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Once you've learned how binary trading works, you might look to develop an effective binary trading system.
A binary trading strategy is a well-researched, consistent and reliable plan that you can apply to all of your binary trades in an attempt to maximise your potential for profit. There are a number of things to consider when designing and implementing your own bespoke binary trading strategy.
With binary trading you just decide whether you think an event will occur within – or at the end of – a set timeframe. You choose between two possible outcomes for each binary trade: you ‘buy’ the binary product if you believe the event will occur, or ‘sell’ the binary if you don’t think the event will occur.
Binaries offer trading opportunities in all market conditions, with the potential to profit from quiet, sideways-moving markets as well as from fast-moving, volatile ones. You can, by trading a combination of different binaries together as part of your binary trading system, take a view on market volatility in either scenario without necessarily speculating on which direction the market will move.
Your binary trading system could also involve trading binaries as a short-term hedging strategy for protection on other regular CFD or spread betting positions that you may hold.
With CMC Markets binary trading is a limited-risk product, meaning that you always know in advance exactly how much you stand to win or lose on each trade. Therefore, the approach you would take to risk management when trading CFDs or spread betting doesn't apply to binaries. For this reason it's not necessary to incorporate risk management orders such as regular, trailing or guaranteed stop losses into your binary trading system.
This doesn't mean you shouldn't include some kind of risk analysis in your binary trading system. You should consider the fundamental and technical factors affecting the instrument you're trading as part of the decision-making process you follow before entering a binary position, and factor any relevant risks into your process and strategy.
You can build a technical analysis element into your binary trading system to help you identify trading opportunities and trade entry points. The CMC Markets charting package includes ten different chart types (including candlesticks), over 20 drawing tools (including trendlines) and 75 technical indicators, including Bollinger Bands®, MACD, SMAs, ichimoku clouds and the RSI.
Having access to a built-in charting package and technical analysis tools can assist you when it comes to binary trading as it allows you to conduct additional in-depth analysis on the instrument you are looking to trade.
Let’s say it's 9am and has been a relatively quiet morning so far. The underlying FTSE 100 index is trading within a steady range. There are no economic data releases scheduled for the remainder of the day, and you think there is a good chance the FTSE 100 will close within a 20-point range of its current level. The underlying market level is 6000.
We are currently offering a binary sell/buy price of 39/45 for the ‘UK 100 above 6010’ Ladder, and 60/66 for the ‘UK 100 above 5090’ Ladder.
You believe that the index will close somewhere around 6000, and so decide to sell the ‘UK 100 above 6010’ Ladder at 39, at a size of £5, and buy the ‘UK 100 above 5090’ Ladder at 66, also at a size of £5.
The UK 100 settles at 6004.5. As a result, the ‘Above 6010’ Ladder expires at 0, and the ‘Above 5090’ Ladder expires at 100. Remember, your profit or loss is based on the difference between your entry price and the binary expiry price (100 or 0).
This means you make a profit of £195 (£5 x [39 – 0]) on the ‘6010 Ladder’ and £170 (£5 x [100 – 66]) on the ‘5090 Ladder’, so your total profit for the strategy is £365.
Remember, if you had guessed the event outcome incorrectly you would have made a combined loss of £635 (£305 sell trade [100 – 39 x £5]) + (£330 buy trade [66 – 0 x £5]).
Let’s say it's midday on Friday and you are anticipating the release of the US non-farm payroll figures at 1.30pm (UK time). You are holding a long £10 per point spread bet spot EUR/USD position, and are worried that a strong number will cause the US dollar to rally, potentially triggering your stop-loss order around 150 points lower than the current market level (1.10000).
We are offering a One Touch binary sell/buy price of 5/9 for ‘EUR/USD to touch 1.08500’, for the binary expiring at 3pm, after the payroll data is released. You buy at 9, as you believe the price will touch 1.08500, with a size of £5, to hedge your spread bet position in case the market does move against you.
As you feared, EUR/USD drops sharply after the payrolls are released, and the pair is now trading below 1.08500. Your stop is triggered and your spot position is closed at a loss. However, the market has touched your binary strike level and your One Touch binary position closes at 100 as a result.
You have made a profit of £455 (£5 x [100 – 9]) on the binary to net off against your spot trade. Remember, your profit or loss on binary trades is based on the difference between your entry price and the binary expiry price (100 or 0).
Conversely, if you had guessed the event outcome incorrectly you would have made a loss of £45 (9 – 0 x £5).
View a more detailed example of a binary trade.