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.