Adaptation of Forex strategies for binary options
Over a long time, a huge number of different systems have been created for trading on the over-the-counter foreign exchange market (Forex). Every trader, regardless of preferences and style, can easily find a suitable strategy for themselves.
For pip traders - short-term ones, designed to quickly make a small profit; for intraday traders - medium-term ones, which give the opportunity to conveniently work on the H1-H4 time frames; fans of positional trading, aimed at long-term holding of open orders, are also not left out.
Some TS ( trading strategies ) have existed for decades, but at the same time show excellent results even today.
Compared to Forex, the binary options (BO) market is much younger and the number of trading vehicles initially developed for it is several times smaller, which is why many users think about questions such as:
- the feasibility of using Forex strategies when trading with BO brokers;
- which strategies are best adapted to options and what expiration time should be set;
- Is it even worth adapting the Forex strategy for binary options or is it better to use existing systems.
In order to answer them clearly, it is necessary to have a good understanding of the main differences between these two markets.
What is the difference between Forex and binary options
To put it as briefly as possible, almost any Forex strategy can be adapted for trading options, but taking into account some of their specific features. The key differences between BO and Forex are:
- limited and pre-agreed duration of the contract;
- fixed amount of profit (if the forecast is correct) and loss (if the price moves in a different direction);
- no stop losses and take profits.
Otherwise, the essence of options and Forex is similar: to guess which way the market will go and open corresponding positions. For the foreign exchange market, this is Buy if the trend is bullish and Sell if it is bearish; for Call options when you expect a rise or Put if you predict a fall.
As for the features noted above, unlike option trading, Forex trading does not allow you to define fixed profits and possible losses by default; they have to be limited manually using Take profit and Stop loss orders, the absence or incorrect setting of which can lead to bankruptcy trader (Margin call, and then Stop out). This is very important to consider when adapting a strategy for binary options.
Fortunately, in options you don’t need to think about how many points the price can move in the direction you want, you just need to guess the direction itself and that’s it. What you really need to think about when converting a Forex strategy to options trading is matching the working time frames with the option expiration dates. Thus, we come to the logical conclusion that the main thing is to correctly compare the expiration time and the direction of price movement on a certain timeframe of the Forex strategy, that is, quotes must have time to confidently rise or fall relative to the moment of entry into the transaction before the option expires.
There are various ways to choose the correct expiration period, but analyzing each will require too much time and effort, so as an example we will take the one that is as universal and effective as possible.
In general, all Forex systems suitable for adaptation to binary options can be divided into several types:
- Trending. One of the simplest but most effective: the presence of a clear vector makes price behavior predictable. Trading is carried out only in the direction of the trend , since it is most likely that it will continue.
- Breakouts. The main calculation is for the breakdown of resistance/support lines , boundaries of trading channels, etc.
- Pipsovochnye (scalping). They involve many short-term entries into the market to make a small profit from each.
- Shapes and patterns. “Head and shoulders”, “double top”, “absorption”, etc.
How to adapt strategies for binary options
As noted above, in options it is important to correctly predict only the direction of the price, therefore, whatever the strategy, all attention should be paid only to those aspects of it that are associated with signals to enter the market.
In binary options, you do not need to think about the size of stops, the size of the spread and other integral elements of trading on Forex and exchanges.
Now the most important thing is how to correctly set the option time using a simple and universal method that works on any strategy.
All that is required is to test the vehicle a little on history, demo or live account, so that you can see how long it will take to get a stable positive result (profit).
That is, we open a number of transactions according to the rules of the trading strategy, and after their completion we find profitable ones, analyze how long the position was open before the profit was triggered or the order was closed manually, then we compare it with others and display the average value. For example, some time after the opening, the price went in the opposite direction, but did not reach the stop loss, and an hour later it turned around and closed positions according to the rules of the strategy. If in other transactions the time is approximately the same, then it should be taken as a basis.
Money management when transferring Forex strategies to options
With regard to money management , you don’t have to worry too much and leave the original rules specified in the Forex strategy unchanged, with the exception, perhaps, of only strategies based on the principle of martingale and others like that with a progressive increase in lot sizes, for which it is advisable to recalculate on a special martingale calculator for binary options .
The rest should not cause any difficulties, since, unlike Forex, where the risk is associated with the size of the stop, in options, both profit and loss are known in advance and are practically similar to the bet amount; all that a trader needs is not to invest in one transaction of more than 1% of the total amount on the trading account.
A real example of transferring the “Calm River” strategy from Forex to BO
The best way to understand how everything works is to analyze a real application example, and today we will take the Calm River TS - a classic short-term Forex system with two EMAs (periods 20 and 50).
The fact that the strategy is transferred to binary options does not in any way negate strict adherence to its rules (all purchases of options will be made only in accordance with them). The conditions for entering a trade with the “Calm River” are very simple: wait until the quotes enter the area located between the two EMAs and bounce off the lower line (that is, do not break through it).
Then you should open an order (if the price fell and rebounded, then Buy, if it grew, then Sell), since the rules assume that the price stays in the area between two EMAs lasts for a period not exceeding three candles, therefore, you need to enter no later than how the third candle closed.
Typically, the optimal time frames for scalping are M5-M15, but before adaptation, for reliability, you can test on different values; for our TS, the M5 chart will be the most convenient.
The more transactions are made during the testing stage, the more accurately the expiration time can be selected. 4-5 trades are enough to find the value we need.
So if, out of 5 orders, 75% brought profit within one candle and all 100% closed in profit during the formation of two five-minute candles, then 10 minutes will be the optimal period for option expiration. As for risk management , the values here are standard - do not invest more than 1-2% of funds in one transaction, that is, for $100 it is $1-2, for $1000 it is ten times more, etc.
conclusions
Time is an invaluable resource for any trader and should not be wasted, and why invent a new strategy for binary options when, over the years of financial markets, professionals have already created a huge number of them. In some cases, transferring a trading strategy to options from Forex or commodity markets not only leaves them operational and generating stable profits, but even increases their profitability.
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