In order to make the most profit with binary options trading, it’s important to evaluate the probability of coming out in or out of the money. Understanding how likely an asset is to end above or below a specific amount is the absolute basis of binary options trading, but it’s also important to realize that this likelihood changes over the course of a single trade, sometimes by a second. You may have entered the trade because it had a high probability of success; but due to changing markets or fluctuating assets, the probability dropped as the trade went on. This is the point where those who trade on the Nadex exchange, or other platforms that allow it, may end a trade early to reduce their risk.
As you can see, probability is the name of the game. Traders can use it to create strategies that help them succeed at binary options trading. Let’s examine a few of those strategies, and how probability comes into play for each:
Snap-Back Strategy
A snap-back is a strong movement that bucks the trend. If an asset has been steadily trending towards a specific behavior, and suddenly takes a strong turn in the opposite direction, that first instance of movement is the snap-back. Probability says that an initial snap-back is always followed by a short trend in the direction of the snap-back. Usually, there is a short period where the asset will stagnate right after the snap-back, only to follow the new snap-back trend afterwards. By watching for the snap-back, getting in during the stagnation while prices are down, and then buying the option that follows the newly set trend, traders can maximize the risk vs. reward ratio.
This type of strategy requires patience, but it can be used to great effect. However, anyone using this strategy needs to be constantly evaluating the asset, watching for signs that it will turn back to its typical behavior. It’s important to get out before that happens, when your risk vs. reward ratio becomes much less desirable. The reason that this strategy works is because most binary options traders are looking at assets in overall pictures, rather than evaluating the minute fluctuations that cause these brief, valuable snap-backs.
Martingale Strategy and the Gambler’s Fallacy
One important thing to understand about probability is that it is not affected by the past. For example, a coin that is tossed one time has a 50% chance of coming up heads or tails. And, even if the coin comes up heads nine times in row, it still has the same 50% chance of coming up tails on the 10 th time. Assuming otherwise is known as the Gambler’s Fallacy, and it’s a common mistake that beginner traders make. Yes, it’s true that analyzing the past behavior of an asset can help a trader understand the chance the asset has of ending in or out of the money; but at the end of the day, the specific market characteristics at the exact time of the trade are all that matters when calculating the probability of risk vs. reward. That’s why it’s so vital that traders constantly evaluate their trades.
So, keeping this in mind, the Martingale strategy draws on the idea that probability remains the same for each instance of trading. The way it works is best illustrated by a coin toss: a gambler would bet $1 that the coin would come up heads. For every time he lost, he would double his bet. By the time the coin finally came up heads (a 50/50 chance each time), he had bet a larger sum, meaning he would win a larger sum. Traders using this strategy double their stakes on a small investment each time the trade comes up out of the money, trusting that eventually, probability will follow through and give them a larger payout.
By understanding how probability works, binary options trading can be much more profitable.
For more information:
https://www.facebook.com/onetwotrade
https://www.youtube.com/user/onetwotrade