Binary Options Trading Strategy: Reduce Risk and Increase Profits

Binary options are the simplest financial assets for trade. This simplicity stems from the binary proposition at their heart - you either make a profit if you made the correct prediction or lose your initial investment if you did not.

Since binary options function in such a straightforward manner, and both the potential profits and losses are predetermined and capped, binary options trading has become incredibly popular among beginner investors.

However, while the risks are limited, they’re still there, which is why you need a solid binary options trading strategy. Many inexperienced traders lost their money to volatile markets, lack of knowledge, or trading with illegitimate brokers. The right tactic can’t eliminate the risks altogether, but it can significantly reduce them.

What Are Binary Options and How to Trade Them

Binary options are simplified options contracts that turn every trade into a “yes or no” proposition: The parties involved predict whether an asset will be above or below a certain price at a specific date.

Consequently, you can either earn a payout or lose the money you’ve invested, depending on whether your prediction was correct - there’s no third result. Hence the name “binary.”

Before choosing a binary options strategy, you have to know the basic ins and outs of this trading type. First of all, binary options don’t give you an asset: You do not own the stock you’re trading on, nor do you get dividends or voting rights like actual stock owners do.

If you plan to head into binary options, one of the most important terms to familiarize yourself with is the so-called “strike price.” This refers to the price against which you trade by deciding whether to place money on the asset going above or below that level.

When investors feel bullish about an asset, they’ll buy a binary option. On the other hand, when they think the price of a particular asset will go down, they sell. These two choices are also referred to as “call” and “put.”

Another bit of binary options basics to remember is that you’re not trading against the binary options broker, but against other traders. The traders themselves determine the bid and ask prices, although the value always sits between $0 and $100.

As we mentioned, all trades end in either a yes or no result. More specifically, each trader will either earn $0 or $100 (minus the option's price and fees) from a particular trade.

For example, you want to predict whether silver will be worth more than $1,000 at 5 p.m. tomorrow. Every binary trade has a determined expiry date which can be hourly, daily, or weekly.

If you think silver will be worth over $1,000 before expiration, you’ll buy that binary option for $60. On the other hand, person B thinks silver will be at or fall below the $1,000 threshold and sells the option for $40.

In case silver does indeed go over the strike price at 5 p.m. tomorrow, you’ll earn $100, with the profit being $40 ($100 minus the $60 you invested). This situation is called being “in the money.” Alternatively, if the price of silver is below $1,000 tomorrow, you’ll lose the $60 you invested, leaving you with $0; proverbially, you will be “out of the money.”

Keep in mind that binary options brokers also charge fees for trades, regardless of the result of the trade, so if your luck doesn’t hold, you’ll actually end up below $0.

Assessing the Risk of Binary Options Trades

A central part of every binary options trading strategy is risk assessment. The good thing about this financial instrument is that the risks and profits for each trade are capped and known in advance. There’s no possibility of you losing a small fortune overnight just because the stock price for an asset dropped.

Still, you can lose a lot of money if you’re not careful. While a singular Bitcoin options trade is capped at $100, you can trade multiple options at the same time. While your potential for profit increases, depending on the payout percentage, you stand to lose a higher sum of money as well.

There’s no binary options trading guide that can help you remove these risks, as they’re intrinsic to how the markets operate. However, a good marker of whether a particular binary options trade is safe is the bid and ask prices. As these prices are determined by the traders, they reflect the probability of the binary options trade in question coming to fruition.

Hence, binary trades that are most probable to happen based on various technical indicators will have a high bid/ask price, often over $80. This makes the initial investment pretty high and profits limited, but dramatically reduces the risk of buyers losing the trade.

When binary trading happens in a market undergoing a volatile period, the bid and ask prices will be closer to the $50 mark. This means traders estimate the chances of the asset’s value ending up on either side of the strike price to be almost equal.

Lastly, when a stock has a very low probability of hitting the strike price come expiration, the bid and ask price will be pretty low - around $15. If you’re selling the option, this gives you access to easy but small profits. For buyers, it’s a cheap buy-in with a low chance of success.

Practically every binary options strategy that works relies on risk assessment, so before we continue, it’s essential to mention the risks of binary options trading as a whole. With options - unlike traditional stocks trading, where you retain the stock even if its price falls - you stand to lose your entire investment if the markets don’t go your way.

Furthermore, there’s a lot of fraudulent activity in the binary options trading market, with some brokers offering unfair terms or refusing to pay out traders. Before you start trading with a broker, make sure they’re regulated by the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) if you’re in the US, or relevant regulatory bodies in other countries.

Strategies for Binary Options Trading

Let’s go over some binary options trading strategies you can use to improve your overall success rate. Most strategies are not mutually exclusive and can be combined to formulate an approach that fits your trading style.

Following the Trends

This is the most commonly employed strategy, both for binary options and trading financial assets in general. Following the trends is a pretty common-sense tactic: As the name suggests, you track the current price trends for any underlying asset you’re trading.

For example, if the price of gold is in an upwards trend, as it often is during inflation, you make your predictions based on the current movements of the asset’s price. If the price seems to be rising, you call, and if it goes down, you put.

This is the simplest of the binary options strategies, but even it isn’t that straightforward in reality: While the price of an asset might be in an upwards or downwards trend, these trends don’t follow a straight line. Instead, they zig-zag between high and low points daily. 

As a result, you have two choices. The first is to follow the general trend by buying or selling binary options with longer expiration dates, where your prediction falls in line with the overall trend.

Most traders rely on so-called “candlestick” charts to make sense of the trends. These charts are a series of bars depicting the low, high, opening, and closing prices of assets you’re betting on, where the “body” of the candle is the range between the opening and closing prices, and the “wicks” reach the highs and lows.

Alternatively, you can trade by relying on the zig-zag price swings. This is a significantly riskier proposition, as these swings are less predictable and stable than the overall price movements. On the other hand, going against the trend during these swings opens up the opportunity to earn more profit.

If you’re looking for a binary options trading strategy that works, following the trends is probably the “safest.” However, they tend to yield considerably lower returns than riskier trades. Furthermore, trends are not eternal, meaning you can always end up losing money if things unexpectedly turn around.

News Trends

This strategy represents a variation on the previous approach. While following the trends relies chiefly on a technical analysis of how a particular asset is performing, the news trends strategy scours the news and global events for market-relevant signals.

As any binary options guide will tell you, you’ll want to focus on reading the news related to the underlying asset you’re trading for. News events can sometimes turn the market upside down, taking the trend in the opposite direction of what the technical metrics were telling you.

There are countless examples of news affecting the prices. New government regulations, acquisitions, SEC investigations, green energy subsidies - all of these events can push the price up or down at any given time.

The best advice would be to keep an eye on both technical indicators and news events simultaneously to better gauge how the prices for underlying assets will move.

60-Second Strategy

The 60-second binary options strategy focuses on making binary options trades with a 1-minute expiry. This strategy is popular for several reasons. First, the sheer amount of trades you can make daily greatly outweighs what’s possible with trades that expire hourly or daily.

Secondly, the 60-second strategy appeals to beginners and experts due to its relative ease of application. The key here is looking at technical indicators to predict where the price will be when the trade expires. Probably the most important metrics are the support and resistance levels, which represent the typical highs and lows of the asset in question.

With a financial instrument such as binary options, even the most rudimentary analysis of technical indicators can help you improve your chances significantly.

Traders with more experience can move beyond solely using support/resistance levels in their analysis and factor moving averages into this binary options daily strategy. These come in handy for removing the minor, less predictable variations in price levels. 

This strategy works best when the market isn’t too tumultuous, with the price levels remaining between resistance and support levels. If the price breaks through, it’s best to wait for the situation to stabilize before employing 60-second trading.

The main risk involved is losing a lot of money quickly. With proper technical analysis skills, the risks are reduced, but still very much present.

5-Minute Strategy

Another hugely popular tactic among binary options investors is 5-minute-expiration trading. Trades with 5-minute expiration dates retain the volatility of 60-second trades, but reflect the overall trend better, making your predictions safer.

Like 60-second strategies, the 5-minute binary options strategy requires traders to rely on technical indicators, specifically candlestick charts. You should review them in one-minute intervals to get the most precise data available. This represents a type of trade to focus on, rather than a specific strategy to employ. Instead, you should use other methods we’ve showcased here in both one-minute and 5-minute trades.

Hedging Strategy

The binary options hedging strategy (also called “pairing”) involves placing both a call and put on the same asset simultaneously. By “playing both sides,” the trader can minimize losses, since they’ll gain something regardless of the result.

This tactic does have its roots in betting, where you “cover” potential losses by betting on both teams. With this strategy, traders can remove many risky, speculative elements from binary options trading.

What’s important with this approach is that you calculate how much profit you’ll have at expiration in each scenario, so you don’t end up bleeding money. This isn’t always possible, and depends on the bid and ask prices, as well as the payout percentages with each broker.

Additionally, this binary options trading strategy does stifle your profit potential considerably, as you’ll always be paying the buy-in for both options. Any profit you accrue will be minor, but the risks involved will be minimal.

Straddle Strategy

The straddle strategy is a type of hedging best used in volatile markets, when you know the price of an asset is about to change, but don’t know the direction. It has a natural synergy with the news trends approach; i.e., you’ll need to keep a close watch on important announcements.

For example, if it’s public knowledge a company on whose assets you’re betting on are about to report their earnings (which usually affects stock price), you need to put and call an option (both need to expire at the same time).

This way, the binary options straddle strategy allows you to minimize the risks by trading both for and against the asset. Additionally, by playing against the current market lows (put when the price is rising, call when it starts dropping), you’ll be able to increase profits as the prices for buying and selling will be better if they’re less probable to occur.

Pinocchio Strategy

The Pinocchio strategy is named after a specific kind of candlestick in a graph, where the candlestick itself is short, but the “wick” is long. Just like Pinocchio’s nose grows whenever he tells a lie, the wick grows disproportionately compared to its body when a current trend is not there to stay, i.e., it’s “lying.”

For example, if the price of gold is rising currently, but the graph says the price will actually turn around soon, you take the put option, betting that it will fall. This strategy opens up room for really significant profits, but there are a few caveats.

First, there are significant risks involved. Trends are trends for a reason, and they don’t break or stop that easily. When trading with the Pinocchio binary options strategy, you’ll be going for predictions that are less probable. Thus, there’s a significant chance of losing money.

What Makes a Great Binary Options Trading Strategy?

The two basic parameters of every good binary options strategy are signals and risk management.

A signal represents an indication of whether the market will rise or fall, and identifying these signals through monitoring of the industry news and technical analysis can lead to greater successes. The proper implementation of binary options signals requires a greater understanding of the market and the consistent following of news, trends and technical indicators. 

Risk management is crucial to any good binary options trading strategy, as binary trading is by nature, a highly risky form of trading. To reduce this risk and develop a successful strategy, traders implement a variety of money management techniques, most notably by limiting the percentage of their total capital they are willing to trade. For beginners, the recommended percentage is 1%, while more seasoned traders shouldn’t risk more than 5% of their capital.

How to Improve Your Binary Options Strategy

The best way to improve any binary options trading strategy is to keep expanding your knowledge and never stop researching and learning about the market or the asset of your choice. Successful traders are always on the lookout for statistics, news and patterns, and never jump into trading on markets or commodities that they haven’t got a great grasp on.

With a more narrow approach and the commitment to learning, you can make better decisions and hone your strategy over time to get the best possible results. If you are, however, interested in an asset that you are not yet certain of, you can implement tools such as fundamental analysis to get a better grasp of the company and the asset itself.

With fundamental analysis, you place a small trade on an asset to test out if your strategy can be profitable, and if it proves successful, you can place larger amounts on it for bigger wins.

Final Thoughts

Here we showcased the most popular binary options trading strategies you can employ when dealing with this financial instrument. All of them are useful for both absolute beginners and experienced traders alike, and each is useful in its own right.

Still, it’s crucial that you’re aware of the involved risks at all times: Just like any other trade, binary options trading is inherently risky. The golden rule is to never play with money you can’t lose, stick to strategies appropriate for your expertise level, and trade with underlying assets you have a solid knowledge of.