When it comes to binary options, the most important thing that you can do is correctly guess the direction that an asset will be moving in. However, when volatility is high, this can be very difficult to do with any sort of consistency. By understanding non-directional trading, you can gain a better understanding of how uncertainty impacts price movement and create higher levels of profits. Here, we will give a basic look at what you need to know to employ this strategy, and what things to look out for.
Application of Volatility
Let’s start by defining “non-directional” trading. This simply means that you are not concerned about which direction an asset’s price is going to go over the long term. You are equally able to trade the asset when it is going up in price and when it is going down in price.
The main thing that non-directional traders look for is price inefficiencies. If you enjoy studying fundamental indicators and then applying that knowledge to technical charts, then this is a perfect strategy for you. This occurs for a number of reasons, but following the news is the easiest and quickest way to expose information for you to take advantage of. You can also look to documents, like financial reports, SEC filings, and more to help you gain a better understanding of value and worth in different marketplaces.
The best way to explain this further is with an example. Let’s say you are watching the EUR/USD currency pair. You know that both the European Central Bank and the Federal Reserve have big announcements coming up, and although you’re not sure what the ECB’s move is going to be, you are positive that the Fed will be raising interest rates. This gives an automatic edge in strength to the U.S. dollar, simply because a higher rate usually means a stronger greenback. Also, since there is more uncertainty coming from the ECB, public opinion is going to buoy the dollar until more information emerges. So, taking out a put option on the EUR/USD once you have seen a large and unwarranted rise in the price of the pair would expose this inefficiency. The EUR/USD has gone too high, and fundamental knowledge tells you it should drop. Your binary option trade reflects this, exposing the inefficiency and allowing you to profit from it.
Finally, be aware that during periods of heightened volatility, markets are much more sensitive to the news than they usually are. We’ve talked about trading the news in the past, but when you recognize that volatility is a larger factor than normal, you need to pay even closer attention to your news feeds than you typically do. When this occurs, it is referred to as an “Event Driven” non-directional trade. This will give you a small advantage over the crowds in times like these.
Drawbacks to this Type of Trading
The biggest drawback to employing this strategy is that by definition, volatile markets are more difficult to predict than other types. While this strategy takes that into account better than most other strategies, there’s no way to completely eliminate the extra level of predictability that occurs. Unless you truly understand how to use this strategy and have accounted for the additional risk, trading in volatile markets—with a good strategy or otherwise—is going to be tougher than other types of trading. An average trader stands the chance of losing out on profits that they would have otherwise pocketed during more predictable market periods.
Also, you will find that there is a higher degree of variance that creeps into your profit rate during volatile points. This just means that although over the long term you are profitable, short term swings can hurt that, and even erase profits that had already been realized.
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