Most binary option traders can be considered as day traders. Binary options were created to improve the performance of day trading strategies. They allow you to open and close a trading position multiple times during the same day to benefit from small price moves on the underlying asset. You need two things to build successful day trading strategies: good timing and good risk management. In order to profit in short periods of time (several minutes to an hour) traditional day traders will typically look for volatile stocks. The implied volatility makes each trade riskier than traditional buy and hold trading strategies. Most of them will use some News Trading skills that consist of trading stocks that have just or are about to release news, report earnings, or have another fundamental catalyst that is likely to strongly impact the price of the related asset.
Binary options are perfect instruments for day trading
With binary options, you don’t necessarily need the underlying asset to be that volatile. Indeed, you can use the leverage effect of binary options to also benefit form really small moves in price. It is one of the biggest advantages of binary options. As long as the asset price goes slightly up or slightly down, depending if you bought a Call or a Put, you can generate a performance of 80% on your invested capital. The other interesting thing with binary options, compared with traditional day trading or leverage day trading via CDS, is that you cannot lose more than you invested capital. Although you may lose your investment pretty quickly if the asset price evolves in the opposite direction, you cannot lose additional funds. A trader that would use a CFD with a leverage ratio of 20 can start losing money if the underlying just goes 5% on the opposite direction of your trade. With volatile equity stocks, this move can happen pretty quickly. If you buy a binary option, you cannot lose more than the amount invested on the trade.
Day trading is all about timing and risk management
There exist many fundamental and technical day trading strategies. The most popular ones are the Gap and Go strategy, the reversal strategy, the pullback trading strategy and the breakout trading strategy. We cover some of these day trading strategies in the relevant website section. Each of these strategies requires the same skills and tools. You need to screen for technical patterns across a list of assets (gap, breakout levels, momentum trend…), once all the indicators suggest the technical pattern is likely to realize on a specific asset, you need to check for the fundamental background behind the move in order to avoid any reversal. If all the lights are green, you can open your trade with a strong conviction and generate a quick profit.
All of the above indicators and methods will help you improve your timing skills, which are critical to any day trading strategy. Nevertheless, you should also keep on learning about binary options and learn to manage your risk if you want to achieve success. These risk management rules may vary from one trader to another or from one strategy to another but some of these rules must always be respected if you want to avoid the mistakes of beginners. You need to have a fixed number of trades and losses you are willing to make every day and you must never break this rule even if you face a long string of losses. You then need to combine these different rules to find the combination that fits you. Your money management rule only determines the path you should follow and help you keep a cold hearted relationship with your trading. An example of an efficient money management rule could be the below:
- Risk 2% of account per trade – $1000 account, risk $20 per trade
- Stop trading once 5 losses made on same day (10% loss)
- Stop trading once 3 wins made on the same day
Another important risk management rule for day trading strategies would be to always build a trading plan and stick to it. For every transaction you open, you should have a strong conviction about your market scenario and stick to it, whatever the evolution of the related asset price. You need to determine your entry point, your target price and your stoploss before you open your trade. Once all these levels are fixed, you will be able to have a cold hearted relationship with your trade that then needs to be based on multiple documented arguments.
Don’t hesitate to have a look at the websites of our recommended brokers that are all regulated and that propose multiple educational contents to help you improve your trading strategies. Feel also free to check our detailed review of each broker in order to find the one that match your needs and your trading profile.