Trading financial markets is not an easy thing to do and before taking a trading decision one should consider both technical and fundamental factors, as well as micro and micro economic analysis.
Anything can move markets, starting with an earthquake, the result of an election or economic news that is released based on the economic calendar.
All the above is creating an environment in which markets are moving and the job of a trader is to look for opportunities in these markets, namely to buy lower values and sell at higher prices, or the sell at higher prices and close the position at lower levels. The result is called profit.
In the case of binary options trading, when buying call options one is expecting for price to move to the upside and put options imply price is moving to the downside after the option is bought.
Trading environment is a special one because out of the whole market, in the fx market for example, the most popular product for binary options trading, the retail part consists of only 5% of the whole market, rest being large institutional investors and major players, banks, commercial and national, etc.
Out of those 5%, 95% of people are losing money and only the rest are profitable. How is that possible and how to overcome this cruel aspect?
One way is to do things differently like the rest of the people and trading with indicators gives this opportunity.
Indicators, and especially oscillators, are showing so called overbought and oversold levels. However, the whole market knows when an indicator shows a currency pair for example is overbought or oversold, and yet the vast majority is still losing money.
The answer is to try to find strength in overbought territory and weakness in oversold ones as that is when markets are moving faster and more aggressive.
Chances for an option to expire in the money is you buy in overbought territory are way higher than if your buying in oversold territory, as markets have the tendency to stay irrational or divergent more than a trader can stay solvent. Plus, at that very moment the trader’s psychic is going to be affected as if you are on the wrong side of the market overtrading and other crucial mistakes may come and dominate your rationale. This leads only to losses.
Being a contrarian is a difficult task when it comes to trading financial markets especially if trading is based on the FX markets as financial instruments. It is one thing to look for a top or a bottom or to trade in the other direction when trading a stock and a totally different story when you look at the forex markets as the currency market is associated with strong and violent moves that give you no possibility to exit a wrong decision.
That being said, how to be a contrarian when trading an FX related product in binary trading? The answer comes from money management and in binary options trading money management can be used both from a size perspective (trading size, the size of the option to be traded) as well as a time perspective.
The thing is to look for market to go into overbought and oversold territories when analyzing oscillators and instead of buying in oversold territory, just use any bounce opportunity to sell, or to buy put options. This will give a whole new perspective when it comes to identifying a trend as strong trends are biting a lot into overbought and oversold levels.
If your regular trading size is, let’s say, fifty dollars, then the trading in a contrarian fashion should be made in small incremental steps in the sense that the entry should be split into three or four different parts and the striking price should have a distance threshold attached. For example, in the case of the EURUSD pair, one should look to trade three different options every time the market is dropping fifty pips more into oversold territory, or spiking fifty pips into oversold territory. The expiration dates to be used should be bigger with each option that is traded. In this way, not only that we’re fading a move lower or higher, but postponing the outcome of the options the more the price travels into overbought or oversold territory. This is what buying when everyone is selling and selling when everyone is buying means.
At the expiration date, if the options are profitable, a regular trade can be initiated with this time the rules of a regular trade to be respected as well.