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Rules for opening contracts in binary options.
Binary options trading is quite a simple way of making money in the financial markets, compared to other methods. The main idea is hidden in the name - binary - which means something dual or two-ways, in simple words. However, in order to be profitable, binary options traders have to stick to a certain set of rules, executing a sequence of necessary steps and following an exact algorithm. There are lots of trading strategies for the binary options in the web, describing several aspects of trading. We’ll talk today about how to open deals or contracts in binary options, focusing on a simple set of rules particularly in this field.
The binary option itself means just a contract with which traders are supposed to make a profit based on a change of price of an underlying asset. The contract is just a deal between a broker and trader with different conditions on the payout volume for profitable outcomes and expiration times. Choosing the underlying asset is important for binary options trading because the overall profit and chances to get it to depend on the financial instrument, as all of that data is variable. We recommend choosing an asset not depending on high payouts but on the predictability of the instrument. So, for example, if your trading strategy is based on technical indicators, then it’s better to choose assets which are technically correct, meaning that they do not have a habit of sudden reversals, whipsaws and fake breakouts. One of the best currency pairs to trade on is EUR/USD just because it has the largest trading volume and lowest volatility among other currency pairs.
At the same time, if you trade on economic or financial news, it would be better to choose the exact asset which depends on that event. For instance, Apple shares will have a sharp price action during the company's quarterly or yearly reports, or during a new product announcement. It would be logical to buy call options Apple shares on expectations of a new iPhone model to be released. Another example is related to negative news or headlines. For instance, if Nissan CEO suddenly gets under arrest and investigation, then Nissan shares will drop and it’s worth buying put options for that financial instrument.
An expiration time and contract volume.
Binary options ways of trading are very flexible, offering traders a wide range of available timeframes, or expiration periods, which usually vary from 30 seconds to 6 months. The overall profit depends on the timeframe choice at the end of the day or month. At the same time, contract volume influences the total profit/loss ratio, so it’s always better to stick to the same contract volume for all of the deal throughout the whole trading period. That’s part of the money management strategy which is supposed to control traders from mistakes and unnecessary steps just to avoid too large losses.
Before choosing the expiration time of a binary option contract, traders should ask themselves a simple question: How often they want to withdraw their profits? If the trading strategy is based on long-term expectations and traders can afford themselves waiting for a long period before taking the profit, then daily or even weekly timeframes are preferable. Such a long expiration time is also suitable for those traders who are interested in hedging themselves from currency rate risks, for example, importers and exporters. So if your business depends on currency exchange fluctuations, then you could cover some of the potential risks by a simple action - buying a binary option for the currency pair on a long-term basis.
Short-term trading is a more popular approach for binary options, just because it gives a chance to increase your potential profits, taking the advantage of one-way directional price action or a trend. However, too short expiration time has disadvantages. The trick is that all of the financial assets are moving like waves, having lots of unpredictable fluctuations. Those changes of the price are especially powerful on timeframes like 30 seconds or 1 minute, for instance. So, even if the general trade was predicted correctly, there could be temporary shifts in the price action which could lead to unnecessary losses. Most of the experienced traders recommend choosing 15- or 30-minutes expiration periods with several exceptions like 5-minutes timeframe. From the technical analysis point of view, the most predictable timeframe is 1 hour, not shorter than that.
The next step is to choose the trading volume, or the size of the contract you’re going to open. There are lots of articles in the field of money- and risk management rules, explaining why traders should not exceed 2-5% of the total account balance for every single deal they open. The key idea is that the trading account would not be vulnerable to a total blow out in this case. That’s also the most often mistake by beginners, as they try to put all eggs into one basket, having their account balance under a huge risk of one single deal. So, if traders are seriously intended to get monthly stable and growing profit, they should not exceed that rule of 2-5% volume for every single contract. The trading volume has to be at the same level for all of the contracts and deals. Sometimes traders think that they found a 100% predictable deal. They become greedy and open a contract for a huge volume. Such deals do not exist in the financial markets and those traders will get huge losses sooner or later. So, don’t rush, make it slow.