There are many types of binary options trading that can confuse newcomers in this field. Most brokers offer not only different assets but also different types of trading such as the ladder, floating pairs, and fixed pairs. In this article, we will try to explain main differences between them, as well as the basic trading principles.
Binary Options Ladder
Binary options trading entails many different elements, the basis of this financial instrument is centered around the put or call options. Both of these are related to underlying asset price movement, with “put” being a prediction of price decline and “call” being a prediction of the price increase. In order to profit from each trade, the underlying asset price will need to be either above or below the strike price as predicted at the end of the expiry time period.
Market conditions must be considered and then factored into the decision between put or call. Under bullish conditions, investors are generally feeling favorable towards assets, often causing values to rise. Bearish conditions are just the opposite, with investors typically selling off assets viewed as undesirable and thus causing values to decline. Binary options traders are able to profit from either condition, which is one of the many reasons as to why this form of trading has become extremely popular.
In addition to being able to judge market conditions, technical analysis is also necessary. Studying past asset price performance may quickly provide the information needed to select between the put or call options. Strong price movement trends in either direction enable easier decision-making. Should not distinct trend be in place, the most recent price movement may be the deciding factor.
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Expiry time must also be factored in while performing technical analysis. When using shorter expiry times, the most recent price performance may be all that matters. However, when using longer expiry times, a broader picture of underlying asset price performance will be required. The main goal is to determine the highest and lowest prices that the asset has reached within a period of time. Though the asset price can move outside of these high and low boundaries, it is most likely to remain between them.
Should the strike price of the underlying asset be close to either boundary, it can be assumed that the price will not move much higher or lower before reversing position. This is yet another element to consider, as binary options trading profits can be earned from selecting either “put” or “call” when an upcoming reversal is spotted in advance. Breakout points, which are times during which the underlying asset price breaks out of the noted boundaries, can be more difficult to predict, yet are equally profitable.
What is most important is that the “put” or “call” option should never be selected by using only guesswork. There are plenty of binary options tools that can be used to study past asset price performance. The market news will often be the strongest indicator of current market conditions and should also be part of the decision-making process. When both of these forms of analysis are completed, the decision between put or call options should be an easy one to make.
Binary Ladder Trading
Ladder binary trading is a kind of binary options trading, where the trader receives several price levels, which are located at an equal distance from each other in the likeness of the ladder. Simply put, binary options ladder indicates the level to which the price of an asset should change for a certain period until the option is active.
This means that the trader must set these levels and time periods. For successful trading, the price should go through these levels as the stairs of the ladder.
Let’s imagine that USDJPY is trading at 99.75 and you want to use the ladder when trading binary options with your broker. You want to make a trade using a ladder with three price levels: 99.50, 101 and 101.40. How do you need to trade in order to make a profit?
In the settings you need to select the option expiry period firstly, which for example we set at 12.00.
We can interpret this as follows. In order to make the first transaction successful, the USDJPY should be closed above 99.50 at 12.00. In this case, the trader will receive a 20% yield. For our second transaction, the currency pair should close above the 101 at 12.00. In this case, the trader will receive 35% yield. And in order to make a profit for the third transaction, USDJPY should be closed above 101.40 at 12.00. This will guarantee us a yield of 50%.
In order to trade using binary options ladder, the trader must analyze the market and determine how quotes of currency pair will move during the day, and then select the ladder version in accordance with the appropriate price moving.
For ladder trading, the strategy based on Pivot levels suits the most. To use it, a trader needs to apply these levels on the chart with the desired currency pair using the Pivot calculator. Thereafter, three lines will be visible as a support (S1, S2 and S3) and as a resistance (R1, R2 and R3). The chart below shows these lines.
To analyze how the price will behave during the day, the trader would be preferable to use a time frame H1. You can also build your ladder trading based on Pivot trading levels. As an alternative, you can try to install the ladder by 5 points above respective Pivot levels. In this case, you can be sure that your trading will be successful.
Selling an Option Before Expiration
After opening the transaction, the trader may at any time request the broker a price at which he is willing to buy back an option. Thus, in contrast to conventional binary options trading, the trader can close the deal before the official expiration date.
Let’s explain the advantages of this trading: first of all, it helps to minimize the risks. For example, someone predicted the rise in oil prices and still their prediction was justified. However, trader noticed that the market is changing and, most of all, by the time of option expires, their forecast will not be so true. In this case, the trader can sell the option back and get profit from it. Of course, this profit will be less than if one waited for the performance to see if forecast would be true, but it is undeniably better than losing 85% in the case of an incorrect prediction at expiry.
Soon after opening the transaction, it can be seen that the performance gained its maximum value and perhaps soon the market will begin to decline. Trader asks for the price at which the broker is willing to buy back the option from them. This kind of trading is strongly recommended for beginners and professionals alike, especially those seeking profit with the least possible risk.
Pair Options Trading
Here we are going to perform an in-depth analysis of the fixed pair choice, which is also known by the name of basic pair options. These options call for determining the expiry time after opening a position. The position can be set in terms of a single day, a week or for a whole month. The amounts and payouts trader earns are determined in between the starting and expiry times. So, here it all depends on the performance of the stock initially selected.
The returns are depending on the position selected. Moreover, the pairs of stocks that are used in this form of trading also happen to be correlated. Furthermore, the stocks belong to the same industry, due to which there are high chances of earning large payouts depending upon the performance statistics of a given industry in that particular time.
But before proceeding with them, be aware of the binary nature of these stocks. In other words, only two possible options are to select from. Most of the traders also refer this type as normalized, as their previous performance might also be taken into account before selecting any of them.
The same is also applicable to the floating pair trading which are used by taking into account the past performances. It is evident now that the fixed pair trades are indeed quite lucrative for those investors who do not plan to risk their money in uncertain business options. In lines to the cost-effective and potentially risk-free benefits, fixed pair trades might turn out to be the right investment option for you.
Floating Pair Options Trading
Here is an example of floating pair options trading.
At 2 p.m. trader commenced the trade for companies Renault/Peugeot by $ 100. Traders speculate that Renault is going to outplay the performance of Peugeot at the end of the day. The time when trader had initiated the trade, Renault was down in comparison to Peugeot and the payment or payout percentage was set to 350 %.
If Renault came to overpower the performance of Peugeot at the time of expiry, then the trader will get the above-mentioned percentage of profits. In other words, if things went exactly as planned, then the payout is going to be $ 450. On the other side, if the opposite happens, the payout is going to be zero.
Here are some important and useful tips for floating pairs trading.
- The relative performance comparison is made from the start of that day and not when the trade is commenced.
- Traders are allowed to close the trading or position before the specified expiry time in lines to which they will be offered the payout depending upon the percentage at that specified time. For example, if the payout had been set to 170% at that particular time, traders would be able to obtain $ 270.
- Most of the novice or new investors prefer to perform a survey or have a trading overview before entering the trade amount. This gives them tranquility and confidence.
- Traders are not required or forced to wait till the trading session ends.
- Traders can also specify an upper or a lower limit for their trading, due to which if the sales prices of the selected assets reach the upper or lower limits then the trading would be closed automatically.