Using the 80 Percent Rule to Trade Binary Options

Using the 80 Percent Rule to Trade Binary Options
Using the 80 Percent Rule to Trade Binary Options
Using the 80 Percent Rule to Trade Binary Options Getty Images

One of the key ways to achieve trading consistency is to always make sure that the probabilities of success in a trade are greater than the capital that you risked on that trade.

If a trading strategy has a historical 70 percent success rate, then the odds of success are in your favor if you risk 60% or less whenever that setup is in play.

Today we will look at the trading the Value Area Box and the 80 Percent Rule, which can be easily calculated on any charting platforms that have Market Profile or Volume Profile indicators.

The Value Area Box represents where 70% of the previous day’s trades occurred. There are three key elements to the Value Are Box:

  • Value Area High – This is the ceiling of the box.
  • Value Area Low – The floor of the box
  • Point of Control – The price level where the greatest number of trading activity occurred

The value area box represents where the marketplace of buyers and sellers believe “fair value” resides. If price travels too far above the value area box, it becomes too expensive, and selling pressure will likely settle in.  If price drifts too far below the box, then it will start to attract buyers.

The chart below shows a 15-minute chart of the US 500 Index on Friday, April 4. The Value Area Box is the gray rectangle.

Using the 80 Percent Rule to Trade Binary Options

ThinkorSwim workspace courtesy of Sean Jantz at BinaryTradeGroup.com

The 80 Percent Rule

This is a trading strategy taught by many Futures trading educators who use Market Profile or Volume Profile in their trading strategies. The 80 Percent Rule is simply defined as follows:

If the market travels into the Value Area Box from above or below the box, and stays inside the box for 2 consecutive 30-minute periods, then there’s an 80 percent chance that the value area will get filled. A Google Search on this strategy will give you plenty of additional insights.

Looking at the chart above, the US 500 index drifted below the Value Are Box, and then came back into the box for an hour. This created the expectation that the market would travel from Value Are Low (2350) all of the way up to Value Area High (2357).

Placing a Binary Options Trade Based on the 80% Rule

11:14am EDT:  The US500 was trading at 2350, with the expectation of a move toward Value Area High (2357). The 11am-1pm time frame was selected, and the following trade was taken:

BUY US 500 (Jun) >2353.8 (1PM) $32.75
Maximum Risk per Contract Traded: $32.75
Maximum Reward Per Contract Traded: $67.25

Using the 80 Percent Rule to Trade Binary Options

With just shy of 2 hours remaining in this trade, there was ample time for the market to move up through the strike price of 2353.8, on its way toward Value Area High at 2357.

By 12:00 the market moved through the 2353.8 strike price and kept moving up.

Using the 80 Percent Rule to Trade Binary Options

At the 1pm Expiry, the US 500 settled ITM at 2355 for the Maximum reward of $67.25, for a 200% return on capital risked (exchange fees not included).

This trade utilized an 80% probability trade, combined with less than 33% risk applied. There were ample opportunities after 12pm to take profit on this trade for a 1:1 risk reward or better.

Did the 80% Rule play out in this trade?

Using the 80 Percent Rule to Trade Binary Options

It sure did. If you have charting software that displays Market Profile or Volume Profile, then you can put the probabilities on your side with the 80 Percent rule.

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