By Darrell Martin
You have probably heard the phrase “All or Nothing”, especially when it pertains to trading binary options. This very phrase may have kept you away from trading binaries, as you thought that made the trade too high risk. It does not have to be all or nothing. True, at settlement the value of a binary is either $0 or $100, but when you trade binary options on Nadex, you are not locked in until expiration. You can exit at any time.
Because you thought a binary had to be all or nothing, you may have looked at trading only the strikes that offered a 20 percent probability of winning. This can cause a lot of undue frustration as you watch trade after trade lose and your account slowly dwindling out of sight. Wouldn’t you rather trade a strike with a 70 percent probability of winning? You can. Let’s look at how this is achieved.
You could choose the EUR/USD 1.0889 strike buying for $26. It is considered out of the money because the Indicative Index, where the market is currently trading is at 1.08812. The market would have to move in order to be profitable. The probability of this happening is around 20 percent.
You could choose the EUR/USD > 1.0877 strike buying for $75.50. This strike is considered in the money because the Indicative Index of 1.08827 is already above the strike price. In the money (ITM) trades can make money if the market stays flat, moves slightly against them or continues to move in the direction of their trade i.e., bought or sold.
This option has a 70 percent probability of expiring in the money. However, most traders do not like the fact they are risking $75 to make $25. It would be great if you could have a high probability with a lower maximum loss. Since you can close a trade early, you can combine the best of these trades.
As stated earlier, an ITM trade has three ways to profit. If it moves against you before expiration and in this case came down and hit your strike, you could exit the trade. When the market moves to a strike, you know the value of that strike will be around $50. By exiting at that point, you will limit your losses to around $25 making this trade a 1:1 risk reward ratio. You risked $25 to make $25 instead of risking $75 to make $25.
Combine this with an actual strategy or system to make it an even higher probability for you. Don’t just trade by the numbers. Make sure you are using a system along with charts to get the best results in your trading business.