Trading Binary Options: Strategies and Tactics


Trading Binary Options

"Are you interested in trading but don't like to wait weeks and months for a return?Are you following news events and want to financially benefit from your knowledge?Or maybe you are new to trading and want to participate but avoid the long learning curve in mastering trading skills. If these questions are on your mind, this book is for you."
—From the Preface

Binary option trading is one of today's fastest growing areas of finance. The greatappeal of binary options is that they are less complex than conventional optionsand provide a simple method to trade based on an opinion of where the marketis headed over a certain period of time—one week at the most.

In Trading Binary Options, author Abe Cofnas puts this exciting new product inperspective, and shows individual investors and traders how it works, when to use it, and what strategies are most effective. While there are many variations to this typeof trading, this reliable resource focuses on the regulatory approved weekly binary option trades of the North American Derivative Exchange (Nadex).

Engaging and informative, Trading Binary Options:Provides insights on how binary options allow for opportunities to speculate on the direction of a market and receive a substantial payout

Identifies the various markets in which binaries are availableOffers suggestions as to which markets provide the best liquidity and lowest trade execution expenses

And much more

If you're looking to get more out of today's markets, look no further than binary options. With Trading Binary Options as your guide, you'll quickly discover how specific strategies and tactics will allow you to capture consistent profits on a weekly basis.

Abe Cofnas has been the forex trading columnist for Futures magazine since 2001 and has writtenover 100 columns on forex trading strategies and tactics. He is also the author of three Wiley titles,Sentiment Indicators, The Forex Trading Course, and The Forex Options Course. He has, for over two decades,provided fundamental and technical analysis on trading strategies in currencies and inter-markets. He is the founder of, which provides private coaching and seminars on currency trading. In 2008, he formed FXDimensions Inc., a third-party trading system and signal development company that has pioneered the concept of algos that detect trader behavioral patterns. He is a recognized expert in technical analysis and has lectured in London and Dubai (with appearances on CNBC Arabia) and continues to work with students and businesses abroad. Cofnas generates weekly alerts on binary options for Agora Financial's Strategic Currency Trader newsletter. He holds a master's in political science and a master's in public policy from the Graduate School of Political Science, University of California, and the Goldman School of Public Policy, University of California, Berkeley, respectively.
Foreword xi

Preface xiii

Acknowledgments xv


What Are Binary Options and Why Are They Important? 1

Nadex versus CBOT Binaries 4

References 5


Key Features of a Binary Option Contract 7

Defi ning the Key Features 7

Strike Price versus Underlying Market Price 8

Currency Pairs as an Underlying Market 11

Moneyness 11

Moneyness and Trader Direction 12

The Role of a Market Maker 14

Sample Bid Ask at Nadex 17


Profit Opportunities in Binary Option Trading 19

Expected Probabilities 19

Winning Occurrence Analysis 23


Sentiment Analysis: The New Predictive Tools 27

Defi ning Sentiment 27

Applying Sentiment Detection Tools 32

References 41


Tracking Economic Forces that Impact Markets 43

The Fundamental Forces 44

Correlations Involving Binary Markets 47

Fear and the U.S. Dollar 52

Foreign Ownership of U.S. Treasuries 58

Crude Oil 59

Implications of Historic Commodity Plunge 60

Carry Trade and Interest Rate Differentials 63

Central Bankers Move the Markets 65

Evaluating Currency Pairs 66

Using an Economic Calendar as Trading Tool 67


Basic Technical Analysis 69

Key Candlestick Patterns 69

Trend Lines 74

Support and Resistance 77

Confi rming Strength with Price Break Charts 82

Key Patterns for Trading Analysis 89

Fibonacci Resistance Lines 94

References 97


Advanced Technical Analysis: Volatility Tools 99

Defi ning Volatility 99

Bollinger Bands 100

VIX: The Fear Index 110

Option Volatility and Sentiment: Put/Call Ratios 116

Volatility Smiles 119

Cycles as Trading Tools 124

Reviewing the Tools 126


General Binary Option Trading Strategies 127

Core Strategies 127

Examples for Strategy Selection 129

Combination Strategies 149

References 151


Strategies for Analyzing Event Risks 153

Key Steps in Analyzing Event Risks 157

Putting Strategies and Tactics Together: Timing and Managing Trades 161

Intermarket Uses of Binary Options 163

A Word on Intraday Strategies 164

References 164


Risk Management in Theory and Practice 167

Deal or No Deal? 168

The Confidence Index 168

Lot Size Management 169

Offsetting Trades: Failing Forward 170

Leverage and Margin 171

References 171


Evaluating and Improving Trading Performance 173

Key Performance Metrics 173

Strategy Scorecard 176

Performance Challenges 177

Analytical Challenges 179

Know Your Trading Personality 181

Targeting Total Returns 182


Algorithmic Approaches for Binary Option Trading 187

What Is Algorithmic Trading? 187

Advantages and Disadvantages of Automated Trading 187

Developing a Trading System 188

Evolving Your Approach 190


The Future of Binary Option Trading 193

Appendix A: Test Your Knowledge 195

Appendix B: More Training Tools and Tests 205

Appendix C: Nadex Contract Specifications 207

Appendix D: Examples of Cycles in Binary Option

Underlying Markets 215

About the Author 221

Index 223