Trading Binary Options: Strategies and Tactics

Preface xiii

Acknowledgments xv

INTRODUCTION

What Are Binary Options and Why Are They Important? 1

Nadex versus CBOT Binaries 4

References 5

CHAPTER 1

Key Features of a Binary Option Contract 7

Defi ning the Key Features 7

Strike Price versus Underlying Market Price 8

Currency Pairs as an Underlying Market 11

Moneyness 11

Moneyness and Trader Direction 12

The Role of a Market Maker 14

Sample Bid Ask at Nadex 17

CHAPTER 2

Profit Opportunities in Binary Option Trading 19

Expected Probabilities 19

Winning Occurrence Analysis 23

CHAPTER 3

Sentiment Analysis: The New Predictive Tools 27

Defi ning Sentiment 27

Applying Sentiment Detection Tools 32

References 41

CHAPTER 4

Tracking Economic Forces that Impact Markets 43

The Fundamental Forces 44

Correlations Involving Binary Markets 47

Fear and the U.S. Dollar 52

Foreign Ownership of U.S. Treasuries 58

Crude Oil 59

Implications of Historic Commodity Plunge 60

Carry Trade and Interest Rate Differentials 63

Central Bankers Move the Markets 65

Evaluating Currency Pairs 66

Using an Economic Calendar as Trading Tool 67

CHAPTER 5

Basic Technical Analysis 69

Key Candlestick Patterns 69

Trend Lines 74

Support and Resistance 77

Confi rming Strength with Price Break Charts 82

Key Patterns for Trading Analysis 89

Fibonacci Resistance Lines 94

References 97

CHAPTER 6

Advanced Technical Analysis: Volatility Tools 99

Defi ning Volatility 99

Bollinger Bands 100

VIX: The Fear Index 110

Option Volatility and Sentiment: Put/Call Ratios 116

Volatility Smiles 119

Cycles as Trading Tools 124

Reviewing the Tools 126

CHAPTER 7

General Binary Option Trading Strategies 127

Core Strategies 127

Examples for Strategy Selection 129

Combination Strategies 149

References 151

CHAPTER 8

Strategies for Analyzing Event Risks 153

Key Steps in Analyzing Event Risks 157

Putting Strategies and Tactics Together: Timing and Managing Trades 161

Intermarket Uses of Binary Options 163

A Word on Intraday Strategies 164

References 164

CHAPTER 9

Risk Management in Theory and Practice 167

Deal or No Deal? 168

The Confidence Index 168

Lot Size Management 169

Offsetting Trades: Failing Forward 170

Leverage and Margin 171

References 171

CHAPTER 10

Evaluating and Improving Trading Performance 173

Key Performance Metrics 173

Strategy Scorecard 176

Performance Challenges 177

Analytical Challenges 179

Know Your Trading Personality 181

Targeting Total Returns 182

CHAPTER 11

Algorithmic Approaches for Binary Option Trading 187

What Is Algorithmic Trading? 187

Advantages and Disadvantages of Automated Trading 187

Developing a Trading System 188

Evolving Your Approach 190

CONCLUSION

The Future of Binary Option Trading 193

Appendix A: Test Your Knowledge 195

Appendix B: More Training Tools and Tests 205

Appendix C: Nadex Contract Specifications 207

Appendix D: Examples of Cycles in Binary Option

Underlying Markets 215

About the Author 221

Index 223