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Trading Binary Options Strategies and Tactics ( PDFDrive )
Film and animation (BJL2112)
Mount Kenya University
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trading studiesPreview text
e Bloomberg Financial Series provides both core reference knowledge and actionable information for nancial professionals. e books are written by experts familiar with the work ows, challenges, and demands of investment professionals who trade the markets, manage money, and analyze investments in their capacity of growing and protecting wealth, hedging risk, and generat- ing revenue. Since 1996, Bloomberg Press has published books for nancial profes- sionals on investing, economics, and policy affecting investors. Titles are writ- ten by leading practitioners and authorities, and have been translated into more than 20 languages. For a list of available titles, please visit our website at wiley/go/ bloombergpress.
TRADING BINARY
OPTIONS
Strategies and Tactics
Second Edition
Abe Cofnas
v
Contents
Preface vii
Acknowledgments ix
About the Author xi
INTRODUCTION
What Are Binary Options and Why Are They Important? 1
CHAPTER 1 Key Features of Binary Option Types 7
CHAPTER 2 Identifying Pro t Return Potential in Binary Option Trading 19
CHAPTER 3 Sentiment Analysis: New Predictive Tools 27
CHAPTER 4 Tracking Fundamental Forces That Impact Markets 43 A Primer for Binary Traders
CHAPTER 5 Basic Technical Analysis 69
CHAPTER 6 Advanced Technical Analysis: Volatility Tools 97
CHAPTER 7 Binary Option Trading Strategies 127
CHAPTER 8 Analyzing NFP Data for Binary Trading 163
vi Contents
- CHAPTER
- Risk Management in Theory and Practice
- CHAPTER
- Metrics for Improving Binary Trading Performance
- CHAPTER
- Binary Option Trading Performance Tools and Training for Improving
- Afterword
- Appendix A: Test Your Knowledge
- Appendix B: More Training Tools and Tests
- Index
viii Preface
include: at-the-money; out-of-the-money; in-the-money; deep-in-the-money; and deep-out-of-the-money. Also reviewed are case studies of binary option trading in relationship to key news events that we have lived through. ese include: e U. congressional elections; the Greek sovereign risk crises; turmoil in the Middle East; and the Japanese earthquake. e reader will see exactly how these events shaped trading strategies that worked. is book is also designed to provide a self-directed performance audit capability to the trader. Speci c training challenges are provided, including a test of your knowledge (see Appendix A). No other book provides a comprehensive get-started approach to trad- ing binary options. It is my hope that Trading Binary Options: Strategies and Tactics makes a difference and improves your ability to get started in binary option trading, but most importantly, to do it the right way!
ix
**Acknowledgments **
is book would not have been possible without the support of many peo- ple. First, I want to thank Agora Financial Inc., and, in particular, Addison Wiggin, for his support in my development of binary options analysis and alerts for the Binary Dimensions newsletter. e experience of a weekly provi- sion of real-time alerts and analysis of binary options has provided an invalu- able base of knowledge that made this book possible. Joseph Shriefer and Rick Barnard of the Agora Financial team have also provided valuable input on my analyses. e North American Derivative Exchange (Nadex) has been of great assistance in providing access to technical information and data used in this book. None of the opinions or alerts in this book has been subject to any prior review or approval by Agora Financial Inc. or Nadex. Dean Reese, Bryant Lie, Zach Tyvand, and Bill Egan provided important research sup- port. Finally, thanks go to my wife, Paula, who provided the support and goodwill at home that sustained me during the intense writing period.
A.
xi
About the Author
Abe Cofnas is considered a leader in the eld of currency trading, analysis, and training. He founded learn4x (learn4x) in 2001 as one of the rst online training programs for currency trading. He has been the Forex trader columnist for Modern Trader magazine since 2001, writing over 100 columns on Forex events. He has authored three previous books on trading: e Forex Trading Course: A Self-Study Guide to Becoming a Successful Currency Trader (now in its second edition); e Forex Options Course: A Self-Study Guide to Trading Currency Options; and Sentiment Indicators—Renko, Price Break, Kagi, Point and Figure: What ey Are and How to Use em to Trade. He is also the editor of Binary Dimensions newsletter, which specializes in binary option alerts. He brings extensive understanding of trading from all perspectives, including advanced fundamental and political analysis. Cofnas holds two master’s degrees from the University of California at Berkeley—a master’s in political science and a master’s in public policy analysis. He is Senior Funda- mental Strategist for the Market Trader’s Institute. Cofnas can be reached at abecofnas@gmail.
2 Trading Binary Options
instrument. In fact, they are not really new. ey have been used for decades at institutional levels as an over-the-counter instrument but, most signi cantly, traders in the United States have used them since 2008 when they became approved by the Commodity Futures Trading Commission (CFTC) and regulated through the Nadex. ey are often called rebate options because of their use to generate a payment as a form of insurance when damage occurs. But let’s get back to the question. Binary options are important because they offer to the trader, in one instrument, the ability to succeed at many levels that go beyond simply obtaining a winning trade. Binary options are an ideal trading instrument for new traders to test their skills because at a core level, binary option trading starts with anticipating direction. Being right on direction is one of the most important skills relevant to trading any market. In fact, being wrong on direction accounts for a major- ity of the losses occurred in any trading. Another key skill important for mastering binary option trading is risk management. A binary option trade is not necessarily a set-and-let decision. is kind of strategy is followed when a position is put on and thereafter the trader watches the screen and sees what happens at the end of the week. Set-and-let trading does not involve man- aging the trade during its duration. Sometimes this is an effective strategy. However, trading binary options requires a sharp sense of timing. It’s impor- tant for the trader to know when conditions are ripe for entry as well as when market conditions have changed enough to justify getting out of the way. Honing entry and exit skills in binary option trading can be transferred to other markets. Binary options are also important because they offer a level playing eld. Anyone can trade the binaries and at very low costs ranging from $5 to $90 per lot at any moment. Because the time frame is at most one week, binary option trading counters the observed tendency of traders to hold losers too long and sell winners too soon (Odean 1998). But there are even more reasons that contribute to the value of binary option trading. Binary options offer beginning traders the ability to explore over 20 different markets. In a sense, binary option trading presents a dis- count tour of global markets. Perhaps one of the most important reasons of all is that binary options are regulated (through the Nadex) and offer price transparency. In this post-Madoff era of scrutiny and skepticism, trading binary options that are regulated becomes more and more salient to traders. at is why this book focuses on the regulated binary options offered at the Nadex exchange. For those who want to trade the binary option instruments that are over the counter, the skills built in trading the Nadex instruments will apply.
What Are Binary Options and Why Are They Important? 3
Binary options are an exciting product. In fact, traders in the United States have responded by participating at increased volume levels of around 30 to 50 percent per month! At this pace of volume growth, binary trad- ing can one day become as big as forex trading, which is now approaching $5 trillion per day. In an email exchange with John Austin, the CEO of IG Markets Group North America, and a key player in creating the binary option product, he says: “ere is really no competing product. I feel quite strongly that for smaller retail traders, the capped-risk nature of binaries is hugely important. Nadex’s contracts allow traders to speculate on global nancial markets while using only a limited amount of risk capital and without leav- ing themselves open to catastrophic losses in the event of unexpected market volatility. For this reason, I believe they may become the product of choice for those who are just starting out in trading. In addition, I think their small size and self-contained nature will mean they will become the default choice for more experienced traders looking for a cheap real-money way to test out new technical analysis-based trading systems, as well as being an additional toolkit used by conventional futures and FX traders alongside their more conventional trading.” Let’s delve a bit into the psycho-dynamic aspects of binary option trad- ing, because, as you will see later in this book, trading binary options is not only a fundamental and technical analysis endeavor, but it is also concomi- tantly a psychological behavioral experience. is points to another reason that binary options are exciting: their similarity to gambling. A binary option trade has been often viewed or referred to as a bet. is is metaphorically true, but not in fact correct. Betting in gambling is quite different from a binary option bet. In gambling, the bettors face the same xed odds and cannot affect the probability of winning. A bet in a gambling activity is indeed a pas- sive ride. Whether it’s the roll of the dice, or the drawing of a card in a game of poker, the gambler is riding a probability wave. Finally, a gambling bet is associated with a probability about what proportion of time an outcome should occur. A binary option bet is quite different. It cannot be associated with a statistically predictable outcome. e binary option trade is certainly a ride, but on a sentiment wave. It is also not a passive experience, and it is one that demands attention because the odds of winning are not a function of statistics. Instead, and in direct contradiction to the gambling situation, the odds of winning are determined by the skills of the trader in assessing market conditions and managing risk. In a roll of the dice, the next outcome is independent of the previous roll. In contrast, in binary trades, the next trade outcome is linked to the market behavior during the previous outcome! In gambling, the prevailing law is
What Are Binary Options and Why Are They Important? 5
having a signi cant advantage for traders who want to experience market action. High volume fuels the power of options and is a critical condition for traders—the Nadex ful lls that need. Lastly, Nadex binaries offer a logical place to start. e skills acquired for trading in Nadex can help prepare you for trading options in other markets. In the near future, however, the popularity of Nadex options will surely spur other imitators. ere are many binary option over-the-counter rms worldwide that provide different forms of binary options. ese include, but are not limited to one-touch and no-touch options , as well as range options. One-touch options are trades in which a win occurs if the price touches a certain point. In these options, the trader is betting that either a resistance point or a support point will be touched by the price by a certain time. A no-touch option is a bet that the particular price point will not be touched by a certain time. A range option presents the bet that the price will stay in between two strike prices, or go through one of them by a certain time. Some of these innovative binary trades are very short, with expiration time frames of minutes. Also, in some overseas rms, the trader determines the size of the payout! In principle, the skills developed trading the Nadex options can enable effective trading of binary options, and other, perhaps more complex and sophisticated, options. So let’s explore the key features of Nadex binary options in greater detail.
Reference
Odean, T. 1998. “Are Investors Reluctant to Realize eir Losses?” Journal of Finance 53: 1775–1798.
Trading Binary Options Strategies and Tactics ( PDFDrive )
Course: Film and animation (BJL2112)
University: Mount Kenya University
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