When you think of strategies for trading binary options, you either have indicators or the term as a starting point. However, as presented last week with the trend-following strategy, a strategy can also be pursued by exploiting market phases.
Nevertheless, the fundamental questions that every retailer has to answer when developing a strategy remain open:
- Which market phases do I want to use?
- Which time frame do I plan for?
- Which product or underlying is best suited for this strategy?
With the first question, the trader determines whether he wants to use trends or sideways phases. The trend following is not limited to a buy and hold strategy, but also the swing trading and correction trading approaches are a kind of trend following, which we will examine in more detail shortly.
Sideways phases are in most cases only the starting point for trend trading. That is, strictly speaking, sideways phases indicate certain zones to the trader that he can use to get started. For example, he can trade a breakout from the sideways phase, or use the small trends alternately between the phase limits.
In the end, however, it comes to a trend trade, either on a short or long-term basis, because you can earn something only when the price changes significantly.
What is the swing trading approach?
As the name suggests, the swing trading approach involves certain swings, So turns in the markets are used. These swings are minor trends within a major trend. The trend is spread over several phases.
The advantage of swing trading is the fact that the trader can take profits in bites and at the same time reduce his risk by not investing continuously. For example, he can avoid longer sideways phases.
The disadvantage of swing trading is that the trader has to make the decision to enter again and again. That sounds easy on the outside, but it's not the case when it comes to implementation. The identification of a sideways phase is also more difficult than in theory.
If you look at the US index S&P 500, you can clearly see several swings on a 4-hour basis. Identifying the swings is not the difficulty. The question is, how do I find the right exit to take the profit with me as planned. You can use indicators that indicate the weakness of a movement. We have already presented such in other articles. However, this question does not arise for the binary options trader, since he can only rarely exit before the time runs out.
Swing trading is often equated with position trading. Position trading is nothing more than trend following on a medium-term basis. Nevertheless, you have to differentiate here according to terms. Swing trading is in most cases much shorter in term. As a rule, the terms of swing trading are between 1-5 days.
What is correction trading?
Correction trading is about making these corrections within to act on a trend. The strength of a correction depends on how strong the respective trend is. The more dynamic and steep the trend, the shorter the corrections. The more developed and persistent the trend, the greater the corrections.
If you look at the current chart for the S&P 500, two trends can be identified. The first trend was very dynamic, the corrections were accordingly shorter. The second trend increases at a larger angle, so the corrections are more developed. The conclusion from this would have to be decided to only trade the correction trade in trends that are less dynamic.
However, you also have to say that the correction trade is a counter-trend strategy. You stand against the prevailing trend with your position. Counter-trend strategies are often viewed critically among traders. For the trader there are additional difficulties that cannot be assessed, because corrections, at least in comparison to trend support, are often less clean.
Swing Trading Forex With Binary Options
The trader wants a "swing" in the index a binary option between 1-5 days is suitable. However, swings can also be traded on a short-term basis. Traders should pay special attention to commodities, which, unlike currencies, can show better trends.
If you look at the current chart for corn on a 4-hour basis, a swing in the trend direction could soon emerge, A call option would therefore be conceivable.
- Swing and correction trading are related to each other like almost all strategies. It is about taking advantage of trend phases on a short to medium-term basis.
- Correction trading is more difficult to implement because correction reversal is inconsistent.
- Trends are more pronounced in stock markets and commodities than in currencies
- Exits in swing trading can be supported by indicators (RSI, stochastics), but not necessary due to the limited term for binary options.
- The more dynamic and steep the trend, the more inconsistent the corrections.