How to Trade Binary Options

There are many different great ways to trade binary options, and most of them are simple and easy to implement, there are some more advanced techniques that deal with hedging and arbitrage, but as far as making direct trades, the process is straight forward. There are some basic tips that every newcomer to the binary options trading and trading in general should know. By following these simple tips you will immediately improve the odds of winning.

Be a Specialist!

Just like trading any other instrument, the trader has to choose a specific market to trade rather than change markets all the time. Sticking to few markets, or just one market will enable you to focus much better, rather than running from one market to another, having little or no insight into the underlying forces that move that market.

Choose a Broker that Meets your Criteria

Choose a binary options broker that offers the right type of binary instruments and trading tools. For example, if your chosen market to trade is EUR/USD, choose a broker that offers most flexibility and widest range of instruments on this market. Don't just listen to the advice of another trader for choosing a broker, unless this trader implements the same trading strategies you want to implement. For more info check our How to choose the right binary options broker article and also our binary broker comparison page.

Be Realistic on Time Frames not Price Targets

Due to their exponential time decay pricing structure, binary options lose their value very rapidly as expiry time approaches, this can result in a big, often unnecessary loss in the option's value. Smart traders focus on their trades, they know they can be right on market direction but wrong on the timing! They are very often wrong on the timing! So they decide on market direction, but then choose expiry dates that are longer than the trade seems to require.

For example: They expect EUR/USD to rise 100 pips over the next 2 hours, it seems very probable, and it is most profitable to choose a 2 hour expiry time. If however the market stays flat for 2-3 hours, which is often the case, then the option with the 2 hour expiry time will lose a huge percentage of its value. Probably some 80% - 90% of its value will be lost as expiry approaches and this prevents you from possibly closing the trade early. If instead you chose a longer expiry time, 3-4 hours out, the payout will be less, but you will have the flexibility to close the trade early if necessary, at a smaller loss, possibly 50% - 60% rather than 90%. You can then reassess the market, and if the trade criteria are still in place, you can then buy another option with a shorter expiry time and bigger payout.

This is true on longer time frames and bigger market moves also, if you believe the market will hit a certain price target in say 15 days, then you should choose slightly longer expiry times. Doing so will enable you to recover much of your losses when the timing goes wrong, but if the market moves in your favor, even halfway through, you still stand to make a significant profit. So there's nothing wrong expecting a large price move, but you have to be flexible, don't make the assumption that because the last market move took X days to complete, the next move will also happen in as many days, more often than not it doesn't!

Hedging Trading Techniques

Hedging techniques are complicated and often hard to evaluate, traders usually implement hedging strategies to hedge longer term trades using shorter term trades. For example, a trader believes that a currency pair will rise overall, over the next week or next 10 days. The trade seems ok so the trader buys a binary option specifically for this purpose, but then on the second day, suddenly the market breaks down and breaches an important support level. If the trader believes that there will be one more big down day, they can hedge the downside risk using a daily binary options or one touch type option and profit from the expected down day. As the market later recovers they stand to profit from the original trade as well.

Don't Try to Be Exact on Market Direction

Nobody really knows where markets will go tomorrow, even seasoned traders are not sure of market direction! Markets cannot be predicted with accuracy, especially during economic report release times, when volatility is high and confusion can fool many traders. Beginner traders are strongly advised to stick to generally longer term trades and longer time frame objectives where things are somewhat clearer!

Conclusion

Markets are tough to trade and very hard to predict at times, many brokers will entice you into high frequency trading, and whilst this is not always a bad thing, beginners should not get involved into very short term trading such as 1 hour, 2 hour trades. This kind of trading tends to become impulsive and leads to wrong, false trend following practices. Beginners are better off in longer term trading, on any time frame where they feel emotions are out. On the other hand, there's however very short term trading such as on 1 min, 10 mins time frame etc, such as scalping. This tends to be a directionless kind of trading, and can be implemented by beginners in an emotionless disciplined way. But if you are thinking of attempting to predict market direction, remember to look at or beyond the 4 hour chart! Anything shorter doesn't work!

Most profitable binary option traders and investors are happy with the risk reward ratio of these instruments and don't want to go back to trading the spot markets. Remember your risk is limited and predetermined, it is truly limited risk trading. That is a huge advantage, the only risky part is with time decay, and knowing how to manage it right.

Risk is inherent in the financial markets, and this is what creates profitable opportunities. Knowing how to embrace risk will enable you to win serious money when others can't. Remember to be a specialist, and study your market from different angles. In the markets, even what is considered by many the most improbable scenario, the most unexpected price movement, can and will happen! It is this disagreement among market participants that creates liquidity and the markets themselves. If we all agreed on market direction, there would be no market. Finally, always remember that nobody knows where markets will go, there's no such thing as 'big boys' or institutional know-it-all investors... just because a huge, very successful investment bank buys the Euro it doesn't necessarily mean they expect it to rally, they might as well have invested in the US Dollar for good, and they are merely hedging temporarily by investing in the Euro. So learn to question every investor's actions, no matter who they are! There's a lot of misinformation out there, such as the interpretation of the C.O.T (Commitment of Traders) report, and the actions of huge investment banks, well be assured that these reports are just as ambiguous and uncertain as a coin toss is... you can perfectly become a profitable trader or investor using your own judgment without copying anybody else.

Next: How to Choose the Right Binary Options Broker