Trading binary options successfully requires a strategy to find the best expiration dates for your binary option. It makes no sense to look at the 1-minute chart and to trade bigger expiration dates, as well as it makes no sense to look at the four hours chart and trade lower expiration dates. That being said, one of the simple and most essential things a binary options trader must to is to adapt the expiration date to the time frame used for analyzing the market.
For example, trading on the 4h chart needs a bigger expiration date, like end of week and even end of month (if the pattern that is traded is occurring on the second half of the month). Also, trading patterns can be the trick to choose the right expiration date as well because a flat or a zigzag, for example, offers a time element for confirmation and this can help a trader in choosing the right expiration date.
Choosing the Expiration Date
Trading binary options is more difficult than trading other financial markets like CFDs for the simple fact that one needs to set the expiration date of a trade. Needless to say that sometimes when price stays in the money for the whole time until expiration date and all of the sudden it goes in the other direction and the option is a losing one then the trader feels disappointed of course.
It doesn’t mean that the trade is not good or it was not a good idea, just that the expiration date was not properly set. After all, market did go in the desired direction, only not stood there. In the FX market that can be avoided, but not one hundred percent in binary options trading.
Rookie Money Management
In order to avoid such impediment, the thing to do is to apply money management techniques on a potential trade. For example, let’s assume a trading plan is being made over the weekend on two or three different financial instruments. The way to go is to divide the amount planned to invest into three equal parts and then each and every single part that is resulting to be split in small quantities. After all, binary trading offers a percentage as an outcome so the final result should not be affected. In this case, one can switch between bigger to shorter expiration dates as both hourly and end-of-day as well as the end-of-week and even end of month expirations can be traded.
Using Timeframe to Choose Expiry Time for an Option
Furthermore, if there was a time dedicated to making a plan, then the plan should be respected as this is the whole purpose for making a plan after all. The switch between the expiration dates should be made based on the time frame the analysis is being made. For example, let’s assume that the trading technique is based on RSI (Relative Strength Index) overbought and oversold levels coupled with divergence from price. If the same setup is being used on time frames starting from the hourly chart and up to the daily chart, then it makes no sense to trade expiration dates lower than the end-of-day.
Trading end of day it does not mean that one should wait for an entire day for the option to expire in the money as if the option is taken in the second half of the day then the time until expiration is merely a few hours. Same is valid if an end of week option is traded in the second part of the week as well as if an end of month option is traded in the second half of the month. Only expectations are being changed, nothing else. In this way the trader applies technical analysis and money management skills in order to avoid one of the most important rookie mistakes of them all: overtrading and trading short term expiry times when long-terms are not taking that much time.
Short-term Expiry Rates
Another advantage comes from the fact that in this way swings caused by economic releases will have less and less impact on the outcome of binary trading as expiration date will “jump” over. Some are not fans of short-term expiration dates but also not a fan of long-term ones either. A trader should try to find a balance between the two and this can be given only by ruthless discipline together with market analysis.
The analysis is not mandatory to be on the technical side only. One can trade on the fundamental side as well, namely trade only the news. But even here, it is desired to have a macro view rather than a micro one as in this situation medium to long term expiration dates are the norm too. The recordings that are coming with this educational series are dealing with the link between different time frames and the expiration date to be chosen.