As you might know, there are certain times of the day that have higher trading volume than others. In the U.S. stock market, for example, the first 30 minutes of the trading day and the last 30 minutes typically see the highest amount of volume for the most popular stocks. As a binary options trader, high volume isn’t necessarily a good thing all of the time, so the reverse volume trading strategy plays to this to help you formulate more easily predictable patterns in stock price movement. Here, we will show you the ways that you can use this to help you trade with higher degrees of accuracy, and what things you should be on the lookout for before you begin.
Applying Reversal of Trading Volume
First, you need to select a stock to focus on. You can trade stocks outside of the United States, but this method is most effective within the U.S. Next, you need to wait until the main thrust of the initial volume is out of the way. On a typical day, this is over by 10:00 am, Eastern Time, but some days it can last more than an hour after the market opens. Gauging volume is easy, but most binary options brokers do not track this on their sites. Instead, you will need a third party to help you. It can be done either online, or with an app.
Although trades are not executed until the quiet part of the day, the setup at the beginning of the day is important as it sets the general tone of the day. Although prices do not move as quickly at this point, thanks to the beginning of the day, prices are now going to move more predictably. If a price channel has been created, trades can be made that will follow the channel. If a range has been created, then you can execute put option trades at the top of the range as prices are most likely to drop, or you can execute call option trades at the bottom of the range, as prices are most likely to increase.
The success of this trading strategy rests on the fact that binary options deliver a fixed rate regardless of how much the asset moves in price. If prices move quickly, large changes are more likely, but your profit rate remains the same. Instead, this focuses on the fact that prices might only change a penny or two, but you will still receive the same fixed profit rate when your trades are correct.
There are Always Drawbacks
There are several drawbacks to this strategy, and being aware of them can allow you to better overcome them. First, if something occurs during the day, there is a chance that volume can increase and eliminate some of the benefits. For example, if you are trading Amazon, and a news report comes out that the company has made a huge breakthrough, volume could pick up instantly. As long as you are aware of the changes, you can still trade with this method effectively, but your profits will not reflect the change in volume. Many larger traders will find that they would have made more money trading with a different tool, such as a traditional stockbroker.
Another drawback is that many sites will have a lag on reporting volume. If you are not getting real time updates when it comes to volume, you may lose out on trading opportunities if volume is unusually large or small on a given day. This is not a huge problem, but it may take away a few trading opportunities from you here and there.
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