Binary Options with Ranges
When working with binary options there are several more exotic ways you can trade them other than the simple yes/no, in or out of the money trades. One of these methods is called range trading, also sometimes known as boundary trading. People who study investment assets such as stocks and commodities will tell you that almost 70% of the time these assets will stay in a so called ‘consolidation’ or ‘tunnel’ phase, where movement of the asset stays within a certain range.
When placing a range type of trade, the trader is betting that the asset will finish in or out of its normal predetermined consolidation (tunnel) range within a specified period of time.
Here is an example of how a binary option range trade works to help simplify it. You are looking at making a binary option range trade based on USD / EUR. The current trading for USD / EUR is 1.9 and the current predetermined range you are given to work with is .99 to 1.25. Based on your analysis you feel that when the option expires the new range will be about 1.29 so you take the ‘out of range option’. The option actually expires at USD / EUR 1.26 and out of the predetermined range so you finish the trade in the money and collect your already established percentage.
That is the beauty of trading binary options because they are so simple to see the resolution on and you already know your profit or loss at the time of the trade.
When betting that binary option will finish out of a range a lot of traders will tell you they like to see at least two areas of resistance on the chart and two areas of support before they will make this type of trade. The reason for this is that one area of support or resistance is not enough to make a confirmation that movement is about to take place. It is more often than not after a second area of support or resistance that price often exceeds the predetermined range. One has to be very careful with this when identifying this possible movement so they are not fooled into making a bad trade.
When trying to identifying ranges a couple of things must be determined. The first is to find the pattern of the previous trend before it went into its consolidation area. The second is to determine whether the move of this previous trend was bearish/bullish and impulsive or simply corrective.
Once these things are established you can then establish the amount you want to trade and the time frame you wish to trade in.
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References and Further Reading:
1. Design and implementation of auto-trading system for forex (AJ Xu, WJ Zhang – 2010)
2. Investment Trading and Strategy Development (A Arnal – 2014)
3. Forex on Five Hours a Week: How to Make Money Trading on Your Own Time (R Horner – 2009)
4. Forex prediction with neural network: USD/EUR currency pair (Y Vyklyuk, D Vukovic, A Jovanovic – 2013)
5. Going Beyond 70 And 30 In Forex (J Saettele – 2013)
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