Effects of Timing

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As a binary options trader, you profit when you correctly predict the direction of an asset price. Volatility is therefore essential to maximize the chances of you increasing your return on investment Studies have shown that the most active trading hours occur during the European session. In the US, trading activity picks up sharply around 8:30 am EST. This is due to the release of closely watched US economic data, which generates the liquidity and volatility needed for the underlying assets to reach its target price before the option expires.

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Prices become most volatile when the US releases its monthly non- farm payrolls report on the first Friday of every month. In contrast, markets will be less active and liquid during major holidays in the US and Europe, resulting in subdued trade.

MACD Binary Options Strategy

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Moving Average Convergence Divergence or MACD as it is more commonly known was developed by Gerard Appel to trade 26 and 12- week cycles in the stock market. MACD is a type of oscillator that can measure market momentum as well as follow or indicate the trend.

MACD consist of two lines, the MACD line and the signal line. The MACD line measures the difference between a short Exponential Moving Average and a long Exponential Moving Average. The Signal line is an Exponential Moving Average of the MACD line. MACD oscillates above and below the zero line without upper and lower boundaries. There is another form of MACD, which displays the difference between the MACD Lind and the Signal Line as a histogram. MACD forest displays the positive and negative difference between the two lines found in the MACD graph (the MACD Line and the Signal Line) as a histogram above and below a zero line.

The default periods are the same as the periods used by Appel. Remember that Appel used 26 and 12 because he observed weekly cycles of similar length in the US stock market. You may wish to change parameters to match another cycle period you have observed.

The most common uses of MACD in Binary Options are to:

  • Generate buy and sell signals

Signals are generated when the MACD Line and the Signal Line cross. A buy signal occurs when the MACD Line crosses from below to above the Signal Line, the further below the zero line that this occurs, the stronger the signal. A sell signal occurs when the MACD Line crosses from above to below the Signal Line, the further above the zero line that this occurs the stronger the signal.

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If a trend is gaining momentum, then the difference between the short and long moving average will increase. This means that if both MACD lines are above (below) zero and the MACD Line is above (below) the signal line, then the trend is up (down).

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Divergence between the MACD and the price indicates that an up or down move is weakening. Bearish Divergence occurs when prices are making higher highs, but the MACD is making lower highs. This is a sign that the up move is weakening. Bullish Divergence occurs when prices are making lower lows, but the MACD is making higher lows. This is a sign that the down move is weakening. It is important to note that although divergences indicate a weakening trend they do not in themselves indicate that the trend has reversed. The confirmation or signal that mostly comes from price action, for example a trend line break.

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Parameters

Short averaging period: (default 12)

Long averaging period: (default 26)

Signal line averaging period: (default 9)

The default periods are the same as the periods used by Appel. Remember that He used 26 and 12 because he observed weekly cycles of similar length in the US stock market. You may wish to change the parameters to match another cycle period you have observed.

 

Reality Check in Binary Options

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One question that new binary options traders ask a lot is, “Why do I do better at

paper trading than I do when I trade with real money?” The answer is easy.

Fear, doubt, complacency, greed, anxiety, excitement, and false pride can

all interfere with rational and intellectual thoughts. When dealing with real

money, you are faced with the realization that you and your money can actually be separated. Try not to get into the buyer’s remorse syndrome. That’s when you buy

a specific product and are still price shopping six months later to make absolutely sure that you got the best deal in town. That is another situation that creates negative emotions and you need to guard against it. Most binary options traders know the saying, “Any profit is a good profit, no matter how small.” It is hard for binary options traders not to look back, but you always have to think positive and be grateful that you picked the right market and did make some money. You should also feel confident and comfortable knowing that your system, method, or

skills may allow you the opportunity to do it again. A hindsight binary option trading is easy; being a mature, professional, and optimistic binary options trader is hard. Take a look at the market from a distance on the sidelines. Some binary options traders like to watch and wait; others will hope things change. The better or more experienced trader will simply get out. Sometimes this simple approach will save you from losses and give you a better time to reenter the market. Maybe you can identify with problems such as “Greed and the undisciplined trader” or “I’m-scared-so-I’ll-think-about-it trader.” I associate greed with the trader or investor who desperately wants to trade to make a quick buck. This type of trader personality profile is certain to realize failure when trading. Such traders have no discipline, acting on any rumor, story, or so called hot tip. They are checking research web sites and jumping from one

source to another to search for the winning trade. There is a common denominator with this type of binary options trader: They constantly do the same thing over and over and over again, generally resulting in losses.

There is an old definition for insanity: repeating the same actions and expecting a different outcome each time.

Advantages and Disadvantages of Binary Options Trading

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Consider the following advantages and disadvantages when trading Binary Options:
Advantages
Risk control – With binary options the return on initial investment is fixed from the beginning, thus the amount of possible profit or loss is well known. Meaning you’ll never lose more than what you expected and can determine your risk as completely as possible. There’s a limit on how much could be earned or lost in one trade. Because the rate of return is relatively high, and trade times are short, in the long run the fixed rate of a binary option can be a big advantage. Short-time trading (daily, hourly) – with binary options you decide what the expiry time of the option will be. If you are a fan of long-time investments, you can choose “end of the week” and “end of the month” expiry times. However, most traders would prefer shorter time frames. Low minimum amounts – Binary brokers have low investment minimums, thus allowing you to start with small amounts. With most brokers you can start trading with as low as $20. If you are familiar with stock market trading, you probably know that you need a decent amount of preliminary investment capital, brokers, commissions, etc. Thus the possibility to begin trading with just $20 as well as the flexibility to pick your investment amount is certainly an advantage. Online trading – binary options are traded on online platforms and therefore you don’t need any software downloads. Trading is available anywhere, all you need is a computer and internet access. You simply enter your login and password and get straight to your personal profile page and start trading. Simplicity – Trading Binary options is very simple and straight forward, all you need to do is decide which of the two directions the asset will move, up or down.

Disadvantages of Binary Options

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The main disadvantage of trading binary options is the level of “fee” that is paid to the broker; it is relatively higher than in other investment areas. Fee? What fee? Well, it’s not exactly a fee; it’s more of a ‘spread’. The brokers’ “fee” is embedded in the business model of a binary options brokerage. You buy the options contracts from the broker, if you win, the broker will pay you out about 71% to 85%. If the contract expires “out of the money”, some brokers will refund a small percentage of the principal. The broker gets the difference between the sum that they keep on a losing trade and the amount they pay out on a winning trade.

 

Moving Average Binary Options Strategy

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A Moving Average is a moving mean of data. In other words, Moving Averages perform a mathematical function where data within a selected period is averages and the average “moves’ as new data is included in the calculation while older data is removed or lessened. Moving averages essentially smooth data by removing ‘noise’. This smoothing of data makes Moving Averages popular tools in identifying price trends and trend reversals.

The differences between the three types of moving averages lie in the way that they are calculated and whether they look at all the data available or only the data within a selected period. This means that each type of moving average has its own characteristics, for example how quickly each will respond to changes in the underlying price.

Simple Moving Average

Simple Moving Averages are the most common and popular form of moving average. The primary reason for this is the relative ease with which Simple Moving Averages are calculated. A Simple Moving Average is calculated by adding values over a set number of periods and then dividing the sum by the total number of values.

As with other types of moving averages, Simple Moving Averages smooth the data by removing ‘noise’ over the selected period. The ability to smooth data makes them a useful tool in identifying price trends and trend reversals.

Moving average – Weighted

As with Simple Moving Averages, Weighted Moving Averages smooth the data by removing “noise’ over the selected period. However a weighted Moving Average will be more sensitive to recent changes in data. This is because a Simple Moving Average gives all observations equal emphasis in its calculation, but a Weighted Moving Average assigns a greater weight to the most recent observations.

Moving average – Exponential

The Exponential Moving Average is similar to the Weighted Moving Average in that they both assign greater weight to the most recent data. Where they differ is that instead of dropping off the oldest data point in the selected period of the moving average, the Exponential Moving Average continues to maintain tall the data. In other words, a 5 day Exponential Moving Average will contain more than 5 pieces of data information. Each observation becomes progressively less significant but still includes in its calculation all the price data in the life of the instrument. The exponential Moving Average is another method of weighting a moving average.

The most common uses of Moving Averages in Binary Options trading:

  • Identify the trend

A common method involves looking at the slope of the Moving Average and the relationship of the prices to the Moving Average. For example, if the Moving Average is sloping down and prices are below the Moving Average then prices are considered to be in a downtrend. The opposite is true for an uptrend. If prices are moving above and below the Moving Average and the Moving Average is flat then a non-trending market exists.

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  • Give buy and sell signals

When trading binary options, this can be achieved a number of ways. The first method looks at the relationship between the close and a single Moving Average. If the market closes above the Moving Average then a buy signal is generated, if the market closes below the Moving Average then a sell signal is generated.

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The second method uses two Moving Averages, one with a shorter observation period than the other. Buy and sell signals are generated when the short moving average crosses over the long moving average. For example if the short moving average crosses above the long moving average, a buy signal is generated; a sell signal is generated when the short Moving Average crosses below the long Moving average.

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When trading binary options, both these buy and sell techniques is most effective when the market is trending. If the market is non-trending then these techniques are likely to give false signals. This is simply because the market needs to continue in the direction of the buy or sell signal in order for the trade to be profitable.

Exponential Moving averages are used in the same manner as the other types of moving average, usually to identify price trends and trend reversals.

Parameters

To use Moving averages in your binary options strategy, the exact averaging period to be used will depend on the purpose of the moving average. If you are using moving averages to identify the trend, the length of the averaging period should reflect the length of the trend you are trying to identify. The longer the trend – the longer the averaging period. For example, if you are looking at a daily chart to identify the long – term trend, you may decide to use an averaging period of 200. For short and medium term trends periods of 20 and 50 could be used respectively.

If you are using moving averages to generate buy and sell signals then shorter, more responsive averaging periods are normally used. For example a two moving average system may use averaging periods of 5 and 20.

It is also important to note that when selecting an averaging period there is a tradeoff between the averaging periods, the number of signals generated and the risk associated with the signal. A longer averaging period will generate fewer signals but will require a larger price move before responding, sacrificing potential profits in order to confirm the signal. A shorter averaging period will generate more signals and require less of a price move before responding, however the risk that the signal is false increases.