Choosing The Right Binary Options Expiry

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Choosing The Right Binary Options Expiry

The Hardest Part Of Trading Binary Options

Don’t get me wrong, binary options are way easier than trading most other forms of financial instruments. And I’m not talking about the ease of access either. There are many reasons why trading binary is attracting more and more traders, and pulling more and more traders away from other disciplines. The very first thing that makes binary better is account size. You don’t have to have a margin account, and there are no margin calls. The second thing that makes binary options better is risk. There is infinitely less risk to a simple yes or no trade than to one that opens your account to unlimited losses the way that spot positions do. This is why so many forex and commodity speculators have switched. If I haven’t yet convinced you that binary is easier than other forms of trading let me mention delta, theta and implied volatility and I will know that equity traders just got a shiver down their back. So, I’ve established that binary is much easier to trade than other forms of trading but that does not make it easy to do. You still have understand the market, work with a strategy, employ a system and use good judgment. If there is one thing that I can say as definitively being the hardest part of trading binary is choosing your expiry.

Caught between a rock and hard place.

How To Choose The Right Broker For Your Strategy

This is of course assuming you have found a good broker to trade with, have learned some technical analysis and are disciplined enough to trade responsibly. I have found that no matter which broker, or which platform I trade on that there is very rarely an expiry exactly when I want. This not a fault of the brokers because they, as a whole, try very hard to provide the options and expiry demanded by the market, namely us traders. The very first step in choosing the right expiry is to understand your strategy and how you are trading. If you are a swing trader like me you will definitely need a broker that has at least end of the week expiry if not end of next week, or end of month, or 30 days, or a combination of these. Not all brokers have them. Most brokers are limited to shorter term expiries because binary options are intended for quick, day trader and option scalper, types of trades.

The next step in choosing the right expiry period comes down to the platform and the broker. The first difference in expiry types is long term and short as in end of day versus end of month expiry. The next difference in expiry types is how expiry is determined relative to time of purchase. Is expiry set at some future time or date or is it a set time from the time of purchase. Let me explain. An end of month expiry is 30 days, at first. And then it is 29 days, and then 20 days, and then 5 days and then one hour all the way down until the time expiry. The amount of expiry depends on how much of that time is left when you buy into your position. If I buy and end of month position on the 1 st , I have roughly 30 days. If I buy it on the 25 th I have 5 or 6 days. I can’t tell you how many times I screwed myself up with that mistake. This is also true of short term expiry. An end of the day expiry has 6 or 7 hours of expiry at the start of trading, but less and less as the day wears on so it is important to keep this in mind.

Expiry set from time of purchase is much better in my opinion but choosing your broker based on expiry comes down to a variety of factors, not just this one. This is how 1 hour, 60 second, 1 week, 30 day and 1 month options are set expire, along with many other choices (depending on the broker). This means that the options expires a set amount of time after the option is purchased. I’m sure the most well known example is 60 second options, options that expire 60 seconds from time of purchase. I like this better because if I want to trade 30 days I can, and am not hindered by the calendar. It just provides a lot more flexibility.

Choosing The Right Expiry For Your Strategy

Understanding your strategy is what ties all of this together. Your strategy dictates what kind of expiry you will need. If you are trading day signals with expiry before the end of the day you obviously don’t longer term expiry and vice versa. However, both kinds of traders can use the same tricks to pinpoint expiry times. They do it by measuring their charts. This is one of the most useful tips I can give to a technician. Go back and measure your charts, measure every rally, every decline, every correction, every trading range until you get a feeling for how your chosen asset moves. It doesn’t matter if you are using 1 day charts, 1 week charts, 5 year charts, hourly, daily or weekly candles. In fact, I suggest measuring your chart in different time frames. Then go back and find all the signals you would want to trade on and measure them. Measure how many candlesticks it takes for the asset to move into the money once your signal has fires. Then average them all together. Then use that figure to pick your expiry, just make sure it can be employed on the platform you are trading. Here are a couple of links to more in depth articles I have written about chart patterns and choosing the right expiry.

Tips For Choosing Binary Options Expiry

How To Get A Base Line Expiry

I learned a long time ago how to judge the duration of a given signal, well before I began trading binary options. The method I will describe is just as effective, even more so in some regards, for binary trading as it is for standard equity options. The first thing to do is to identify what your signal is. Is it a trend line bounce, a stochastic crossover, a shift in momentum, a candlestick pattern or a variety of signals as if the case with most profitable strategies today. Then, you go back over your charts for a given period and identify all the signals. It doesn’t matter what time frame you are using, this technique works in all. Once you identify your signals mark the strong signals and weak signals and then count how many bars or candles it takes for each signal to move into the money.

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Once that is done you can take an average of the number of bars needed for the strong and for the weak signals to move into the money. These averages are now your base line expiry for you signal. If you are using a chart of hourly prices and your signal takes an average of 3.7 candles to move into the money you will want to use an expiry that coincides with that time. This could be a mid day, end of day, 4 hour or other option with an expiry that matches your signal horizon. If the signals takes 3.7 candles and you are using a daily chart that means 3.7 days, if the hourly chart 3.7 hours.

Let’s look at the chart below. I am going to use a basic moving average strategy to illustrate my point. I will use the 30 bar exponential moving average because it hugs prices closer than a simple moving average and will give us more signals to count. Also, in order to weed out bad signals and to, hopefully, improve results, I am only choosing the bullish trend following signals. So, there are 15 total signals; 6 weaker signals and 9 stronger signals. On average, it takes 4.2 bars for these signals to move into the money and PEAK OUT. That means, since this is an hourly chart, that each signal will move into profitability and reach the peak of that movement in about 4 hours. So for expiry I would want to choose the closest expiry to 4 hours that is available. If a good choice is not available then no trade can be comfortably made. Breaking it down a little the weak signals peak out in about 2.6 hours versus the stronger signals which take about 5.3 hours. Putting this knowledge in perspective, a weaker signal might be one that is close to resistance. A stronger signal might be one that is not close to resistance. Also, a stronger signal might be one where price action makes a long white candle and definitive move above or from the moving average whereas a weaker one might only create small candles and spinning tops.

Measuring signals to choose expiry

Additional Tips For Choosing Binary Options Expiry

Choosing expiry is one of the most important factors in making a trade. The other most important factor being direction. All too often I get asked questions about why a trade went bad in the final moments and one of the most common areas of error I find is in choosing expiry. Of course there are the errors in analysis that result in counter trend trading, the random bits of news that can reverse a market in a heartbeat and many other reasons why a trade can go bad but the focus of this discussion is expiry. It is obvious that you don’t want to use 60 second expiry when trading on weekly charts and you won’t want to use end of day expiry when trading off the 60 second charts but just how do you determine what the best expiry will be?

One question you must ask yourself is if you are trading with or against the trend. When trading against the trend I would suggest a shorter expiry than a longer one simply because there is less chance of an extended move counter to the trend; your expiry must be more precise. When you trade with the trend your expiry can be a little farther out. A trend following trade has a higher likelihood of closing in the money so don’t need to be as precise. A signal that follows the trend is a lot more likely to be in the money an hour, a day, a week or a month from now than one that goes against the trend.

Another factor that can have a big impact on which expiry is best for a given trade is support and resistance. The relative level of prices to a support or resistance line is a factor in how likely a trade is to move in a given direction. If prices are near a S/R line and moving away there is much more chance of your option closing in the money than if prices are near a S/R line and moving toward it. When prices are moving toward one of these lines the chances of the movement being halted and/or reversed is much higher than when prices are moving away from one. So, how does this apply to expiry? If you are taking a signal that has a higher chance of being halted or reversed then you would want to choose a shorter expiry than if the same signal were not faced with a S/R level. I purposefully did not say call or put, or bullish or bearish, because this applies to both bullish and bearish trading. Also, keep in mind that support and resistance can be in the form of lines drawn at areas of interesting price action or peaks, moving averages, Fibonacci’s, envelopes and bands.

Choose the Right Binary Option Expiration Period

There are many benefits to binary options trading over traditional stocks or Forex trading. Binary options are unrivaled in their simplicity. They are easy to understand and execute, even for beginners. Some types of options even provide you with amazing opportunities you will find nowhere else. With Range trades for example, you can make money in flat markets.

But one area where binary options are not superior to traditional forms of trading is where expiry periods are concerned. This is something you will figure out quickly when you start trading. You are given a finite selection of trade opportunities and expiry periods. If you pick the wrong expiry time, even with a great trade setup, you will lose.

So, how do you choose the best expiration period for your trades? That is the subject we will explore in this article. But first, I will go over expiry basics with you just in case you are a complete newbie.

What Is a Binary Options Expiration Period?

Let’s take an example of a standard High/Low trade. With a High/Low trade, you are essentially being asked a question about a financial asset, which could be a commodity, currency, stock, or index. Let’s say the asset is GBP/JPY.

At (expiry time), will the price of GBP/JPY be higher or lower than (price)?

You answer that question by choosing High or Low (sometimes termed Call or Put).

If when the trade expires you were correct, and the asset is priced as you anticipated, you would win. Otherwise, you would lose.

So, if you picked High for GBP/JPY, and GBP/JPY was trading above the specified price when the trade expired, you would win. If it was trading below it, you would lose your investment.

How Is This Different from Traditional Forms of Trading?

Let’s consider how Forex works. Imagine we are again talking about GBP/JPY, and you still have reason to believe that its price is going to rise.

With a regular FX trade, you would use a market order to buy immediately, or a limit order to buy when price hits a certain level. You would then be in the trade.

You can then sit around in front of your computer and exit the trade manually whenever you want, or you can set up a and walk away to exit automatically at a certain level.

Limitations of Binary Trading Expiry Times

You should now start to see why the expiry time system used in binary trading is restrictive. With traditional forms of trading, you can exit your trade whenever you want. That means you can be entirely strategic about it. If necessary, you can do it on the spot.

But with binary options trading, that is not always possible. The expiry time you picked at the start of the trade is the one you are stuck with (there are some exceptions — see the section on early close below).

This can make it a challenge to profit for multiple reasons.

  • First of all, unless you are trading on an exchange, the broker is taking the opposite side of every trade you make. You are playing against the house. It is therefore not in your broker’s interest that you win. So, the entries and expiry times (exits) offered to you will play in your broker’s favor, not yours.
  • Some systems are reliant upon highly specific exit strategies. You may have a great system which is impossible to put into practice because none of the expiry times offered are a fit for the exit strategies you need to adopt to be profitable.
  • There are also systems that depend on your ability to close out your trades at a moment’s notice. If you cannot exercise this control, you cannot profit.
  • Backtesting can be confusing. After all, while you are testing trade ideas on historical charts, you have no way to know what expiry times would have been offered to you. So, you cannot say with certainty whether your system will work in real life.

So how can you tackle these choices and choose profitable expiry times? Following are four suggestions.

Start by Developing a Strategy

No matter what, the first thing you need is some kind of strategy to trade with. You need a system which gives you entry rules. With traditional FX, it could be said that your system needs to include exit rules as well, but as you do not have total control over your exit strategy with binary options, let’s say exit guidelines.

Taking an example, let’s say you are going with price action, and you will be trading pinbars and inside bars. You must start by learning how to recognize those formations. Then you need to come up with a rule for how and when you will enter trades.

Pick Expiry Times Appropriate for Your Timeframe

The next recommendation is that you go through and backtest your strategy as you would trade it for traditional FX. Go through old charts and note down trade entries you would take as well as the exits you would ideally make. If the results are profitable, you have a system that may potentially work for binary options as well.

Now you should have a pretty good idea what an ideal expiry time looks like for your typical trade. If you have a broker that allows you to set customized expiry times, use what you have learned to do so. Just think of it like setting a .

Most binary brokers do not allow this however. They will only offer you a certain selection of expiry times. It is up to you to pick the best one — or skip the trade. For example, the screenshot below (from IQ Option platform) demonstrates that the range of expiry periods is quite limited even with brokers that offer a rather flexible choice:

If there is an expiry time available near where you would set a , that is a great choice, and you should go with it.

If there is not one, think about timeframes. Is there an expiry time which may still be appropriate given your trade?

If you have been testing price action strategies on the 1-hour chart, for example, and most of your profitable trades during testing spanned several hours or longer, it makes no sense to pick an expiry time 20 minutes in the future, or several months from now. But if there is something within a few hours, that may be a viable choice.

Likewise, if you are a position trader banking on some kind of political event, it would make zero sense to pick an expiration period which is just a few hours or days ahead.

And if you are using a strategy for scalping, an expiry time of even 10 or 20 minutes might be too much. You may do better with 60-second trades.

A quick note about 60-second trades: If you can profit off of them, by all means, do so. But if you are a newbie, it is important to recognize that this timeframe is incredibly volatile.

So, if you are still in the stages of choosing a strategy, go with one that will naturally steer you in the direction of longer expiration periods. You will be dealing with less volatility. Less volatility means less uncertainty, which in turn means a reduction in risk.

Definitely Do Some Demo Testing

The next tip for choosing appropriate expiration periods is to make sure that you demo test before you go live. As was mentioned before, there are some questions about exiting trades which you cannot reliably answer while backtesting.

But with demo testing, you can find out whether your strategies will work in real life with data and trade opportunities.

Once you do start demo testing, you may discover one of several things.

Either your trades will work out as planned, because the expiry times you need are readily available…

Your plan will not work out at all, because the expiry periods you need are rarely or never available…

Your system will sort ofwork. The expiry times may not always be ideal, but you may discover with some tweaking that you can get the results you need.

You cannot overestimate the importance of this step. There is no other way for you to know whether the system you came up with during backtesting is viable when traded live with real money.

Use Early Close

One of the more insightful conversations I ever had with a binary options broker concerned the early close feature which some websites offer.

Early close allows you to exit a binary options trade you are in before it expires.

Different sites have different restrictions on this tool. A few sites allow you to use early close anytime. But most have some kind of limitations on it. For example:

  • You might only be able to early close while you are profitable (for a partial profit).
  • You might only be able to early close while you are unprofitable (for a partial loss).
  • You might not be able to exit a trade during the last 5 minutes before it expires (or some other length of time).

You will need to check your broker’s resources to find out how early close works on your trading site.

Coming back to the conversation I mentioned, the owner of a binary site once told me that the single biggest mistake that traders on her site made was not using the early close feature.

She told me the vast majority of her customers were losing money, and the few that were profitable made great use of early close to minimize and avoid losses.

So, if it makes sense with your exit strategy, do make use of this tool. Since you cannot customize your expiry times on most binary sites, early close is often indispensable when it comes to getting the exit time you need.

There is also a tool called rollover to extend a trade past the expiry time, but be advised to approach it with caution. Usually you are asked to increase your stake in order to extend your expiration time.

Conclusion

Exiting trades profitably with binary options is a challenge compared to the traditional forms of trading, but definitely not impossible. Now you know all about how expiry times work in binary options trading, and you are familiar with the obstacles involved with choosing profitable expiration periods. But with some testing and creativity, you should be able to pick binary options expiry periods that work for you.

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