Trading the news is one of the more effective methods of Forex trading because it often requires less expertise when it comes to technical analysis. As binary options trading becomes more and more attractive to Forex traders, it’s important to know that this same concept can be applied in your trades, but adjustments need to be made if you want to be successful. Using the same techniques will not bring you profits.
Let’s take a look at what adjustments need to be made and why.
First, we need to see why the same methods will not be effective in binary options trading. Binary options have expiration times, called expires. In other words, you have very little (usually no) control over the trade once it’s been executed. Those that are new to binaries often lose money not because they don’t understand the trades they are making, but because they don’t understand just how powerful expires are. Choosing the right expiry for the trade that you make is key. It’s no different when you’re trading the news.
In Forex trading, you can choose to end trade with a partial loss or a partial gain. Unless you are using an inappropriate amount of leverage, you will never lose all of your money on a single trade. In binary options, you will lose all that you risk if your trade prediction is incorrect.
These two differences are huge, but they are easy to compensate for.
Making Smart Choices
Being an effective news trader in the binary options market involves making smart decisions when it comes to risk management.
Accounting for expiries is the first half of making smart choices. Expiries add an element of uncertainty to the outcome of your trades. If you take out a 60-second option, even if the direction of the trade is certain, there will be a high degree of volatility because of the short-term nature of the trade. If you take out a 30-day option, the impact that the economic event will have is negated by other factors. A happy medium is a must.
While the expiry will vary based on the magnitude of the news event and the pair involved, it is important that you stay in the 5 to 15-minute range when trading. This is where trading the news is most effective because of the degree of certainty that you will have on the outcome. Also be sure to look at the usual technical indicators so that your timing is as strong as possible.
Some economic events will influence price for a few hours, while others will influence price for a few minutes. Be sure that you know which event you are trading so that you aren’t trading the news when it isn’t having an influence on prices.
Always remember that trades must be small. While it’s okay to risk more when you are not losing all of what you risk, binary options are an all or nothing trade. If you have an account of $1,000, you would never risk $10 with the leverage of 100 times. As soon as the trade moves against you, you’ve lost all of your money. In the same way, you would never risk $1,000 on a single binary trade if you only have $1,000 in your account. The general rule of thumb is to never risk more than 2 percent of your account on any one trade regardless of how certain you are of the outcome. Volatility and variance in the binary options market are far too high because of the addition of the expiry.
Timing is the second half of this. If you choose the wrong expires, you are immediately putting yourself at a disadvantage. Unfortunately, this is a lot harder to get a good answer for than the first issue. Different magnitudes of news will impact currency pairs in different ways. For example, if the Federal Reserve raises interest rates by 0.5 percent by surprise, this will impact the price of the EUR/USD in a different manner than if it raises rates by 0.25 percent at an expected time. One will be a surprise and markets will adjust suddenly. The other will likely not have as much of an impact because of the expected nature; the markets will likely have already mostly accounted for the change in rates.
The best way to approach these differences is to see the past rates of similar news. Keeping historical records of the impact that the economic release has had on the particular pairs that you focus on will be your best bet so that you have a reference point to work from.
A Word on Robots
A lot of Forex traders rely on robots through their MetaTrader accounts. As automated trading begins to catch on in the world of binary options, it’s only natural that Forex traders begin to branch out and start using these tools. However, when it comes to trading the news, robots often are not as effective in the binary options market.
To understand this, take a look at how trading robots work. They look at pre-programmed technical signals and then make trades based on certain conditions.
This works to your advantage, but only if you are proactive. In the world of Forex trading, trade success is determined by the number of pips that the price moves in your advantage, so trading robots tend to be a lot more discerning when it comes to opening positions. They target trades that have signs showing significant growth.
Binary options robots tend to work differently. Not only do they look for direction instead of strength, but they also have expires to worry about. Trades do not end when they are in the trader’s favor, but rather when the broker says that time’s up. This adds an extra element of uncertainty to trades, and as such, can work against a trader. Being selective where trades open by using a robot is the best way to tilt the odds in your favor. The whole point of robots is to have a hands-off approach. But this just doesn’t work the same if you are hoping to use the news to help determine your success.
Trading the News
We trade to make money. We’re in the market because we want to grow financially, setting aside the fun and the excitement of trading. The news is one of the more effective ways to grow your money, but that doesn’t mean it’s easy. Whether you’re in the binary options or the Forex market, the effective strategy will be your profitable trading outline. Hopefully, the information presented above will give you a good foundation for making smart choices if you are thinking of transitioning from the Forex market to the binary options market. There’s a lot of potential here, but only if approached correctly.