Binary Options on the news, part 2: strategies and recommendations
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In the first part, you learned by the criteria of news for profitable trading and how to set up an economic calendar. In the second part, we continue to teach how to trade on the news: types of trading strategies and recommendations for use in addition to binary options trading signal.
Compared to the stock and foreign exchange markets, binary options have two significant drawbacks: a time limit (expiration date) and the impossibility of early closure. The option ends either in profit or loss. Brokers can close the transaction before the expiration, but the return rate does not exceed 10-15%.
A binary options trader is always in a more losing situation than a Forex trader - you can open two pending orders and wait for one of them to work after the news release. The second-order can be closed without losses at any time. Yes, you can try to open an option to exit the range or two "On Touch" options above and below the current price in the expectation that in the first minutes the price will move in different directions. But there are problems:
- The price after the news release can only go up or down. This will lead to losses on one of the "On Touch" options because it can not be closed before expiration. Given that the profit is usually less than 100% compensation for losses will not be;
- The range from which the price should go or touch levels for a guaranteed operation will be at a small distance from the current price. Brokers also understand this and reduce the profit level to 20-30% or do not allow opening an option.
The only ones from the point of view of acceptable profit will be the «Higher/Lower» transactions used in most binary options strategy. The three most common ways to trade options on the news:
- Opening an option before the news release in 20-30 minutes.
A trader opens an option based on preliminary forecasts and their correctness in the past. In the economic calendar, statistics are visible, on its basis, it is possible to assume in what direction the market will move. We look at an example:
Data on the change in the number of people employed in the non-agricultural sector of the USA, better known as Non Farm Payroll, is taken. It is published monthly and is considered the strongest news among traders. Over the past six months, only two times (highlighted in red) the forecast turned out to be incorrect and at first glance the strategy of the preliminary opening of options makes sense. But this is only at first glance. Let's see news with high volatility:
The results are not so good compared to the previous case: an equal number of correct and incorrect predictions. If you trade only on this news and the profit on option is less than 100% there will be only losses.
You can try to create a news list with positive forecast statistics, but this will not lead to a significant reduction in risk. We remind you that a profitable strategy for a binary option for newbies must have at least 7 profitable trades out of 10. Forecasts do not come true, and positive statistics can become negative at any time. It is clear that without access to insider information this type of trading has no prospects.
2. After the news release, open the option with a "long" expiration of 10-15 minutes.
At the heart of the strategy is the hypothesis that after the news is released, the direction of the market will not change until the end of the current trading day. If you look at the historical chart, one gets the impression that this always happens, but this is only at first glance. Do not forget that we analyze what has already happened, and not the real dynamics of trading, which the trader sees in the terminal. Here’s an example:
- Friday 20 September 2019: The Bank of England publishes another quarterly report. The news is strong and you can't miss the moment to open the option, especially if there is confirmation on binary signals such as vfxAlert. It can be predicted that such an important event will lead to both short-term and long-term price impulses and trends.
- The screenshot specially removed part of the historical chart to show how the trader saw the market at the time of news release:
- What do we see? At 14:00 GMT the report was published, despite the previous statistics, this did not cause sharp movements - the price moved from a downtrend to a sideways movement (flat). We can say that the market has a short-term balance between buyers and sellers and where the market will go to decide within the next 15-20 minutes.
The flat-ended with a sharp downward impulse. What prediction can be made from this fact? It is logical to assume that we have a classic situation from binary options guide, where large players fix their profits and remove the Stop Loss of small players.
Next, the trader sees the beginning of the upward movement and makes the second assumption - the market, after all, reacted positively to the news and opens a CALL option to increase with an expiration date of the end of the current day. Do not forget that the decision in which direction to open the option must be made in a limited period.
- Now that we've considered the possible process of deciding to open a position, let's see how it ended. In the image above, the full history of the expiration date of our CALL - option.
A quick continuation of the upward movement did not happen, it all depended on the expiration period - with 3-4 minutes the result of the option is difficult to predict, the price is almost near the opening level. If you increase to 10-15 minutes, you can hope for profit, if you set the expiration there will be a loss even further. Look at the second downward impulse of market makers once again taking profits and removing Stop Loss small players. Readers may object here:
- «We need to switch to a longer timeframe and make a decision on it». Yes, in this case, it may have helped to avoid losses, but there is no guarantee that a similar situation will not happen on other timeframes. Once again we remind you that we see how the situation has developed, but the trader is not.
- «Open quickly after the news». Now it is clear at historical prices. When the market is moving in real-time, the «closer» option is to news, the higher the risk. You can reduce it only after waiting 20-30 minutes when you can more likely to assess where the market is going. So all conditions are met, and the result is negative.
This is just one example where even an exact binary options strategy does not give positive results until the end of the current day. Such situations occur quite often, on all trading assets, technical analysis indicators do not help here. For example, sharp movements as in the figure above lead to "sticking" of overbought/oversold oscillators in their extreme zones and they do not react to the market for a long time even if the trend reversal.
3. At the time of the news release, a short-term option is opened.
Options open in the first 1-2 minutes after the news release when the chart already clearly shows where the first impulse of the price is going. At the same time, the expiration time is selected for each event, but not more than 5 minutes.
Such trading places high demands on three factors:
- The Internet should be the fastest available, the parameters of a computer, notebook and mobile device should be sufficient for new browsers and best binary trading platform requiring more resources than graphic and video editors.
- The delay in opening/closing an option by the broker is minimal. The result completely depends on how quickly the trade will process the client's request. On the news, every second is important, if the broker's equipment or trading terminal is running slowly, trades will open far from the declared price.
- A trader must be psychologically stable. Decisions are made quickly, without hesitation and only once. There is always a lot of stress and if you can't handle it, it's best to choose a different trading method. News trading is not suitable for everyone and beginners should definitely have practised on the demo account - professionals can have a second deposit and have time to open the opposite option with double the amount in a few seconds if the initial forecast is incorrect.
As an example, Forex's reaction to the release of NFP (Nonfarm payroll employment) data is shown on October 4, 2019.
The market provides two points for opening an option:
- One minute after the news release with an expiration period of 2 minutes:
- A minute before the news release. The last candle before the NFP often indicates where the market will go in the next 3-4 minutes.
We warn of the dangers of using turbo options after 60 seconds. A delayed opening of even 2 seconds can lead to loss, even if using the binary options bot!
Recommendations for use:
- Opening options at the time of news release requires a quick and accurate response. There are no more than 3-4 seconds to make a decision, external distractions must be removed:
- Turn off your phone and other communications (Skype, Twitter, Viber, WhatsApp). Trading practice knows many examples where a phone call or a chat message was pressed "PUT" instead of a "CALL" button;
- Close all other applications and tabs - only the broker's page and the chart of the trading instrument should remain. New sites don't pay due attention to performance, the browser may stop working at the right time when playing video on a background page.
- All transaction parameters must be determined at least 30 minutes before the news release.
- At the beginning of the week, check the time of traded events and news. Despite the regularity of releases, there may be deviations of 1-2 days or hours;
- If the chairman of the Federal Reserve System or European Central Bank is scheduled to speak on the current trading day, it is recommended to stay out of the market. In these days, the market reaction can not be predicted and if Forex traders using pending orders can make a profit on binary signals is a very high risk of losses;
- Check the profit level. Before the release of strong news, the broker can reduce the amount of payment.
- If possible, it is recommended that you close your current positions by the time the news is released, even if the profit level is small. The same goes for losing trades.
- When the first reaction to the news is unclear, we wait for the directional trend to appear, or wait for the next binary options signals. When the price is near strong support/resistance levels, open the option only after their breakout.
- When you open «On Touch» or «Inside/Outside» options, we look at a range of no more than 20-30 points from the current price. Large values (50 points or more) are permissible only with high intra-day volatility.
- For options with an expiration period of an hour or more to continue the market movement in the direction of news, be out of the market for the first 20-30 minutes - the trend has not yet been determined.
Let's summarize. The release of news and statistics, even the strongest from the point of view of fundamental analysis, will not guarantee strong price impulses or a trend reversal - there may be no movement at all.
But all traders should be able to use the news in a binary options strategy. This is a good source of additional profit, but only with strict discipline and proper money management.