Choosing which sort of binary option to trade with is a strategic decision. You need to keep strategy in mind when you make all trading decisions. This is no exception. In the case of boundary options, we are talking about a binary option that offers a higher return than the basic high/low option.
In contrast to most options, it does not require traders to predict in which direction the market will move. Instead it is all about foreseeing whether the price of an asset will move beyond a certain range or not. If you would like to know more about trading strategies for boundary options and make money on binary options, please read on!
Which strategies for boundary options can you apply?
The unique plus-point of boundary options is that you won’t have to predict in which direction the price of an asset will move in order to win the option. All that’s required is for you to correctly call whether the price will move sufficiently far in either direction, i.e. up or down. This is not all that tricky. Even less so if you use momentum indicators to help out.
If you use a 10 minute chart in your trading and you invest in a boundary option that has a 30 minute expiration time, the market will move three periods over the course of the option’s running time. This information is easy to get, but valuable none the less. It can be used to generate any number of predictions with regards to future market movements, the expected market range included.
One way to figure out how far the market will move during the three periods until your boundary option’s expiry time is to use a momentum indicator. One such momentum indicator is the average true range, or ATR. It measures how big the market movements were in each of the recent periods. In order to ascertain the largest movement during a set time frame, you simply multiply the ATR by the number of periods that remain until your option is set to expire.
For this value to be exact, the market would need to move in only one direction the whole time. This is unlikely to occur, so you ought to adjust the value accordingly. You can do this by multiplying the ATR’s value by a set factor. Some traders use 0.5. Alternatively you can use another indicator in order to make a variable factor.
These methods are every bit as efficient as each other. What matters is that you are able to come up with a value that determines how far the price of the relevant asset will move during your boundary option’s running time.
Next, you simply compare the value you have found with the difference between your boundary option’s target prices and the applicable asset’s current price. If the target prices are closer than the market reach you have estimated, it is advisable to invest in the boundary option. This is because the price is likely to reach one of the option’s target prices, the high or the low, during the applicable time frame.
On the other hand, if the target prices are further from your estimated market reach, it will not be advisable to make such an investment. This situation would indicate that the price is unlikely to move sufficiently, either up or down, to reach either of the target prices.
Trading effectively with boundary options
In order to make the most out of this kind of strategy there is no need to generate a trading signal. It doesn’t matter which direction the market will move, just as long as the movement – in either direction – is sufficiently strong. Therefore, you don’t have to worry about the future direction of the market.
Having said that, this strategy might work best when the market is moving in only one direction. Some traders feel that in a market with a strong movement, either down or up, the price of an asset is more likely to burst out of a boundary option’s price limits. For this reason, such traders will try to identify trending periods, and execute boundary option trades during them.
In order to do this, you can use a lagging indicator. Many successful traders find that using moving averages, preferably in conjunction with such strategies as the three moving average crossover technique, helps identify whether or not the market is in a trend, and in which direction the trend is moving.
You need to keep in mind, of course, that even when the market is in a trend, corrections will none the less occur quite often. This has led many traders to maintain that all market environments – trending and non-trending – are suitable for the boundary option strategy we have outlined. In other words, there is no need to determine whether the market is in a trend or not. You will simply be complicating matters, and wasting your time in completing the unnecessary step of looking for trends. In this matter there is no way to determine a perfect answer. Really, it boils down to your preference as a trader..