Many binary options brokers now offer limit orders as part of their exotic trade offerings, but unlike most of the other exotic options out there, limit orders hold a lot of potential for profits. However, before you start using limit orders in your binary options trading, it’s important that you know what they are and how to get the most use out of them.
Application is Key
A limit order basically tells a binary options broker that you do not want to execute a trade unless the asset’s price hits a certain point. So, if you want to trade the euro/U.S. dollar pair, but not until it hits 1.1150, then you would enter a limit order to indicate this. Rather than needing to sit in front of your computer and wait for the precise moment that this happens, the broker will execute the trade for you automatically as long as it stays open.
This is a powerful tool, but only when used correctly. The strategy that we are looking at here involves using a range bound asset, and then taking out a limit trade near the very bottom or the very top of the range where that asset is trending.
When you think about it this way, using the limit order tool is actually pretty simple. You pick a price just above the bottom support line and take out a call option, or you pick a price just below the top resistance line and take out a put option. You can even do both at the same time, and leave them open as long as the range is still in existence.
How much of a gap you will leave depends on the timeframes you are trading and the asset’s nature. For example, if you are trading a 60 second option on Apple, then you would want the execution rate to be within a penny of the range’s extreme. If you are trading a 15 minute expiry on the same asset, then five cents is a good number. If you’re trading a currency pair for a 60 second option, then a tenth of a pip is a good number. You will find that as you use these more and more, the exact gap between your execution rate and your range extreme will be more easily deduced with each individual trade. It will take some nuancing to get correct, but this framework will give you a good jump start. Refining it based on your own experiences will increase your profit rate slightly, though.
Drawbacks do Occur of Course
One of the biggest drawbacks to using limit orders is the possibility for emotions to cloud your trading strategy. Luckily, this is also the strength of using the limit order. The best way to create these is to set up a couple of them before you do any trading for the day, and then only change them if the range changes. The danger lays in changing them as you conduct other trades throughout the day. This is easy to do, especially if you find yourself growing impatient or wanting to take a risk because you are running hot or cold on your trades. The only reason you should ever change your trades once they are set is if something happens throughout the course of the day to make it a good idea. This is another drawback. If something happens, such as a breakout price movement or some sort of media occurrence that makes a range moot, then you need to be on top of this so that you can close trades that haven’t been executed yet without risking unnecessary losses.
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