Binary options can be dealt with a myriad of different approaches depending upon the type of strategy you plan to undertake. The following article describes exclusively the IN/OUT trading strategy which is commonly also referred to as boundary trading.
Depending upon the broker you have hired, boundary trading can give you one of the following different outcomes:
Ending inside the range: If on the time of expiry of the contract the price action is inside the selected price range then the option happens to be ‘in the money’.
Ending outside the range: Similar to the case above if the price action happens to be lying outside of the pre-defined boundaries when the asset expires then the option is said to be ‘out of money’
If the option stays between the price boundaries then the price action must not breach any boundaries.
Outside boundary: If it goes outside the price boundary then the trader, in order to make a profit, requires the currency’s price to breach the selected boundary which gives the trader the option to decide whether the trade is best for him or not at that particular instant.
Setting the trade up
The first concern that needs to be addressed is what the range would be. Range trading mechanism suits best when the market is not trending but moving sideways, in other words when the market is consolidating. This is so because it is impossible to predict prices in a trending market because of the continuously rising and falling prices.
The best way to go about it is to use an indicator such as the Bollinger Band designed and created by John Bollinger. It has a lower, middle and upper band to indicate where the market currently stands. The consolidation of the market is shown by the upper and the lower bands. One can also make use of the horizontal line tool in order to have two strike prices for boundary trading.
What types of trade can be executed
A trader can set the relevant expiry date according to his or her own fancy by using one of the four contract types for boundary trade option. Most of the brokers prefer to take up at least seven days before reaching expiry which gives them a sort of insurance that the period of consolidation will exceed the time frame set. An appropriate expiry can be set by using a chart.
It is not necessary for a trader to only use boundary trading. One can also make use of touch/no touch option contract where a trader must set the price barrier either towards the upside or the downside, outside the price range. This makes sure that price action of the underlying asset does not come close to the price barriers.
All in all, trading with a range bound requires extensive knowledge of graphs as they are used to decide the range in most of the occasions. For those who have a sound understanding of graphical representations, this is an extremely helpful method to make the most of range bound binary options.