Momentum Indicator and Binary Options

The strategies I have showed so far have revolved around price action and using visual skills to make successful trades. In this post I'll go over a indicator I sometimes use, the momentum indicator. Momentum is  the derivative(velocity) of price over a given period. The formula for momentum can be written as

M = PC - PL

 Where "M" is momentum, "PC" is current price, and "PL" is the first price in a given time period. Momentum is usually charted around a zero line. When momentum is above the zero line, then the asset's overall trend is upward and when momentum is below the zero line then the assets overall trend is downward. Take a look at the example below. Note FreestockCharts.com uses '100' as the zero line.

The most important part of the momentum chart is where it crosses the 100 line. If momentum crosses up over the 100 line, then that's a good indication that price is on the rise and the opposite if price moves below the 100 line. Momentum works well with any time chart; just remember that the signal is usually only good for the next couple of candles so for example when using it with the 1 min chart, make a trade that's 5 mins or less (the best is generally 2 mins). The best time to enter a trade is when momentum crosses the 100 line on the close of the previous candlestick.

 There are a few things to keep in mind when using momentum as a indicator in binary options.

1. Don't forget price action. If looking are the chart it seems like a bad time to enter the trade, then DON'T enter. It will give false signals.

2. Watch out for relatively large candlesticks/relatively calm periods. During times with very little movement, the momentum indicator is basically useless for when to enter a trade in binary options as the momentum indicator will be constantly be moving above and below the zero line. Also if there's a candle that's much larger than the ones before it then the indicator is more likely to be off.

3. It will at times lag behind price. While it is a useful leading indicator, curtain setups will cause the momentum indicator to lag behind price. If it seems off, try it on a different asset. 

Momentum is one one of the most useful indicators when trading binary options when used correctly.

Questions?  

Hedging Money in Binary Options

One thing I want to talk about a bit is hedging in binary options. Even really good traders will only average a winning percentage of 70-80% in binary options, so betting to much of your money on one trade could bankrupt your account even if your winning the majority of your trades. Let me show you an example:

Say your starting out and your real winning percentage over your first week of trading is 60%. Lets also say your starting amount is $500. A good general rule is betting anywhere from 1-5% and when first trading, betting the lowest amount possible. Lets say you go with 2% of the initial $500 per bet ($10). Your odds of losing all of your money with a 60% winning percentage is very low. If you bet 20% of your money, however, your odds are much higher of loosing all the money in your account even if you are good at trading binary options.

High risk doesn't always equal high reward. If you stick to betting a percent of your account each trade, your amount you trade will change but your risk won't change. If your account grows from $500 to $1000 and your betting 2% each time, the amount you will trade will change from $10 to $20 but the risk you are taking each trade is the same. Some traders also choose to lower there percent they bet each trade as their amount of money in their account goes up so to avoid losing too much money in a bad loosing streak.

In summary, hedge anywhere from 1-5% of your account on each trade so even a unlucky loosing streak won't bankrupt your account.

Random Fluctuation Strategy for Binary Options

The random fluctuation strategy is the main strategy I'm currently using when trading binary options. The best times to use it are when the asset is in a range and not extremely active. The strategy is simple yet effective. you wait for price to spike toward a support/resistance line and you enter the trade toward where price was originally. It works best on the 1min chart but use the higher time frame charts to make sure the asset is in a range and not trending. Your winning % will probably be slightly lower, but the number of trades you can take is much higher that I have found it to be more effective than traditional price action. Here's a chart example of the strategy.

EUR/GBP 11-1pm est Fri 10/25/13 1min price chart, from freestockcharts.com

As you can see, over only 2 hours, there was 16 possible trades that could be taken and would have won at least 11 (2 you would lose and 3 could go either way). The trades you enter should have short expiry times. No more than 5mins and should be 2-5mins depending on the setup. Risk low amounts of money on these trades, since you have the opportunity to take a larger number. Set up lines of support and resistance on the previous spikes in price and trade in the opposite direction when price reaches that value again. Make sure the market is in a range and isn't trending. Trade when prices touches a point of support/resistance. Questions?

Using Candlesticks Charts with Binary Options

When trading Binary Options, I always use a candlestick chart when plotting price. A simple line or bar graph won't provide enough data to know when to enter a trade. Candlesticks show the movement of price over a given period of time. The color of the candlestick tells you whether price went up or down during that time period. Green and clear means price went up. Red and filled in means price went down over that time interval. Example below.

Now for how to use them. There's certain candlesticks you want to be on the look out for when trading binary options.. Candlesticks should help guide you and NOT be used as the only signal to trade. Alone, the reversal signs from candlesticks aren't very accurate. If used with Price action (as discussed in other posts) there effectiveness is much higher. Take a look at the image below.

At the start, price is moving up (indicated by the green candle). The second candle is what people call a pin-bar. It signaled that price moved up, then moved back down to where it started at that candle. If the 'wick' of the candle is on top, it's a possible sign that price will start moving downward. The 5th candle is the same thing except it signals price might start moving upward. The 8th and 12th candle are called doji's. A doji also indicates a possible reversal and is characterized by a wick on the top and bottom with little net movement in price from the beginning to the end on the candlestick. Use candlesticks as guidelines for when price might reverse in binary options. They are by no means guarantees that price will change direction.

When to enter trades in Binary Options

When I first started trading binary options, one of the hardest things for me was figuring out when to enter a trade.The two most common methods people use are entering on a touch of a support/resistance line or entering after conformation.

As talked about in the last two post, price action can help you set up those support and resistance lines of what values you should be entering trades at. A touch trader would enter the trade right when price touches one of those lines. A conformation trader would wait until the candle stick closes and ente if the next candlestick is moving away from the support/resistance line. An example is below.

EUR/CAD 5min candlestick chart, freestockcharts.com

Lets go through the possible trades on the chart above.

Lets start off with #0 on the chart. At this point you don't know the EUR/CAD is going to start ranging so you might enter the trade off the resistance line 40mins earlier. Touch traders would enter the trade and lose but conformation traders would stay out of the trade as the next candle is green( indicating a increase in price).

#1: This trade is off the trend line of the previous two highs. Touch traders would win and conformation traders depending on where they enter might or might not finish in the money.

#2,3,4: These are trades off the trend line, touch and conformation traders would finish in the money on all three.

#5: Touch traders would enter on the support line and would lose, conformation traders wouldn't enter the trade since the next candle is red.

#6,7,8: These are more trades off the trend line and both types of trading would finish in the money on those trades.

I personally trade when price touches the support/resistance lines. While touch trading is more risky, I find overall it bring in more profit.

Binary Options With More Price Action

Something I didn't talk about in my last post was the type of market the asset is in. The asset will either be ranging or trending. In a ranging market, price stays within certain bounds. Take a look at the example below.

1min EUR/GBP from 10am-1:35pmest, from freestockcharts.com

For the whole three hours, price doesn't really move all that much. Lows are close to the previous lows and highs are close to the previous highs. If you were trading this period, you would trade puts at the top of the range and calls at the bottom of the range. A good general rule is to only trade the top 5-10% and bottom 5-10% of the range. As you can tell, there's ranges within the ranges. Generally only trade the bigger range unless the range has permanently shifted up or down. Remember that the asset won't range forever. The hardest part about trading a range is trying to figure out when the asset will break the range. There is no simple answer, but things like relatively large candles very close toward support/resistance lines, a general movement toward the higher or lower part of the range, and the amount of time the asset has been ranging can be signs that a range is breaking down. Assets usually don't range for more than 2-3hours.

The second type of market is a trending market. A trending market is where the highs and lows get higher or lower(depending on if it's a uptrend or a downtrend). For binary options, trending markets are better to trade than ranging markets. You use the same method of connecting previous lows and highs but instead of horizontal lines, the lines are at a angle. Also similar to ranging markets, there are wider channels of support and resistance and narrower channels of support and resistance. The only major difference in trading binary options is don't trade against the trend on most uptrend. If it's a very weak uptrend, then you can probably get away with trading against the trend but it's a lower probably of winning trade. Take a look at the example below.

1min GBP/JPY candlestick chart, freestockcharts.com

The 5-10% rule can apply to trending markets as well, meaning you would only trade in the 5-10% of the top or the bottom of the trend. That's the basic of trading binary options using price action. Next post on when to enter trades.

First Post and a Overview of Binary Options

Hey Everyone!

When I first got into binary options, there was a lot of miss information. Lots of "instant rich" systems, become a millionaire in a month, get $100 every 5 minutes, etc., and of course this information is false. However, binary options are NOT a scam and with discipline, hard work, and lots of studying, you can make profits. I'm not gonna lie to you and say I'm a millionaire, though with low risk amount trades I have made a lot of money for a college student so far trading. This blog will be dedicated to winning strategies and tools I use to be successful at trading binary options.

You might be asking what binary options are and the simple answer is a option where the payout is a set all or nothing amount if you either rightly or wrongly guessed the direction of the asset. You're trying to guess the direction a asset is moving. Binary options are generally for the short term with most options expiring 30 mins. or less of the time it's bought, but there are some brokers where you can get longer expires. Lets take a look at a short example.

Say you think a asset is going to continue its downtrend. So you place a put option(For reference, "put" means you think the asset will go down and "call" means you think the asset will go up) of $50 at the current price of 1000. The broker will display the payout you will get for being right or being wrong. The payout can vary from about 70% of your bet to up to 90% of your bet. Lets say you're correct and the asset does drop below 1000 at its expiry time. You would then get $50 multiplied by what ever the payout % is. If you were wrong and the asset expired above 1000 at the expiry time, you would get nothing. Pic below.

Next post I'll jump into the basics of trading