage return, depending on how long the options have to run and also where the current price is relative to the strike price. The close early feature can essentially prevent the terrible feeling when a positive trade moves in to negative territory shortly before the binary options expire. It can also be used when a trade is beyond repair and cutting the losses of these options allow the trading capital to be invested elsewhere.

Using the rollover tool

Another feature which can be very useful as another powerful tool to binary options traders is the Rollover feature. This is perhaps most effectively employed by those with some experience of trading with the idea being that it allows the expiry of the options to be extended. Unfortunately, this is not a free tool and requires an additional investment on top of the original which can push losses much higher than the original trade would have incurred. However, for those trades which still appear to be strong, yet are likely to end up negative without extending the options this tool can potentially turn losses in to profits. A reasonable degree of confidence is required to extend the options but, if the criteria for the binary options trading strategy is still relevant, this tool can allow critical flexibility in the timing of the trade.

Hedging in order to lower trading risk

Finally, a tool which is not promoted directly by binary options platforms, but which is available to all traders, is the ability to hedge a trade. This feature is unique to binary options and allows traders to have more than one position open at any one time. The rationale for this technique is to limit risk when taking high-probability trades such as break-outs. The hedged position can effectively neutralise the risk should the trade appear to fail. This way, traders can let the profitable trades run whilst those which may threaten to reverse can be neutralised relatively easily.

The are several key advantages of purchasing binary options as opposed to other forms of trading or  investment which goes some way to explaining its rise in popularity over the past five years. This starts with its simplicity in comparison to other, more complex forms of investment but also includes factors such as the ability to easily control risk, increased flexibility for traders with limited timetables and, of course, the potential profits to be made.

One of the simplest way to trade currency and stock markets

In terms of the obvious simplicity of binary options trading, this should not be understated. For both new and highly experienced traders, binary options offer a straightforward interpretation of the market; simply higher or lower. The trader can apply of their analytical powers in to the two straightforward decisions of the length of time to allow the options expiry and whether this will be higher or lower than the strike price at the moment of purchase. Traders will, of course need to also decide on how much to invest but this is removed from the complex and potential hazards of trading on margin as many new forex traders experience. The rules for purchasing binary options are far easier than this with the initial investment being the full investment amount. The value of this investment does not rise or fall in the same way that stock or forex trades might and binary options traders therefore know exactly how much they are set to lose or gain before the trade has even been placed.

Binary options can provide better risk management for new traders

An additional feature of binary options trading which makes it more attractive than forex and stock trading is the ability to manage risk much easier. As we have already seen, binary options provide a predetermined level of risk before the options are purchased. This is typically between 85-100% of the initial investment and does not change regardless of the degree to which price moves either side or the purchasing price. Stop losses are therefore not required in binary options trading and along with this comes an instant removal of the risk of adjusting stop losses of failing trades as is very common for inexperienced forex and stock traders alike. Furthermore, sudden market volatility will not affect the level of losses in the way that a price spike can often cause forex traders to incur large degrees of slippage in the execution price. For many who prefer risk as quantified, binary options offers this as a distinct advantage over other forms of investment.

Binary options offer flexibility outside market hours

For traders who are not able to trade during market hours, binary options offer a great way to trade during the quieter trading sessions and even at weekends. The reason that binary options are popular outside of market hours is twofold. The first reason is because traders do not pay spreads on purchases of binary options which, in slow moving markets, are unattractive and risky. It is also worth noting that spreads for overnight markets are also far wider on currency pairs than during active market hours. The second reason is that binary options traders only require the price to move one point higher than the strike price in order to be profitable, whilst currency and stock traders rely on price moving by a larger degree in order to be equally profitable. This clearly favours the use of binary options in quieter trading times and for trades which may only move one or two ticks higher or lower. Binary options therefore provide an advantage for those seeking flexible trading and who may not be able to trade during normal market hours