Short-term strategy for binary options

It can be very lucrative but also very risky to trade Short-term. Its lucrative because you can make profits of up to 81% per trade, but the risk is in the fact that the time frame is so short, that a good chart analysis is the key to success.

A trade can have a duration of a few seconds (Turbo’s) to several hours/day’s (Up/Down, Advanced and Forex). Traders must understand the risks and yield to be successful. Besides that, you must know how to spot good opportunities in short-term, you also must be able to protect yourself from unforeseen events. In this article, you read more about the basics and how you will succeed in short-term trading.

The basics of Short-Term trading

Understanding the basics of short-term trading means the difference between profit or loss, therefore it is important to understand several basic concepts. Read the vital principles below to be profitable in the short-term trades.

What is the duration of a Short-term trade?

At abcOptions, Short-term trades are options with a duration of less than one day. At our trading platform you can trade with the duration of less than one day with the Turbo Options (duration from 15 seconds to 5 minutes), Up/Down options (duration per 15 minutes and the end of the day) and Advanced options (duration in short term with intervals of 5 minutes and midterm with an interval of one hour).

Recognize a profitable trade in 3 steps

To recognize the right trading opportunities, you should know the difference between good potential trading situations and the ones you can better avoid. Often traders watch the evening news and read financial pages, to determine their trading strategy. The truth is, when you heard the news, the markets already reacted and the trading possibility has already past. Therefore, you must follow a few basic steps to find the right trading moment.

Step 1 – watch the moving average

A moving average is the average price of an asset (Futures, Commodities, currencies, stocks and indices) over a certain amount of time, which is plotted in the chart in order to determine the trend of the price development of an asset. The most common moving averages are calculated over 15, 20, 30, 50, 100, and 200 days. For Short term trading these periods are too long. When trading on short-term, we recommend to work with moving averages calculated over an intervals of  1, 5, 15, 30, 60, 120 minutes. As always, the chosen time interval is key to perform the correct analysis. When you trade 5 minute Turbo’s you will have to work with moving averages of 1 to 5 minutes.

Generally, a potential successful Call option has an increasing average (the trend goes up). Visa versa, for a successful Put option you must search for an area were the moving average flares out or decreases.

Popular technical indicators that are based on the moving average are the MACD and the Bolling Bands. Both indicators are available in the Advanced chart of abcOptions.

Step 2 – understand cycles or patterns

Generally, there are cycles (repeating processes) at financial markets. Therefore, it is important to look at the calendar so now and then. For example, since 1950 most price increases took place in the period from November to April. While in the period May to October the average stayed equal. You can use cycles in advantage to decide your call or put option.

To see cycles you must look to the historic development of an asset. So, ask yourself the question: how moved the asset last year and the year before? Are there similar patterns? For the short-term you should ask yourself if there are patterns on the short term.

Step 3 – get feeling for market trends

When a trend is negative (decreasing prices), you can consider a Put/Sell position, or wait and see for a reversal and go for a Call/Buy position. When the trend is positive (increasing prices), you can consider a Call/Buy position, and pay less attention for Puts. The reason is when the general market trend is moving against you, the change to success will decrease.

To get the feeling of the market it is important to watch the historic price development of an asset on different prices/intervals. So, play with the different time intervals from 1 week to 1 day, to 4 hours, to 1 hour, tot 1 minute and see how the patterns adapt to the shorter periods.

To start with these 3 basic steps, you we can recognize potential trade opportunities a decide on which asset,at what time, and for which duration you can (short or long term) place a trade.

Risk control

To control your risk is one of the most important aspects in becoming a successful trader. Short-term trading comes with more risk and therefore it is essential to minimize the your risk exposure and maximize your potential return on investment. This requires the use of Stop-Loss and Trading tools to protect your trades against market turns. By applying Stop-Loss level on your Forex trades and Trading tools on your Up/down options you will minimize your risk, and consequently raise your yield.

A standard rule for short-term trading with Forex is that you place the stop-loss at 10-15% of the level of your strike rate. Besides we also recommend to not invest more than 10% of your trading balance in 1 trade. The idea behind this 10% rule is that the possible losses are manageable, and that the winnings are significantly more than the possible losses. In this way, you always start with a healthy trade balance.

Technical analysis

Technical analyses are about the process of evaluating and studying the price development of assets using technical indicators and patterns. Making technical analyses will help you first of all to get a good understanding of the historical price development of an asset, but secondly and more important, it will enable you to predict future price movements. It is the most important instrument in short-term trading to grasp the underlying principles on how to really make profit. A couple of these technical indicators and techniques will be show below.

Patterns

One of the tools to help you increase your winning chance is recognizing of (recurring) patterns in the chart. A pattern is formed by changes in direction of the price development (in- or decrease). This price increase and decrease result in possible expected price movements, since patterns are very likely to repeat over time. Note, that Patterns could develop over a couple of minutes, hours, days, weeks, months, or years. However, no pattern is equal, but they can come close to the ideal pattern and are hence used to predict future price movements. Below we outline some of the most successful patterns.

 The most common and profitable patterns:

  1. Triangles

A Triangle is formed when there a small reach is between the highest and the lowest price. This happens when the prices are at the bottom or the top. When the prices are getting smaller it could mean that the price of the asset can break out on the up or the down.

Triangle

  1. Double tops

There is a double top when prices increase until a certain point on a heavy volume and then pull back. Then you can see a repeat from a lower volume. On this point, there would be a decrease and the stock will further decline.

double tops

  1. Double bottoms

There is a double bottom when prices decrease on a heavy volume until a certain point. Then it will increase and fall back at the original level on a lower volume. Not capable to break the lower point, the prices will increase.

double bottoms

  1. Head and shoulders pattern

The head and shoulders is considered as the most reliable pattern. This is considered as a reversals pattern.

head and shoulder

Buy and Sell indicators

Different indicators are used to decide the right time to buy or sell. Two of the most popular ones are the RSI (relative strength index) and the stochastic oscillator. The can be used as stock picking tools, but we can recommend using it in combination with other tools to pin point the best trading opportunity on short-term (as well as long term).

The RSI compares the power and weakness of a stock. In general, we can say that when the RSI reaches 70 and above the asset price is overbought, and when it reaches levels less than 30 it means that the asset price is oversold.

RSI

The stochastic RSI or the Stoch RSI is used to decide if a share is expensive or cheap on the basis of a closing rate of a share in a certain period. When u see 80 it means that the stock is expensive and 20 means it is cheap.

stochastic indicator

Conclusion

With short-term trades, you can use different methods to earn money. However, you must know how to use the tools to be successful with a certain short-term strategy.  If you can do that, you can minimize your loss and maximize your profit.