How to set the Expiration Date of a Binary Option
The biggest challenge in successfully trading binary options is to set the right expiration date. Is it possible to know where the market is going and still to lose money? Yes it is, and two reasons for that are overtrading and not taking into account the time frame your analysis is made.
But we covered those two subjects here in our Forex Academy projects. However, there is something else that makes a difference between the right expiration date and any expiration date: economic events.
Knowing when economic events are happening is crucial both for striking price and for the expiration date to chose. Not only that volatility is picking up, but usually market is not really moving if an important event is to come.
The Non-Farm Payrolls Example
For example, non-farm payrolls are always released on the 1st Friday of each month, and this makes the first three days in the week being range days, so looking for large moves would not do any good. The expiration dates to be watched are either one week or end of week.
Moving into the actual event and knowing that it is the major one for the medium period, then bigger expiration dates should be traded as volatility is picking up and it doesn’t make any sense to trade short term expirations in order to avoid fake breaks.
Find out what are the most important economic events to be watched and how to prepare the trading month taking into account those events, therefore taking into account fundamental analysis.
Trading binary options is more difficult that trading in general as the trader not only that it needs to say where price is going, so basically the direction, but also when price is going to be there. The holly-grail in trading is exactly this one: price and time, and this makes setting the expiration date of the option more important than the actual striking price one is using.
Using the Economic Calendar
The way to go is to start over the weekend and look at the economic events for the week to come. This can be done by checking the economic calendar. If the week is dominated by Euro news, for example the European Central Bank may have its interest rate decision on that week and the press conference as well, then it is advisable that any option traded before the actual economic event should have the expiration date to go beyond that date as choosing lower expiration dates will be more risky.
The same is valid when a US driven event is coming like the NFP (Non-Farm Payrolls) report in the United States. This one is released every first Friday of each month and that week is characterized by strong consolidation areas and big ranges. In this case, any option traded before the event should either have the expiration date at the end of that week, to avoid the NFP volatility, or, if the pattern is coming from even a bigger time frame, then trading end of month is recommended.
The idea from all the above is to look for an expiration date bigger than the time frame the trade is being taken on. This means if one is looking at the one minute chart, then trading minimum five minutes expiries should be ok. The five minutes chart requires minimum hourly expiries and even bigger ones, while the four hour time frame can easily be used for trading end of week expiration dates. End of month should come from the daily chart and that would be pretty much the whole strategy to connect the striking price, the time frame and the expiration date of an option.
How about the economic releases? It must be said that if the option is based on a currency pair, then it is a must to know when the central banks of the two currencies that are involved in a currency pair are meeting to establish the interest rates. For example, in the case of the USDCAD currency pair, knowing when Bank of Canada and the Federal Reserve of the United States are meeting is crucial in setting the expiration date of any option. Any other releases in between two central banks meetings are secondary to the importance the interest rate has.
What to do when Trading Stocks?
If the financial product to be traded is a stock, then knowing when the company is going to announce a dividend as well as when the earnings season starts is key as those are moment of times when the stock is really moving so adjusting the expiration date is vital as well.
All in all, it must be said that technical analysis is not working without the fundamental one and they should be both considered. Details regarding the important economic events to watch and consider can be found out by watching the two video recordings that are coming with this educational series.