Boundary options are the ideal options type for many traders. Because boundary options do not require you to predict the direction the market will move in, they make trading easier. Learn more in our article Strategies for Boundary Options here.
For most traders, predicting the future market direction is the toughest part when trading binary options, and by allowing you to use strategies that jump over this difficult issue, your trading can become less time consuming and, most importantly, more profitable.
Right now, you might be a little confused. If boundary options do not require you to predict the market’s direction, then what do you have to predict with boundary options? Well, the trick to understanding boundary options is that they are volatility based options. Find out more about the best strategies for boundary options.
To win a boundary option, you have to predict how far the market will move over a given period of time. Which direction the market moves in is unimportant – you will win your option if the market climbs the necessary distance, and you will win your option if the market falls the necessary distance.
With boundary options, you can ignore the complicated task of having to predict the market’s direction, freeing you to focus on one exclusive issue – volatility.
In a volatile market, prices are nervously moving up and down. By diagnosing a market that is volatile and has the necessary trading range, you can easily find good trading opportunities for boundary options.
When are important news are scheduled to be released, for example, you can often predict that the market will react strongly. Since you do not know whether the news are good or bad, however, you can’t predict whether the market will rise or fall. This is the perfect opportunity to trade a boundary option. After the news are released, the market will react in either direction, thereby triggering one of your boundary option’s two target prices.
This strategy is relatively secure, but it has one major flaw. There are only few scheduled news that reach the market, and employing a strategy based on these news would rarely create a trading opportunity.
To help you find more profitable trading opportunities for boundary options, there is a group of tools called volatility indicators. These indicators aggregate past market movements in a way that allows you to easily decide whether the current market environment has the potential to trigger your boundary option’s target prices.
In real life trading, such a strategy could be based on an indicator such as the average true range (ATR). The ATR measures how far the market has moved in each single period over the last time. By multiplying the ATR’s value with a number of periods, you get a rough indication for how far the market could move over the next periods.
This knowledge is important. If your broker offers you a boundary option with an expiry of 30 minutes and you are looking at a 10 minute price chart, you know that your option will expire in three periods. By multiplying the ATR’s value with three, you get an indication for how far the market could move if all three periods point into the same direction.
You can compare this value to your boundary option’s target prices thereby getting a first indication on whether the market has a realistic chance of reaching the target prices. If the target prices are further than this first indication of the market’s reach, you should probably pass on the boundary option right away.
If the ATR indicates that your boundary option’s target prices are within the market’s reach, you have to decide whether it is realistic for the market to reach them. There is no guarantee that all three periods will point in the same direction, maybe they will even cancel each other out. You should only invest when the market can truly reach the target prices.
Most trader use another indicator to make this decision. Some only invest during a trend, some use the three moving crossover technique to cancel out sideways movements. These approaches aim at finding market environments where periods are likely to point into the same direction.
Some traders also simply discount the result of the ATR’s calculation by a fixed value, multiplying the final result of ATR times number of period with 0.5, for example. If the result is still bigger than the distance to either of your boundary option’s target price, you should invest.
Both methods can work equally well, and some traders also use a combination of both. You should find your personal preferences for the strategies for boundary options by experimenting a little bit. Learn to create a definite value for how far you expect the market to move until your boundary option expires, compare this value to your boundary option’s target prices, and invest if you think that you are likely to win your option.