Trading strategy: One touch binary options
One-touch binary options – options that pay a predetermined amount if the strike price is reached before expiry – are a financial innovation useful for various situations. They’re named one-touch because they only have to touch the strike price once to pay out, and the trader doesn’t have to worry about the market price remaining above the strike price until expiry.
They contrast with high-low binary options in that a strike price is specified for one-touch, but only a direction is required for high-low options. Reaching this strike price within the allotted timeframe is much less probable, leading to greater risk (and therefore greater payoff) for the trader.
Since the spot price must move towards and touch the strike price for the payoff condition to be triggered, traditional momentum trading strategies are useful for one-touch binary options trading.
Momentum Trading Indicators
The buy/sell indicators for momentum trading lend insight into whether any particular contract would become a profitable one-touch trade. The foundational condition is having the underlying asset’s price move in the correct direction. Here we discuss three of the most common, but plenty of others ones are available (and if you’re a math person, you can create your own).
The most common and easiest to use are moving average (MA) indicators. The main idea is that as “faster” moving averages cross “slower” averages, the price trend will continue in that direction. Faster averages are more sensitive to recent prices because they take fewer timepoints into consideration: a 20-period MA looks at the last twenty price points, and each period contributes 5% to the final average. A 50-period MA looks at the last fifty price points, and each period contributes 2%. So every price in a shorter MA affects the MA’s price more (5% vs 2% in our example).
When a faster average crosses above a slower average, we have a buy signal: the recent price activity indicates an upward trend, as recent prices are higher than the longer-term average. As an example, if gold’s 20-period MA crosses above its 50-period MA, a long one-touch binary option is a trade to consider.
MACD binary options strategy
The MACD indicator is actually comprised of three moving averages and their differences: a slower MA is subtracted from a faster one, and this difference is compared against an even faster MA. Usually exponential MAs are used, and the most frequent setup is the 12-period minus 26-period EMA graphed against the 9-period EMA. The latter is called the signal line. When the difference line crosses above the signal line, we get a buy signal. We can also determine if a particular asset is overbought or oversold (i.e. time to sell or buy, respectively), by how far away the difference line is from the zero line (when the 12-period MA equals the 26-period MA and their difference is zero). The farther away from the line, the more extreme the trend and the higher the probability of reversal.
Relative Strength Index (RSI)
A good indicator to use in conjunction with MACD is the RSI, which normalizes recent price activity to a 0-100 scale. Strong recent performance generates a high RSI. This indicator is less precise, as it relies on three categories: 0-30 is underbought (recent poor performance and likely to increase), 30-70 is normal, and 70-100 is overbought (recent price action is excellent and likely to lose momentum). It is wise to avoid long positions in one-touch trades if the RSI is high, because it is unlikely the momentum can continue.
Resistance and Support
One charting technique that is essential for one-touch binary option trading is looking at resistance and support levels. If a long one-touch carries a strike price just above a resistance point, it will probably pay better than one with a strike just below the resistance point. Why? Because the brokers offering the option know the market will probably hit the resistance point then fall, never reaching the higher level. That means they never pay out – and you lost.
When trading one-touch binary options, it’s essential to consider momentum and how long the momentum can continue.
Fundamentals matter with binary options
A lot of traders ignore fundamentals and focus solely on price action, but some of the best opportunities are value investments. By simply charting, one risks overlooking long-term prospects. And if fundamental analysis indicates a contrarian investment is in order, the one-touch options might be extremely cheap: the market does not expect the outcome, so it places a high payout on the option.
This means it is necessary for traders to also pay attention to earnings announcements, products in the pipeline, marketing strategies, global events, and overall financial health. A strong performer may have poor scaffolding underneath. And even the strongest company can fall victim to economic policy, catastrophes, and regional unrest.