The Right Expiration Date
The expiration date of an option makes the difference between a winning and a losing one so knowing how to set it may make the difference between a successful trader and one that is still struggling.
Binary options are no different than regular trading the spot market as still one needs to identify the direction the market is going: up or down.
However, in binary options there is also the time element. The trader should not only know the direction the market is moving, but also when it is going to do that.
Technical analysis allows a trader to have an educated guess about market movements and there are a couple of patterns that incorporate the time element in the analysis.
For example, trading a head and shoulders pattern implies similarities between the left and the right shoulder and it is well known that they should take almost the same amount of time.
Therefore, when setting the expiration date for an option that is based on the 4h chart analysis and the right shoulder still needs 10-20 candles to complete the time, it makes no sense to set a small expiration date as it is simply wrong. You need to take into account the moment that the neckline should be broken and that is going to happen only after the time expires. Hence, end of week or even end of month should be recommended.
What is a Pennant?
Another pattern with the same interpretation of the time element is the pennant, explained here in the Binary Options Academy with an individual project as well.
Flats, zigzags, flags, are all patterns that can be used in order to set the expiration date of your option.
There is nothing more important than the time element because if one is making a forecast and says that price is going to a specific level but that level is not coming within a specific time frame, than the whole forecast might as well be useless.
Binary options trading offer this possibility and if you want this is the big difference between binary options trading and FX trading as one has to put the time element into the trading equation. But how to measure time?
There are specific tools for that and one is called the Fibonacci Time Zones and it is on every trading platform. Fibonacci trading tools are pretty important as they are coming with the Retracement, Arcs, Expansion, but also with time zones.
According to Fibonacci, the levels can be used not only for physical prices, but also for identifying the time taken for a specific price action to take place.
In the Metatrader platform, the most popular trading platform out there, under the Insert tab there is the Fibonacci Time Zones indicator and by the time one clicks on it, the next thing to do is to drag the indicator from the beginning of the pattern until its end. The purpose is to find the golden ratio but in time, not in price, both in 61.8% as well as in 161.8% and beyond.
If one is trading a contracting triangle then it is important to know when the contracting triangle is ending and, even more important, what it represents or where exactly it is forming, as it can be a wave b in a classical a-b-c or wave 4 in an impulsive move, or something else. Measuring the time element when triangle breaks is key in knowing that the triangular formation is really over and where exactly was formed.
Another way to measure the time element and to use it in binary trading is to simply take a shape tool and click and drag above the candles that are intended to be taken into consideration. That shape can be copy/paste after that on the right side of the screen and just like that we have a limitation in time for both a target and a new price.
For example, we know that in a triangle that has a limited time for the thrust to reach the target we can project the time on the right side and then by the time it expires, we can trade call options if the triangle was in a bearish trend or put options if the triangle was in a bullish trend.
When to use the Time Element in Binary Trading?
There are many situations in which time element can be used but the most opportunities are being offered by the Elliott Waves theory. It can be used in finding the time taken for the c wave in a flat to form, or in a zigzag as a matter of fact as well. It can be used in finding the ending of a triangle or even of a wedge. Countless possibilities for something that represents the holy grail in trading: knowing where price is going and when.