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- The grail myth
- Tactics and strategy
- Money management as an integral part of tactics
- Psychology of market trading
- Strategies. From simple to complex. Correlations.
- Algorithm for preparing and implementing the “correlation” strategy
- Three in a strategy in one Bollinger bands indicator
- Countertrends – learning to make money on corrections
- Trading strategy
The specificity of binary options in their style of execution and terminology is similar to bets in a casino or the children’s game “Heads-Tails”. Therefore, a newbie entering this market does not consciously seek knowledge, scrupulously selecting trading instruments, but simply tries to “poke” the arrows up or down, adjusting the amount for which he buys binary options, since the simplicity of the platform allows you to quickly understand the functionality of trading settings … Is this tactic justified?
It is not known, but I would like to object for at least two reasons. The first reason, the market and binary options are not casinos, but tools. Need the adrenaline of uncertainty? Find online casinos online. The second follows from the first. The market puts tools in hand, drawing an analogy with a shovel: you should not dig the ground in different places in an unsuccessful search for treasure, you should learn how to cultivate a garden, plant and harvest. This is certainly not “crazy gold of the treasure”, but you will always be well fed, even in “hungry years, taking care of the bins in advance”.
The grail myth
The biblical meaning of this word can be found in Wikipedia, the role of the word in trading can be found by throwing the phrase: “Ok Google, how to trade binary options?” This article does not contain grails, they are not on the market by definition.
Beginners are taught tales about “cherished win-win strategies”, but without trading experience, you should understand that the market price reacts to any event instantly, the events themselves are unpredictable. All force majeure, natural disasters, decisions of Governments and Presidents, etc. impossible to predict. There is not a single psychic show that predicts the value of certain market assets. True, there are many analysts who believe that they can do this. However, this is another topic.
Tactics and strategy
Do not worry about the general availability of the strategy , the trading results themselves will vary. In addition to the strategy, there are tactics that, with the right approach, help a trader to improve trading results or worsen them.
A strategy is a set of general rules for entry and exit . There is a simple exploitation, to a certain extent, of standard market situations from the “As a rule” category.
For example, as a rule, quotes of a market asset that opened with a price gap predict a price return to this area. In traders’ slang, this is called “closing the gap.” The gap gives a signal to open a position in the opposite direction. Tactics allows you to determine a specific entry point and time to hold the position. Significant or force majeure events can make the resulting gap irreversible. Traders usually rush to get rid of an asset after some negative event, preferring to turn the investment into cash. The tactic takes into account the peculiarities of the formation of a gap, analyzes the reasons that caused the gap, assesses the strength of their impact on the market, setting filters for entering a position.
Conclusion: the strategy assumes the direction of entry / exit, the tactics gives the final “go-ahead” to the deal, indicates the place and time, specific levels of entry and exit.
Money management as an integral part of tactics
Money management is a loss control, determination of the amount of funds allocated for a trade, designed to help survive a series of unprofitable trades, staying “afloat”, wait for a profit that restores a deposit, shabby from past losses.
Binary options inherently have built-in money management. Before the start of the transaction, the trader knows about the loss of the option value in the event of a negative development of events. The whole point of money management of binary options is to determine the number of losing trades in a row when using a certain type of strategy. For this series of losses, a reserve is allocated from the total amount of the deposit, which is twice the expected loss (more, but not less).
What happens if you don’t? The market will take all your funds. Psychologically, the situation will be aggravated by the fact of realizing your awareness of the possibility of such a situation and the presence of a solution to how this could have been avoided.
How to determine the number of losing trades in a row? Before the start of trading, conduct tests of the strategy on historical data. Take at least 10,000 candles (time intervals of quotes) of the selected “working” timeframe.
Psychology of market trading
The financial result of binary options trading is dynamic, developing in both positive and negative areas. This inevitably causes in us a feeling of excitement, greed, fears of losing a deposit, excessive emotional euphoria from positive results. The emotional color changes with the change in the result as you observe the deal, from its beginning to the end. At the end of the working day, a trader can be completely mentally and emotionally exhausted. This topic, described in many articles, will be limited to a few practical tips.
Do not open the trading terminal unnecessarily and do not hang in it. Having made a deal, look at the end of the financial result, you do not need to observe it during the course of the deal, you cannot move the asset quotes with your eyes.
The second tip follows from the first. Use notification systems (alerts) to enter a trade, do not continuously monitor the market situation while waiting for the moment. The probability of missing a signal will be higher than “following the moment of entry”. When a signal appears, after long observations, the trader develops a fear of entering a position, it seems that the price is too low or high, etc.
The third tip is to hide the overall financial result from your eyes. The sight of the overall financial result leads to unnecessary emotions.
Fourth tip. The financial attractiveness of high-frequency trades and turbo options for up to five minutes is purely theoretical, think, can you experience such emotional stress every minute? The frequency of trades dissipates accuracy, every third / second trade will be unprofitable, there are a series of unprofitable trades. At the same time, you must constantly keep composure and concentrate, any mistake will be paid for by you from your own pocket. Adding your erroneous, unprofitable trades to the low percentage of profitable trades prevalence, the positive overall financial result will be questionable. Having spent so much effort, having made such a number of transactions, through your own fault, you simply “fed the broker” all day. Choose a comfortable timeframe and a small number of signals. The increase in the number of transactions will come with experience.
Binary options transactions are performed by adult traders, already established people. Why is it necessary to talk about discipline? It would seem that difficult to follow a set of strategy rules with filters and tactics features? Practice shows: a high percentage of traders face such difficulties. The market does not forgive any mistakes. Including your own opinion in the strategy formula, remember: at best, out of ten completed trades, seven will be successful, which means that in this series you have the right to make only two mistakes. You trade to zero. Was it worth it then to start a trade with such results?
The discipline of trading binary options is to unconditionally follow the signals of tactics and strategy. Having a ready-made strategy in hand, before launching it, the trader performs tests on historical data, developing tactics along the way, determining money management, getting “target control figures” to track the discrepancy between the results of real trading on the strategy and test ones. Such a comparison is necessary to avoid the effect of “developing” a strategy. Nothing lasts forever; over time, the strategy can become unprofitable. To catch this process in time, change the strategy or optimize – a comparative analysis with test values will help. Trading on tests in one key, in reality adding his “intuition”, a trader will not be able to determine the failure of the strategy. However, if you trade by intuition, why did you need a strategy then?
Strategies. From simple to complex. Correlations.
As a beginner, looking to generate additional income from binary options trading, you have to find a way to extract this income from the market. In addition to choosing an exchange asset for which you will purchase binary options, you will have to choose an earnings strategy that makes it possible to correctly predict the prices of the selected asset.
The market prices displayed on your trading platform flow in a continuous flow like a broken curve. How can you analyze a continuous stream of prices?
The book Memoirs of a Stock Market Speculator describes a similar analysis dating back to the early 20th century. Scalpers (traders with a large number of intraday trades ) use the analysis of the tape of all trades to this day, slightly complicating and adding volume analysis. For a beginner, this strategy is difficult, let’s move on.
The Japanese have come up with a more simplified representation of the streaming trades curve, representing it as a candlestick. In this case, the flow of quotes is taken at a certain point in time – the timeframe, let’s say for five minutes, the body of the candlestick contains the distance traveled by the quotes from the price of the beginning of the range and the price prevailing at the end of five minutes, the tails of the candle end at extreme values reached by quotes in five minutes, the entire candlestick from the tip of the upper tail to the end of the lower one contains all the price fluctuations of five minutes.
Considering the importance of visual perception in the used “correlation” strategy, let’s leave the display of quotes of exchange instruments in candles.
Let’s choose the kind of markets for the forthcoming work, guided by the numerical characteristics, which are determined by the amount of funds invested in these markets. Markets are stock markets, securities are traded on them, commodities, offering the opportunity to trade from energy sources, metals to agricultural products, derivatives, various derivatives for indices, the same securities and raw materials, currency pairs .
The Forex currency market operates 24 hours a day, five days a week, and is the leader in terms of the turnover of funds circulating in it among all other types of markets. Without checking, without experience and knowledge in the field of currency speculation, having reasoned logically, any person will put the euro-dollar pair in the first place in popularity in the foreign exchange market and will be right. Pairs, the base or numerator of which is the US dollar, having the status of reserve currencies, are called the major group, being considered the main pairs. This group includes 7 pairs, which together provide up to 70% of the intraday turnover of the foreign exchange market.
Correlation is a feature of the prices of one exchange-traded asset to follow, repeat changes in the quotes of another. This can be due to the relationship of the spirit of assets. In our case, the selected currency pairs include the US dollar. The strong economy of this country has a significant impact on the global economy with its macroeconomic news , causing the correlation of movements in all currency pairs measured in US dollars and national currencies.
We use this phenomenon for our trading. Our strategy is simple, we use the previously voiced formula – “As a rule …”, the movements of the pairs should coincide, the divergences will serve as a signal for a trade, depending on the type of divergence, the trade will be carried out in the opposite direction.
Algorithm for preparing and implementing the “correlation” strategy
We select a leading and a driven pair. The leading pair should be a liquid pair (with a higher trading volume). In our case, this is EURUSD. Determining the instrument to be traded, the GBPUSD pair is in second place in terms of turnover. We will make transactions by purchasing binary options on the British pound for US dollars. The type of option suitable for such a strategy is classic higher / lower. A profit will be provided to us by a situation in which at the end of the option’s validity period the price will be higher or lower than our entry level. There are options with the condition – “the price above” is called “call”, below – “put”. The working timeframe is limited only by your imagination and terminal settings, but remember about the psychological aspects described above.
The simplicity of the binary options trading platform presupposes conducting technical analysis of charts “on the side”. Sometimes binary options brokers themselves provide this opportunity . We will use the common trading terminal Metatrader 5 (in the fourth, everything is the same), by connecting two charts EURUSD and GBPUSD, we will put candles in a 15-minute range.
Having seen the signal (1) of a discrepancy between the movement of the EUR \ USD quote and the behavior of the GBP \ USD price, open a deal in the direction of the leading pair. Since EUR \ USD has a positive candlestick, and the GBP \ USD quotation has fallen, we buy a binary call option for a period of 15 minutes, after which we fix the profit (2).
When using inverted pairs such as USD / CHF, the correlation will be inverse.
Not only currency correlations are possible, but also industry ones, metals correlate with each other, a strong correlation is observed in gold and silver, an example of an intersectoral correlation is oil and the USD \ RUB currency pair (inverse correlation).
The correlation coefficient is usually denoted by the letter r, calculated as the ratio of the product of measurements (n) of the total differences in prices of two assets a and b to the square root of the difference between the products of their squares.
The value changes from -1 to +1, a negative value indicates an inverse correlation (the example is given above), with values above 0.7, the asset relationship is considered strong. For the “purity” of calculations, the daily closing prices of the compared assets are usually taken. There is enough information on this topic on the Internet, the formula is given for reference, the correlation can be calculated on any modern calculator.
Three in a strategy in one Bollinger bands indicator
After dividing the continuous flow of prices into discrete values of the opening / closing prices of Japanese candlesticks and extreme values of changes in quotations, in this period it became possible to apply various methods of mathematical analysis to transform the quotes chart into a function of these digital values. The functions themselves were called indicators, which, when superimposed on the graph of interaction with quotes, made it possible to predict further price behavior.
Technical indicators are tightly incorporated into all trading platforms, strategies are developed on their basis , robots are programmed. The evolution of indicators is not over, the mathematical analysis used is becoming more complex, indicators are emerging using methods of nonlinear mathematics and probability theory.
The standard set of indicators for trading platforms includes a package of about 30 items. They include the Bollinger Bands indicator , which is a simple moving average line and up and down standard deviations. Thanks to them, the indicator has become attractive for use in binary options trading strategies.
By itself, the mathematical standard deviation taken from the theory of probability, is very useful for the analysis of time series, which can represent the price using the closing prices of timeframes. Between the upper and lower Bollinger bands is the area where the price is likely to be located. But if it goes beyond this area, then, as a rule, something happened and the price will continue to move in the direction of the breakout .
Algorithm for pre-trade preparation:
– Choosing instruments, there are no restrictions, recommendations relate to gaps at the opening, such instruments as stocks, indices, etc., with a trading session duration of 12 hours or less. Gaps spoil and blur the indicator readings, try to trade after one or two trading hours.
– We select a timeframe, the recommended interval is at least fifteen minutes, which allows us to maintain a balance of accuracy and the number of signals.
– Install the Bollinger indicator on the chart with the asset. We leave the settings by default, standard, there are no recommendations for the values of the moving average period, the standard deviation equal to two cannot be touched.
We are waiting for the moment of the exit and closing of the candle below / above, the lower / upper Bollinger band. After the candle closes behind the lines, open a deal in a binary option of the classic type above / below, put or call, whichever line is “broken” by the price.
The duration of the binary option is chosen equal to two timeframes. We chose a 15 minute timeframe, open an option with an expiration period of 30 minutes.
The second strategy is a kind of hedging (protective) strategy in relation to the first, it is diametrically opposite to it. The market postulate is exploited that, as a rule, when the purposeful trend influence on the price stops, it will tend to its average value. We will consider the return of quotes back to the channel as a measure of termination of such impact.
Let’s stipulate one indispensable condition. The opening price of a candlestick must be located behind the Bollinger Band, and the closing price must be in the channel. In the case discussed above (Fig. 10), the price returned to the channel in both cases after our entry. But only the second return served as a signal for the trade.
We are waiting for the closing of the candlestick inside the Bollinger Channel. We open a trade in the direction of the moving average using the classic “above / below” binary option. The duration of a trade is equal to two selected working timeframes.
As we can see, cases (1) and (2) served as an example of losing trades for the first strategy. Whereas the deals of the second strategy brought profit. It can be said that the deals of the second strategy were hedging in relation to the first, significantly reducing the loss.
The specificity of the third and last strategy with the use of Bollinger is associated with binary options of the type “with touch / without touch”. High payments for binary options of this type are due to the fact that it is necessary to predict whether the price will touch the boundaries of a certain interval or not.
The strategy has a strict time limit and can be exploited with an eye on the economic news calendar. A beginner trader will have to learn the specifics of night trading . The trading time period is from 21-00 to 1-00 Moscow time, with amendments for the transitions to summer and winter time modes, North American and Asian exchanges. There should be no news at this time. Volatility is undesirable, we are waiting for the Bollinger bands to narrow. The range set by the broker must be above these lines. If all these conditions are met, you can make a deal, betting that the price will not touch the range. Choose the timeframe as small as possible.
Countertrends – learning to make money on corrections
Over time, traders came to the conclusion that it is better to use the analysis capabilities, not the price itself, but to transform it in the form of price ranges (differences), correlating them with different price variations. The class of such indicators was called oscillators .
Thanks to such a calculation system, the indicator readings changed from minus one to plus one, a histogram was plotted on the chart, it became possible to determine the “overbought, oversold” conditions of the markets and “catch” quotes reversal zones.
With the introduction and testing of oscillators, in addition to the term “overbought, oversold”, a “ divergence ” or divergence trading signal appeared , which is especially valuable for traders. It occurred when the price and indicator movements did not match (quotes up, indicator down). As a rule, a reversal took place after a divergence signal.
First, let’s select the type of oscillator indicator that will be used in our strategy. We will use the Power Bull \ Bear oscillators created by Alexander Edler; a detailed description of the indicators can be found in his works.
The type of binary options is classic, the most understandable and simple for a beginner, any timeframe. but it is advisable to use an hour candle.
Binary options for this strategy can be purchased for any available assets.
Having chosen an asset, a working timeframe, we place two histograms on the chart that measure the strength of bulls (buyers) below it, the strength of bears (sellers). If necessary, adjust the color gamut of the terminal so that the eye can accurately distinguish between indicators and price candles, visualization is important in the strategy.
When a new local intraday high occurs, look at the bulls strength histogram. The signal to open a put option occurs when the new high of the price does not match the high on the histogram (1). Having found a discrepancy, pay attention to the lower histogram. The strength of bears indicator must be in the positive zone (2). We make an entry (3) by purchasing a binary put option, because a new high is not confirmed and the price may stagnate or reverse. We choose the expiration time equal to two working timeframes. In this example, it will be two hours.
The main difficulty for beginners arises in determining the reversal signal when falling. If we are looking for divergences during the growth, when the price falls and the determination of new lows of quotations, correlating them with the lows of the oscillator, we will need to find convergence, as shown in the figure.
For all the seeming simplicity of the strategy, it is quite difficult to execute. Often, beginners cannot compare more distant previous extremes with the current ones and miss signals, forget to check the conditions for finding the second indicator in a zone similar to the oscillator, according to which we received a signal to enter a trade. A mistake will lead to an inevitable loss, the trend is by definition “programmed” to continue.
Correctly built approach and selection of indicators allows avoiding the problem of time limited binary options. While one could argue how much of a problem is this? The “sitting out” factor inherent in newbies was worth a lot of deposits.