This article gives the reader insights into binary options trading and most importantly offers tips for binary options traders. (Binary Options How to trade)
Know your risks
Understanding and managing risk is one of the main principles of trading successfully. Generally, traders should not risk more than 1% of their equity into a trade. The trades that they do enter should ideally give a reward that is at least 50% or more of their risked capital. Of course, the higher the rewards are the better the chances of success. For example at 1:3 risk reward would mean that you can risk losing one out of three trades and still keep a profit.
Most traders tend to risk the entire equity into one single binary option trade which can be disastrous. This is nothing but greed at play which often comes alongside emotions. If a trader can be disciplined enough to risk their equity in small amounts, the risks can be better managed.
If you have deposited an initial amount of $500, then make sure to not risk more than $25 per option. This simple strategy therefore gives you a chance to make 20 trades. Now if you have a good strategy with a 1:2 risk reward (or 1:3) it gives you enough room to take at least 10 losing trades and yet still be able to retain your equity.
Know your options
In the article Type of binary options, we covered the different types of binary options trading. ( Different type of binary options) Understanding how each of those type of options work is important. Also the fact each of the type of options offer different returns if the options expire in-the-money, it is essential for a trader to have a firm understanding of which type of binary options to trade under the changing market conditions. For example, a short term binary option expiry works best during or ahead of news releases, if a trader is very sure that the news will be bullish. Likewise, a long term trader could opt for a weekly expiry contract for a High/Low option if they believe that a trend for an instrument is changing.
Select the right expiry time
One of the advantages a forex trader has over a binary options trader is that they can keep a trade open for as long as it takes for price to reach its objective. This is not the case with an options trader because each of the binary options comes with a specific expiry time. It is important to choose the expiry time because for a binary options trader, it is essential that the options contract must expire in the money by the time the binary option expires. ( ? read more about Expire Time)
The importance of using the right option expiry time cannot be stressed more. For example, your analysis might be right however if you select an expiry time that is too far away or too close it could result in a losing options trade. Tie your analysis to the options: Regardless of the strategy or analysis that you employ, always make sure to think in terms of the expiry time. This can be done by using the right time frame. For example a 15 minute chart analysis is ideal for an option expiry from 15 up to 30 minutes and in some cases even a 60 minute expiring contract depending on the prevailing market conditions. Quite often though, traders tend to lose track of the time frame and end up choosing the wrong option expiry time.
Putting it together
Combining the above factors, a trader will be able to make more profitable trades in binary options as long as they stick to the discipline and do not let emotions such as greed or fear take over in their trading. Binary options, although simple as they are in fact behave the same way as any financial markets such as forex or equity. The only difference being that the options come with an expiry time. Understanding how the markets are behaving within the perspective of the type of option being traded and the expiry time can help a trader to risk their investment on more profitable trades.