If you are approaching binary options with the idea these are simple instruments, with a simple yes or no outcome then please think again as this is not the case. Whilst it may be the marketing message at present, this will undoubtably change as more traders begin to appreciate the complexity that lies beneath.In many ways an on exchange binary option has a great deal more in common with the options traded on the major exchanges of the CBOE and the CME. Binary options are sophisticated instruments, with sophisticated risk and reward profiles.
The proposition may be simple, the instrument itself is not, and as with any form of speculative trading the starting point is always an understanding of the instrument itself.Once we understand the forces driving them, the next step is to apply our analytical techniques to shift the probabilities in our favor.If you have never traded an option before, understanding the impact of time is essential. It lies at the heart of any wasting asset such as an option.
As I often say in my training rooms and seminars, in trading and investing you are never really wrong, it’s all a question of timing. Whilst I may say this a little ‘tongue in cheek’ there is a grain of truth in this statement. After all, in the world of forex, a currency never goes to zero and will eventually return to revisit a price. This may take days, weeks, months or even years, but if you have enough money and time, a losing position will eventually move into profit. And the key word here is eventually.
You have no constraints of time, and this does also assume you have no stop loss in place.Many traders approaching binaries fail to appreciate the question being asked. It is no longer good enough to be right, we have to be right within a certain period of time. If the first is difficult, the second makes it even harder. And if perhaps you may be having second thoughts about trading binaries, just remember the wasting aspect of time can work for you and against you.
As a binary trader if the probabilities of the proposition are heavily weighted in our favor, time is working for us but against the trader on the other side. The underlying price can do one of three things and we can still remain in profit. The price can do nothing,move higher or lower (provided it does not move back to the strike price) or just move sideways.On the opposite side, the trader has only one hope of salvation – the price has to move, and quickly. As time erodes ever faster, the probability of this occurring diminishes until ultimately the option expires at zero.
Equally of course, we can put time on our side as a binary option seller, as here we are selling on the expectation the event will not happen. Again if the probabilities of the proposition are heavily weighted in our favor, the faster time is eroding towards our target of zero.Understanding the importance of time and using it wisely in binary trading is therefore crucial.In the remainder of this chapter I want to share with you the tools and techniques to help you forecast future price action with confidence.
The approach you are going to learn here is the one I have used for almost twenty years, and have applied to all markets and instruments. It is the approach that has worked for me, and I hope in this introduction to the subject you will begin to understand why. It is one based on sound logic and common sense, and can be applied to any market provided that market reports volume. It is what I refer to as volume price analysis, and I am going to introduce and explain the broad ideas and concepts.
I have written a book on the subject called A Complete Guide To Volume Price Analysis, which you can find on Amazon, and I do hope that once you have read this chapter you will become a volume believer too.Volume price analysis is premised on some straightforward principles. The first and perhaps most important, is that both volume and price are leading indicators.
They are the only indicators we have with which to forecast future market price action based on what is happening at the live edge of the market. Every other indicator we use is lagged in some way, and is considering past price action to forecast the future. The second point is this – volume and price on their own are just that. One reveals the activity as a volume bar, and the other reveals the price action, again in a bar or candle.
On their own this is all they reveal, but put them together in volume price analysis, our charts explode into life. Suddenly, using the analytical power of volume and price, we can forecast where the market is heading next, and even more importantly for binary trading the associated strength of any move.Volume is the fuel that drives the market. It is the power behind the price action. A market needs volume to move, both higher and lower. If there is weak or low volume the market is not going to move far.