Trading Momentum with Binary Options

The Role of Momentum in Trading

Whenever we look to trade a financial security, we are looking to predict its price at a future point in time. We do this by looking at past data, including where the price is currently moving and what has tended to happen more often than not given the current move.

When a market moves forward in price, we call that a bull market, and when it moves down, that’s called a bear market. Bull and bear markets address longer term trends, and while we wouldn’t normally call shorter term moves bull and bear, they are essentially the same thing, only of a shorter or much shorter duration.

Trading Momentum with Binary OptionsPeople newer to trading are generally familiar with the concept of bull and bear markets so this is a good starting point to begin to understand what we are trying to accomplish when we trade. We look to ride the waves of price, seeking to be long when the waves move up and out or short when they move down.

We never really know for sure how a market will move over a certain time period, but we often an know that one or the other is more likely than not, and this can provide us with a trading advantage. Over time, this trading advantage based upon probability will allow us to make a profit if we truly do have an advantage and if the advantage is significant enough to overcome our trading costs.

With normal trading, we need to account for our not only being right but what happens when we are wrong, and this is where risk management comes in, which seeks to limit our losses to an acceptable amount. We need to protect ourselves from paying too much in these cases and especially not paying an amount that would hurt us, both with losses from individual trades and against periods where our account balances may decline due to a run of losing trades.

If the probabilities shift during the trade and it turns out that the trade is more likely to fail than lose, then it is time to get out of the trade because the conditions that had us entering, the probability of profit, is no longer present. We therefore can say that when we trade we need to be aware of both the presence of momentum that is favorable and shifting momentum that is unfavorable.

How Momentum Plays Out with Binary Options Trading

One of the great things about binary options trading is that, provided one just holds the position to expiration and does not seek to trade it during the option period, this takes all concerns of negative momentum out of the equation. Given that newer and less experienced or successful traders struggle so much with managing the negative side of momentum, this is a very good thing if you are such a trader.

More accomplished traders will tend to trade other things actually, where they can better leverage their trade management skills, and also seek to trade things that do not involve the higher trading costs that binary options involve. Binary options also limit the potential for gain, to the payout amount, where with other forms of trading, the upside is not limited, but neither is the downside.

If we can just enter a trade and forget about it, as is the case with binary options trading, this is a big advantage to those who haven’t truly mastered managing trades, where one must make decisions throughout the trade to decide whether it is still tradeable or not and where we should exit it.

This is not to suggest that binary options trading is easy by any means, but it is certainly easier when the only decision that you have to make is whether to enter a trade or not.

These decisions to enter, like all trading decisions, need to be guided by looking at momentum, as momentum determines both our entries and our exits. By confining this analysis to just one side of the trade, the entries, this serves to make trading more manageable for those who have not yet mastered trading.

We still will be looking at momentum as the guiding force behind our trading decisions with binary options, although in this case we just have to look at whether it may have enough momentum to reach our target.

When we trade other things, we’re generally just focused on what direction a security’s price is moving, although we still need to take into account it having enough potential momentum to not only cover our trading costs but also cover our losses with the trades that end up losing money.

This is a concept that new traders aren’t really familiar with and why some of the better books on trading teach that we need to pay close attention to the upside of a trade and make sure that it is large enough to justify the risk we’re taking.

The same principal applies to binary options trading, and even more so, as if we don’t have enough momentum on our side in a trade, it can move in the direction we predict but not move enough and we can lose the money that we put into the trade, all of it.

It is quite a bit easier to calculate what direction price will move in over a given time period than it is to decide whether it will move a given amount, and both are required to be a successful binary options trader.

However, this is a task that can be accomplished successfully enough to generate a profit from this form of trading, as long as we understand what we’re trying to accomplish and know what we are doing in seeking to do so.

Time Frames and Momentum with Binary Options Trading

One of the real keys to understanding momentum in trading is realizing that momentum manifests itself differently across different time frames.

The direction of the price of a financial security can differ quite a bit depending on the time frame we look at, for instance it can be upward on a weekly chart but quite downward on an hourly chart.

In order to assess the potential for a binary options trade to succeed, we first need to look at the time frame in which the trade exists in. This does not mean using daily bars for trades that last a day, and although we do need to look at this as well, this would provide the high level view of the trade only.

We need to also look at time frames of a shorter duration than the trade, in this case looking at something like 4 hour bars for instance, to get a better idea of where the daily chart may be heading.

Since we’re looking to trade the next bar only on a daily chart, this is going to be too broad to use alone. Within a daily bar, which in our case is the current one, there is a lot of information that may not be apparent by just looking at the bar, where the price headed during the last half or third of the day for instance.

This is very important information to know, and we can only see this if we drill down a bit, to 4 hour bars for instance. If we see a favorable trend with sufficient velocity on both charts, this may indicate the potential for a profitable trade.

We might see the daily chart look favorable but have the 4 hour chart showing that things are slowing down and that can suggest that this may not be a good trade to take. We want things working together, trends in multiple time frames showing enough promise in other words to distinguish good trades from not so promising ones.

In this scenario, we aren’t going to worry about time frames too short to be meaningful, 15 minute bars for instance with our daily trades. If the trade is of a shorter duration though we may want to pay attention to time frames this short if they do serve to provide information on the current trend that is relevant to our trading time frame.

Beating Binary Options Consistently

This is no simple matter but far simpler and easier than if we look to approach this without having much of an idea about what we should be looking at or measuring, like the majority of binary options traders do.

While we don’t compete directly with other binary options traders, binary options trades are set up in such a way that the average trader will lose more than they win, and our task therefore is to be better and considerably better than the average trader.

The fact that most binary options traders are just gamblers who don’t know a whole lot about what they are doing and don’t even have much of an idea of what they don’t know is certainly an advantage to those who seek a greater understanding of this form of trading and a more systematic approach to it.

We don’t just want to look at a chart like a lot of people do and think, it’s going up, let’s go long with it with a binary options trade. That might be a bit better than random, flipping a coin and heads we go long and tails we go short, but it’s not much better.

The most important thing to do when looking to trade binary options is to learn from our mistakes and look to improve from these lessons, and there will be mistakes made and a lot of them in fact.

By keeping a journal and looking to figure out why some trades worked and why some did not, and taking what we learn from this and get better. This is how all traders learn to be good, and reading books and observing will only take you so far and the most significant lessons are learned on the playing field itself.

We should not just rely on our memories to compile these lessons and the analysis that emerge from them, as it is very helpful to compile this in a journal and this is the best way by far to keep ourselves appraised of trends occurring with our trading and also provide a more holistic view of things when we look back upon what has happened, as we must.

It is only through effort that we will succeed trading binary options, and if we are indeed committed to succeeding at this, we have to be willing to make the effort and put the time needed into this.

It’s not that doing this requires all that much effort, but it does take real time, and what is important is that we approach this task much more systematically than the gamblers do, with a real eye to what it will take to win more than we lose at this, coming up with a plan to do so, and continuing to refine our ideas as we move toward achieving our goals.

Doing this well will put us well ahead of the curve among binary options traders and place us in a position where may indeed succeed at beating the house.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

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