Trading Put Options in Downwards Moving Markets

Trading Put Options in Downwards Moving Markets

In the binary options marketplace, you have one main decision to make: is the price of the asset in question going to go up or down? The beauty of binary options is that you can make money off of either direction; prices don’t need to go up for you to be successful. For this reason, learning how to trade put options will be extremely beneficial. When currency prices are set to go down, when you have a solid put option open, you can make money trading even if markets everywhere are going down in price.

Your first step is to identify opportunities. Which currencies are struggling overall? With binary options, you will only rarely want to go against the prevailing trend, so your first step is to figure out which currencies are going down and which are going up. When a currency is going down in price there will still be short term ups and downs, but the majority of the movement will be with the overall trend.

Trading put options is a great way to make money when a lot of other traders are losing money or even sitting out of the marketplace. But just identifying overall trends is not enough to be successful. If it were this easy, everyone would be making money trading and as you know, this is not the case. Binary options are especially tough to make money in because you are at an immediate disadvantage because of your broker. Think about it this way: when you are right, you get an 80 percent return on your investment. But when you’re wrong, you lose 100 percent of the money you risked. This immediately puts you behind the broker. This isn’t a bad thing—brokers do need to make money after all—but it is a difficult thing to overcome. Your correct trade rate needs to be much higher than 51 percent if you want to make money here.

In order to give yourself a higher profit rate, you need to come up with a strategy that allows you to predict downward momentum within a currency at as high of a rate as possible. Short term movement—essentially what you are trying to predict with most binary put options—becomes more reliant on technical indicators. Your entry strategy is the only part of the trade that you have complete control over. Once you execute the trade, it is completely out of your hands. You are essentially at the mercy of the market. Therefore, you want to time these as perfectly as possible. When getting ready for a put option, you will want to make sure that there is room for a drop in price. For example, if the currency is at its support level, odds are that it will increase in price as other traders recognize this fact. This is true even if the overall trend is down. Utilizing price channels can be extremely helpful here. A channel, like a support level, designates a zone that the price moves within. When a currency is overbought, it will appear to be at the upper portion of the channel. While this is certainly not foolproof, enough other traders recognize this fact and will act accordingly and back off. For the put trader, this means that other traders will close out their positions, causing a brief drop in price. When the currency is at the top of the channel, it is time to enter a put position.

Designing price channels can quite easily be done with a good charting software program. These are constructed taking into account exponential moving averages and channel coefficients. Then, a couple lines are superimposed upon the price chart, giving you an easy visual of what prices are doing and how they are moving. This is one of the easiest ways to identify trends and short term movement. When prices move upward and out of the price channel, you can expect prices to drop in the near future.

Of course, one method of analysis is never enough. If you are looking at a currency that has broken through the top layer of its channel, this does not necessarily mean that the price will drop. If a currency has strong fundamentals, the price might keep going up for a while. Look at the relationships that surround the U.S. dollar. If the Euro is already weak because of the Greece bailout (as it currently is), and the price of gold is dropping too, the U.S. dollar is probably poised to go up in price, regardless of whatever channel or trend it is currently experiencing. These two factors rely on fundamental analysis and even if the dollar has weak technical prospects, these factors might influence the price in a way that technical indicators cannot predict. So price channels are a good way to identify potential trades, but if you are going to trade put options, you want to make sure that the fundamental prospects of the currency are also weak.

Trading binary options is tough, but with the proper research you can identify many opportunities. Using downward sloping price channels is a good way to point out prospective put options, but you will always want to double check fundamental factors before entering a position. This two pronged approach to entering a trade will boost your correct trade rate and make you a more profitable trader.