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Trading Binary Options: Strategies and Tactics

Abe Cofnas, Addison Wiggin (Foreword by)
ISBN: 978-0-470-95284-9
256 pages
December 2011
Trading Binary Options: Strategies and Tactics (0470952849) cover image
An essential guide to the fast growing area of binary options

Long the province of professional traders, binary options are now offered to retail investors through the North American Derivative Exchange (Nadex) and a growing group of online brokerages. Now, with this new book, author Abe Cofnas explains how independent traders and investors can use binary options to speculate on price movements and global events.

The great appeal of binary options is that they are less complex than conventional options and provide a simple method to trade based on an opinion of where the market is headed over a certain period of time. Engaging and informative, this reliable guide reveals how binary options work, what are the best binary options trading strategies, and when to use them.

  • Identifies the various markets in which binaries are available
  • Offers insights on how binary options allow for opportunities to speculate on the direction of a market and receive a substantial payout
  • Provides suggestions as to which markets provide the best liquidity and lowest trade execution expenses

As the first book solely devoted to this topic, Binary Options will provide retail traders with an authoritative guide to trading this exciting new market.

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Foreword xi

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

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Abe Cofnas has been the forex trading columnist for Futures magazine since 2001 and has writtenover 100 columns on forex trading strategies and tactics. He is also the author of three Wiley titles,Sentiment Indicators, The Forex Trading Course, and The Forex Options Course. He has, for over two decades,provided fundamental and technical analysis on trading strategies in currencies and inter-markets. He is the founder of learn4x.com, which provides private coaching and seminars on currency trading. In 2008, he formed FXDimensions Inc., a third-party trading system and signal development company that has pioneered the concept of algos that detect trader behavioral patterns. He is a recognized expert in technical analysis and has lectured in London and Dubai (with appearances on CNBC Arabia) and continues to work with students and businesses abroad. Cofnas generates weekly alerts on binary options for Agora Financial's Strategic Currency Trader newsletter. He holds a master's in political science and a master's in public policy from the Graduate School of Political Science, University of California, and the Goldman School of Public Policy, University of California, Berkeley, respectively.
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