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How To Make A Binary Options Trading System

Updated on February 26, 2014
Binary Market Analysis is a good source of information on binary options, trading and the best binary options brokers.
Binary Market Analysis is a good source of information on binary options, trading and the best binary options brokers. | Source

Binary Trading Systems Always Start With Analysis

It takes some time and dedication in order to be good at stock market analysis. The good news is that you use the same technical and fundamental analysis to trade binary options as you do to trade any other financial instrument. That being said there are numerous sources of information on the subject. I have several articles in this series that can help a newcomer get started or lead a more experienced trader to information you need.

  • Fundamental Analysis - Fundamental analysis is the study of the market, it's participants, what drives it and its inherent strengths or weaknesses. This could mean the general market as represented by the S&P, the DAX or the FTSE. It could mean an individual stock, commodity or currency pair like APPL, spot Gold or EUR/USD. Good fundamental analysis is like having your finger on the pulse of the market being studied. This depth of knowledge takes time to master but can be applied to trading strategies along the way. Try to stick to only a few markets, read all the news, learn some history and sign up for the press releases. After nearly ten years of trading I have narrowed and expanded and then narrowed my focus several times. I currently watch a handful of world indexes, 2 currency pairs and 2 commodity indexes. I do not trade them all all the time, I watch them all day to day and make a trade in each one as my signals develop. Fundamental analysis can help tell you which direction a market is moving and how it is valued by the market. It does not do a very good job of pointing you to entry and exit points.
  • Technical Analysis- Technical Analysis is the study of financial markets and price movements. Technical analysis uses charts of weekly, daily or shorter time frames to determine trends and market strength. In a sense, technical is a form of applied social science. It assumes that all things are known, will be known or are being anticipated by the market and that those things will or are being shown to us through price movement. Technical analysis uses trend lines, oscillators and other types of indicators and measurements to predict price movement and market strength. Trending, reversing and range bound markets all give off unique signals that can be tracked and anticipated. Investors, traders, speculators and gamblers all use technical analysis to help pinpoint price movements, entry and exits points.

About Me...

I have been an avid market watcher, investor and trader since 2005. I am not a licensed or registered broker, dealer or representative. My fascination with financial markets and trading has led me on a roller coaster ride of experiences that have led me here. I became interested in binary options in 2011 and have been researching, reviewing and trading them ever since. I am trying to help dispel some of the myths associated with them. They are highly speculative but are a great way to speculate for those who can't or don't want to trouble themselves with futures, options and margin accounts. Because of their accessibility the industry does attract gamblers. Binary options are highly speculative and very risky. I highly recommend you learn all you can about them and consult a professional before making any decisions.

My Approach To Trading Binary Options

I always begin with the economy, globally and locally. How are things going, what are the signs and what are the expectations. Next I will move down to a specific market, lets say the EU Fake Index 500. At this point I will use a chart of a long term time frame to see how this market is doing in relation to my economic outlook. After that I move down to charts of daily closing prices and see how it looks. I check all my indicators, look for convergence and divergence, and make my decisions then.

A good package of trading signals, usually free with any charting system, should include a support and resistance indicator, a trend following indicator and at least two oscillators. Other types can be applied as well. Indicators like Bollinger Bands and Elliot Waves also give good, reliable signals. I get charts from OptionsXpress, they are live streaming charts and have dozens of indicators, way more than I will ever use or explore.

Binary Options Technical Signals

Stochastic is one method for giving binary options signals.
Stochastic is one method for giving binary options signals. | Source

Technical Analysis Oscillators

MACD and stochastic are two oscillators that do a variety of things for traders and investors. They can help judge trend, predict reversals and give buy and sell signals when used properly. The strongest signals that oscillators give is when they occur in two or more time frames at once. Many traders will even wait for a triple cross before trading on these signals. Here are some other types of oscillators.

  • Relative Strength Index
  • Chaikens Money Flow
  • Twiggs

Learn To Read Binary Option Signals

Binary options signals are the same technical and fundamental signals as any other tradable derivative. Candlestick charts, moving averages, oscillators and other more esoteric technical indicators all apply. The only difference is that the nature of the analysis is simplified. There is no worry over whether a stock moved far enough or quickly enough in order to profit, only that it did. This is when technical analysis comes into play. Trend lines, support and resistance, oscillators, Bollinger Bands, Elliot Waves and many, many more types of indicators can be used. Don't get discouraged. You do not have to learn to use them all, just 3-5.

I recommend using multiple time frames for your binary options strategy. Common time frames used by successful traders are weekly closing prices, daily closing prices and then a shorter term like 1 hr, 30 min or 15 min closings. Some types of indicators like stochastic can be applied in any time frame and some others work better in one. Typically, the shorter the time frame the less important and less reliable the signal. This is why 60 second options are gambling and why I stick to weekly or monthly closings.

Indicators that I commonly use are Fibonacci Retracements, 30 and 150 day moving averages, support and resistance lines, MACD, stochastic and the VIX. Fibonacci Retracements are potential support and resistance indicators based on the work of the famed mathematician Fibonacci. It is uncanny how often these predictions coincide with market movements. Fibonacci's can also help confirm your own support and resistance lines. The moving averages are trend following and trend confirming. They can also become support or resistance. Any area of support or resistance you can confirm with all three of these is likely to be a very significant area, possible a bottom or a top or even confirming a breakout.

Two Kinds Of Binary Options

NADEX is the best choice for U.S. binary options traders. There are several good choices among the CySEC regulated brokers.
NADEX is the best choice for U.S. binary options traders. There are several good choices among the CySEC regulated brokers. | Source

Pick A Binary Options Strategy

There are quite a few ways to trade binary options and your choices depend on where you live. The bulk of binary options brokers are based off shore, primarily in Limossol, Cyprus. These are regulated by CySEC, the MiFIB and other EU governing bodies. NADEX, the North American Derivatives Exchange, is headquartered in Chicago and provides services for U.S. traders. U.S. traders can also trade CBOE and AMEX binary options. European and American binary options are similar and different. The similarities make them both easy to trade and give access to world markets. The differences between the two are subtle but important to understand in order to trade successfully.

  • CySEC Binary Options Are the best for traders located outside the U.S. They may not be legal in your area so be sure to check. CySEC regulated binary options brokers can operate in any country within the European Economic Arena and other countries friendly to the EU such as Canada and Australia.
  • NADEX Binary Options Are the best for traders located within the U.S. NADEX is an exchange that you can join. It allows you access to the trading floor through their online platform where you trade binary options at market prices. NADEX binary options are a 0-100 binary option, are liquid and can be traded at any time up to their expiration.
  • Binary Options Regulation Is confusing. CySEC binary options brokers are not regulated by the CFTC or the SEC and can not, or are not supposed to, market to U.S. citizens. NADEX is the only U.S. regulated binary options exchange.

Your strategy will depend on which type of broker you use. NADEX binary options are bought and sold, can be a credit position and are traded throughout their life. CySEC binary options are not liquid, are not traded before expiration and can not be a credit position. However, more and more products are being offered by CySEC binary options brokers including 60 second options, one touch options, range options, Option Builder and even a form of 0-100 options offered by AnyOption. Treat your strategy like your analysis. Learn every in and out, when to use it, when not to. When strategy and signal coincide you'll have a good chance of success.

1% Rule For NADEX Binary Options

Account Risk$
Position Risk
Position Size
1 Lot
2 Lots
4 Lots
This table shows how the 1% rule can be applied to NADEX binary options. It assumes the position risk is less than $50 but this will vary with strike and the price of the underlying.

Tip For Position Sizing

To be effective position sizing must be applied to each and every trade consistently. Let me reiterate each and every trade consistently. This is a crucial part of a successful system. A string of losses could easily wipe an account out. This is why trading binary options is so risky. There is no underlying value to the options, when they expire you lose your money.

Create A Binary Options Risk Management System

Risk management and position sizing are the foundations of any good investment or trading strategy. Because binary options are purely speculative in nature and have no underlying value it is important to handle your account with care.

  • 1% Rule - 1% of $10,000 is 100. If you are trading European style binary options which return 70-80% on average you can profit $70-$80. If you are trading NADEX, CBOE or AMEX binary options the potential profits could be much higher. Options of either kind can be purchased for $50 or less depending on market conditions. Stick to risking 1% of your account with each trade and make trades as your signals develop.

Position Sizing

Position sizing is very important. It is how you maximize your trade size while protecting your account balance. Assuming you will be following the 1% rule and your account is $10,000 that means you can risk $100. This is your account risk, it is how much of your money you are willing to risk according to the 1% rule. This does not necessarily mean you will be trading $100. If your are using NADEX for binary options this would be the case. You are only going to risk $100 so you can buy as many lots as $100 will buy, or sell depending on your stance. This is not so for CySEC binary options. Some CySEC brokers either pay a small percentage refund on losing trades or even let traders pick a risk and reward ratio. Brokers powered by SpotOption have the Option Builder Tool. Other brokers, like Anyoption, have always had that option.

Assuming your CySEC option is going to return 30% on a losing trade. That means if you trade $100 you are only risking $70. The remaining 70% is the trade risk. This is where position sizing really comes into play. To risk $100 you have to increase you trade so that $100 is 70%. To do this divide your account risk amount by the trade risk which gives a trade amount of $142.85

1% Rule For European Binary Options

Account Size
Account Risk%
Account Risk$
Position Risk%
Position Size
This table shows how to use the one percent rule to size binary options positions for good account management. This table assumes 70% position risk but this will vary from option to option so be sure to check each one.

Great Community For All Binary Options Trders

Binary Options That Suck has a great community forum for binary options traders.
Binary Options That Suck has a great community forum for binary options traders. | Source

The Best Binary Options Trading System

The best binary options trading system is the one you create yourself. If you are new to trading I can say that it definitely takes time and effort to get really good at it. It is still possible to make money along the way. Start slow and small, perhaps even lowering your risk to only a half percent until you are more confident. Learn your chosen market, study and analyze it, watch and wait for signals then apply proper risk management. It is possible to succeed. Steady, systematic gains will lead you to big success but you will pay for it with time.

  • The Best Binary Options Trading System Is The One You Create Yourself


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    • TheDigitalOption profile image

      Justin Delano 

      5 years ago from Everett

      It's just too bad that anyoption had to quit accepting US traders, for now anyway. They are a solid broker so hopefully they are able to take on US traders at some point in the future anyway.

      Keep up the good work!

    • DDE profile image

      Devika Primić 

      6 years ago from Dubrovnik, Croatia

      A well researched hub with valuable points, and most interesting


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