One of the principal success factors you need in order to attain success as a binary trader is a solid strategy. It can be a real challenge to establish the best strategy for you – something which is especially true for new traders. Learn more about the gap strategy here.
You are faced with a wide choice of different strategies. There are some that are based on signals, others that rely on gambling theories, and more that are based on price charts. A strategy that has become very popular thanks in no small part to its ease of use is called gap strategy.
The aim of this article is to present the basics of what defines a gap, and how gaps can be used when trading in binary options.
When the price of an asset experiences a sudden, large movement the result can be a jump in the price. Such a jump will leave a gap on the price chart for the asset in question. Usually such gaps appear following a cessation of trading such as overnight or following the weekend break. They can also come as the result of news events that influence the market conditions sharply. For example, if a stock closes at $100 and opens the next day at $104, we have a gap of $4 between the closing and opening price.
For traders, gaps are of great interest. In the case of an upward gap (a gap in which the price moves up, such as in the previous example) you will most likely find that the sudden price increase will see more people wanting to sell the stock, whereas fewer people will be looking to buy.
As a consequence, the balance between supply and demand will shift. The price of the stock will change direction and move towards the previous day’s closing price, thereby closing the gap. An identical pattern will be seen in the opposite direction for downward gaps.
If you teach yourself how gaps work, you can use this knowledge in your trading. You can be on the lookout for gaps that have occurred overnight, gaps that are caused by sudden news events, and gaps that have happened after the weekend or holiday periods. When you have discovered a gap, you can trade on the knowledge that it is likely to close. As a result, you can make money by predicting that the price of the asset will move in the opposite direction of the gap. This is done by investing in a binary option.
Several different types of binary options are well suited for gap trading. To begin with you can choose 60 second, or even 30 second options, moving in the other direction than the gap. As always, timing is vital in order to win with such a trade. This is something that cannot be taught. If you still haven’t gotten the knack of timing your trades, why not practice with a free demo account? These are on offer with several good binary brokers.
Should the gap be sufficiently large, you can invest in a touch option that predicts that the price of the asset will reach the predetermined target price. You can also go with a High/Low option if you believe the closing of the gap will not occur before your High/Low option expires.
Any turnaround that is caused by a gap is only a temporary occurrence. For this reason you should only use relatively short expiry times when trading on a gap strategy. Certainly never more than one trading day. As we already stated: timing is always essential. This goes for every type of binary option strategy that exists, and gap strategy is no exception. A gap can indicate the nest price movement. It is up to you to time your investment correctly to take advantage of this knowledge.