It’s important that an investor, when investing in binary options, understands the market and uses a proper trading strategy. To minimise a potential loss, many people use hedging strategy. Hedging strategy is a well known way to protect investments. There are various types of hedging strategies and The Reversal is one of them.
Many experienced binary option traders have recognised and evaluated different binary options trading strategies and many of them can be used by beginners in order to excel in binary trading. It’s crucial to understand that every trader occupies a different position in their own selected market of trading and in their own style. Thus, strategies developed are not a benchmark and can vary from trader to trader.
The Reversal – one of the common used strategies in binary trading
Predicting a future direction of a price can be tedious. The reversal strategy tells an investor to look for peaks and a following trend in the market to invest in. The basic idea behind the strategy is to move in an opposite direction of what market says. If an asset price is moving in one direction, it’s likely that it will soon move in the reverse direction i.e. back to its original position. This way of treating binary option strategy is contrary to the population.
To illustrate, a trader decides to invest in an asset that is moving in specified direction. He predicts that asset is unlikely to remain in that position for long. Depending on whether asset will experience abrupt rise or fall, trader will place call or put option. In the example above – put option.
How The Reversal strategy works?
The idea how the strategy works is very simple – prices that rapidly increase may very soon decrease and vice versa. Observing behaviours of the market; looking for peaks (highest and lowest) and trends, investors can make money. For example, trader wants to invest in the stock market and goes for Apple stock. He observes that price of Apple stock has been constant at 108.43 with very gradual increase. However, it experiences a sudden upsurge and comes to 113.21. Within a short period of time an abrupt increase can be followed by a sudden downfall of the price. Investor places a put option and quickly responds to the market situation in order to lock profit.
Conversely, this binary option trading strategy is quite risky. It’s purely based on speculations. In some market situations it might pay-off well, in others it might not. Thus, it’s wise not to invest too much with this strategy. Use no more than 6 – 9% of your portfolio on such trades.