Forex strategy for binary options: transition difficulties

When moving to new assets in the trading world, given the amount of effort and time it takes to develop an effective strategy, many people prefer to use proven systems. Is it possible to successfully adapt a Forex methodology to trade options? Let’s find out.

Let’s say right away that not all strategies that work consistently in the Forex market can be safely applied to the binary options market to avoid rapid loss of the deposit in just a few trades. The common feature for binary options and other market assets is just the need to accurately determine the time of entry and the direction of movement. However, once positions are opened, the logic of working with them can vary considerably.

Main differences between binary options and the normal foreign exchange market

In the Forex market, the result of an order can only be calculated approximately, as it depends on the difference between the opening and closing prices. The open position is constantly monitored, and the loss can be limited with a StopLoss order. TakeProfit orders are used to lock in profits, and the levels of stop orders can be adjusted. A trader can decide at any time to close an order manually or partially close it, as well as open a counter trade. Time frames in the Forex market are not critical.

In the case of binary options, a rigidly defined amount of profit (or loss) is assumed, and the price of the asset during the transaction does not matter. The closing time (expiration) and the direction of the option are fixed in advance, and after opening the trade, the trader is only left to wait for the time to arrive. Some brokers may offer the opportunity to close the option before the expiration time, but in most cases, once the binary trade is opened, the trader cannot influence its outcome. Neither profits nor losses can exceed a predetermined amount. Predicting the exact price at any given time in binary options is a difficult task, and indicators can only help to estimate the probability of price direction. However, the exact time and price remain unknown factors, especially in today’s speculative market.

Reasons why currency traders fail in the binary options market:

1. Greed and gambling: Fast 15-30 second turbo options and short-term 2-3 minute trades make many people dream of instant super-profits. Traders are eager to squeeze profits from minute market chaos that defies analysis. Even successful scalpers in M1 find themselves on a slippery slope when working with fast options, where all their experience becomes a gamble. The problem is often solved by moving to longer-term trading.
2. Dual analysis problem: traders often analyze on one platform and trade on another. Quotes and indicators on different terminals may not match, which creates additional complications. This problem can be avoided by choosing a broker that offers binary options in the popular MetaTrader, such as Grand Capital.
3. Trading without strategy: Many people are convinced that binary options are an easy way to make money, which sometimes leads to ignoring systematic trading. This problem is usually solved by practicing and returning to regular markets.
4. Copying Forex strategies: Transferring strategies from Forex to binary options is often ineffective due to differences in opening and expiration times. To solve this problem it is necessary to adjust the trading mentality and calculate the correct expiration time.
5. Manipulation violation: In the forex market, traders can earn a lot by using leverage and long trades. However, in the binary options market, profits are fixed and many traders unconsciously seek to quickly increase their deposit, often resulting in losses. This problem can be solved by aligning money management strategies.

What to do? Learn how to manage your time and capital effectively.

How to determine the expiration period?

The objective of an option is for the price of an asset to reach the set contract price (or a certain “upper/lower” level) on the expiration date. For a strategy to be successful, only the entry signal is important, that is what you should focus on. Any information not related to direction determination (TakeProfit, StopLoss, spreads, swaps) is superfluous in this context.

To determine the optimal expiration period, it is necessary to perform a price history analysis or a small test with fresh quotes. The objective is to calculate the average time it takes for the price to reach profit, which will be the reference point for determining the option period.

For example, if, based on Forex statistics, the price usually fluctuates for 10 minutes after an entry signal and then moves into profit with a high probability. In this case, we set the option period to 10 minutes and expect to be successful.

What techniques can be effective?

For binary options they are excellent:

• strategies for breaking channel boundaries, key levels and Pivot levels;
• candlestick and harmonic pattern analysis, classic chart patterns, especially effective on long options using Price Action;
• scalping techniques using standard indicators;
• trend strategies based on strong momentum.

An example of adapting a trend strategy

For short duration trades, as in the case of binary options, we choose a scalping technique. An example would be the classic strategy using a pair of moving averages EMA(20) and EMA(50).

The basic principle of this strategy is to enter the market when the price reaches a range between the two moving average lines, moves out of them and immediately exits that range. The price should not remain between the two moving averages for more than 3-4 bars.

To determine the optimal expiration time, we perform a short-term test on the time frame in which we plan to work with binary options, e.g. M5. From this test we identify 4 moments for which the maximum expiration time should not exceed 10-15 minutes.

This strategy assumes a risk per trade within 1-2% of the total deposit. For example, for an account with a balance of $1000, the volume of binary options (in terms of money) should not exceed $20.

From my personal experience: in a relatively calm market (without news events) it is quite possible to use Pivot levels. It is a simple, clear and quite reliable method, known in trading for a long time.

Pivot levels help to determine the price direction: above the Pivot level there is an overbought zone, below – oversold. The probability of a reversal from this zone is quite high. For information, it is recommended to use standard indicators or external information resources, such as ru.investing.com, where data is systematized and regularly updated.

When using Pivot levels, choose a data period similar to the opening of a binary option. Wait for a new candle to open and compare the price to the midline price. If the opening price is higher (more than 5 pips), open a PUT option with a 5-minute expiration; if it is lower (at least 5 pips), open a CALL option. If the price is close to the calculated levels, the probability of a retracement is also high, but additional analysis will be necessary.

What is the final result?

A successful binary options strategy is a coveted achievement for any trader. The interaction of the experience of trading binary options with conventional assets only makes us stronger, both technically and psychologically. While in the forex market we have to work with prices and their levels, binary options train us to control time; although we cannot directly influence the price, we can control the expiration time. A well-chosen closing time allows us to make money even where a long order in the forex market can lead to losses.