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An essential guide to the fast growing area of binary options
Long the province of professional traders, binary options are now offered to retail investors through the North American Derivative Exchange (Nadex) and a growing group of online brokerages. Now, with this new book, author Abe Cofnas explains how independent traders and investors can use binary options to speculate on price movements and global events.
The great appeal of binary options is that they are less complex than conventional options and provide a simple method to trade based on an opinion of where the market is headed over a certain period of time. Engaging and informative, this reliable guide reveals how binary options work, what are the best binary options trading strategies, and when to use them.* Identifies the various markets in which binaries are available * Offers insights on how binary options allow for opportunities to speculate on the direction of a market and receive a substantial payout * Provides suggestions as to which markets provide the best liquidity and lowest trade execution expenses
As the first book solely devoted to this topic, Binary Options will provide retail traders with an authoritative guide to trading this exciting new market.
Contents
Foreword xi
Preface xiii
Acknowledgments xv
INTRODUCTION
What Are Binary Options and Why Are They Important? 1
Nadex versus CBOT Binaries 4
References 5
CHAPTER 1
Key Features of a Binary Option Contract 7
Defi ning the Key Features 7
Strike Price versus Underlying Market Price 8
Currency Pairs as an Underlying Market 11
Moneyness 11
Moneyness and Trader Direction 12
The Role of a Market Maker 14
Sample Bid Ask at Nadex 17
CHAPTER 2
Profit Opportunities in Binary Option Trading 19
Expected Probabilities 19
Winning Occurrence Analysis 23
CHAPTER 3
Sentiment Analysis: The New Predictive Tools 27
Defi ning Sentiment 27
Applying Sentiment Detection Tools 32
References 41
CHAPTER 4
Tracking Economic Forces that Impact Markets 43
The Fundamental Forces 44
Correlations Involving Binary Markets 47
Fear and the U.S. Dollar 52
Foreign Ownership of U.S. Treasuries 58
Crude Oil 59
Implications of Historic Commodity Plunge 60
Carry Trade and Interest Rate Differentials 63
Central Bankers Move the Markets 65
Evaluating Currency Pairs 66
Using an Economic Calendar as Trading Tool 67
CHAPTER 5
Basic Technical Analysis 69
Key Candlestick Patterns 69
Trend Lines 74
Support and Resistance 77
Confi rming Strength with Price Break Charts 82
Key Patterns for Trading Analysis 89
Fibonacci Resistance Lines 94
References 97
CHAPTER 6
Advanced Technical Analysis: Volatility Tools 99
Defi ning Volatility 99
Bollinger Bands 100
VIX: The Fear Index 110
Option Volatility and Sentiment: Put/Call Ratios 116
Volatility Smiles 119
Cycles as Trading Tools 124
Reviewing the Tools 126
CHAPTER 7
General Binary Option Trading Strategies 127
Core Strategies 127
Examples for Strategy Selection 129
Combination Strategies 149
References 151
CHAPTER 8
Strategies for Analyzing Event Risks 153
Key Steps in Analyzing Event Risks 157
Putting Strategies and Tactics Together: Timing and Managing Trades 161
Intermarket Uses of Binary Options 163
A Word on Intraday Strategies 164
References 164
CHAPTER 9
Risk Management in Theory and Practice 167
Deal or No Deal? 168
The Confidence Index 168
Lot Size Management 169
Offsetting Trades: Failing Forward 170
Leverage and Margin 171
References 171
CHAPTER 10
Evaluating and Improving Trading Performance 173
Key Performance Metrics 173
Strategy Scorecard 176
Performance Challenges 177
Analytical Challenges 179
Know Your Trading Personality 181
Targeting Total Returns 182
CHAPTER 11
Algorithmic Approaches for Binary Option Trading 187
What Is Algorithmic Trading? 187
Advantages and Disadvantages of Automated Trading 187
Developing a Trading System 188
Evolving Your Approach 190
CONCLUSION
The Future of Binary Option Trading 193
Appendix A: Test Your Knowledge 195
Appendix B: More Training Tools and Tests 205
Appendix C: Nadex Contract Specifications 207
Appendix D: Examples of Cycles in Binary Option
Underlying Markets 215
About the Author 221
Index 223
