“The trend is your friend, until it ends.”
This is a very popular quote shared by many trading educators. Catching a trend can be a great way to trade binary options, but this isn’t always as easy as it sounds.
Trading binary options, just like trading any other instrument, requires planning. You want to trade with the probabilities on your side. This requires making decisions about the time frame you believe works the best for your strategy, coupled with selecting the best strike price and employing proper risk management.
The more comfortable you are with a strategy, and the more disciplined you become as a trader can produce an environment where you make rational decisions based on time-tested trading rules.
The more prepared you are, the less stressful trading can become. Do you have a profit target in mind? How much are you prepared to lose without batting an eye? Do you know the probabilities of success on a strategy? Are you risking less than that probability? What is your frame of mind? Are you trading in a distraction-free environment?
Let’s take a look at the Opening Bell on Tuesday, December 27 on the US Tech 100 Index (based on NASDAQ futures).
Before the Opening Bell, it was time to check the Economic Calendar. There are several sources you can use to get economic news. I prefer Investing.com. Nothing major was on the calendar before 10 am EDT.
Next, it was time to switch to the 15 minute charts to see if the market was trending up, trending down, or moving sideways in the hours before the Opening Bell.
Starting at 6 am EDT, the US Tech 100 Index was on a steep uptrend going in to the Opening Bell. NASDAQ futures were being propelled by large gains in the pharmaceutical and healthcare sectors. This set a bullish bias going into the 9:30 Opening Bell.
Could the market make a sharp reversal at 9:30? Absolutely. But that would involve trying to guess about a reversal. I don’t have a crystal ball that can do that. The decision was made to stay with the trend.
At the 9:30 Opening Bell, The US Tech 100 Index opened at 4949. The decision was made to BUY the US Tech 100 Index at >4951 in anticipation of an uptrend continuation. The following order was placed:
BUY US Tech 100 >4951 (10 am expiry) $40.75 Max Risk: $40.75, Max Reward $59.25 per contract traded.
Here’s how the trade played out:
On this day, the trend was my friend. The market shot up like a rocket on the Opening Bell. In less than 10 minutes, the US Tech 100 was flashing a profit of $42.50 per contract, or just over a 1:1 return on capital risked.
Would the trend continue, with 20 minutes left in the trade? It certainly seemed possible, but the markets can also get very choppy on the Opening Bell.
Rather than taking the risk on a profitable position for the hope of collecting the maximum reward of $59.25 at the 10 am expiry, the decision was made to take a sure profit, and collect the $42.50 profit that was on the table for a 100% return on capital risked (exchange fees not included).
As it turned out, the US Tech 100 Index settled at 4990, and the trade was never threatened. The maximum reward of $59.25 could have been collected, but there was no remorse. On the Opening Bell, markets can temporarily turn on a dime, and there was a fair reward on the table for exiting the trade early. Remember though had the trade not worked in our favor, the trade risk was always clearly defined with the option to cut your losses if you wanted.