Choosing the right expiry, or amount of time until your binary option expires, is perhaps one of the most difficult concepts to master. Too many times have I sat and watched a trade move in the money, and then out of the money, and then in the money, and then out of the money just before expiry only to move back above my strike price after my options expired worthless. This is one of the most frustrating parts of trading and one of the reasons why I don’t watch open trades. I usually keep between 5 and 12 trades open at any one time. My goal is to open 5 new trades per week making small investments with each trade. Sometimes my trades have an expiration of 3 days or less, sometimes a week and sometimes a month or longer. There are three things to try to keep in mind when choosing expiration; what kind of signal was it, what time frame was the chart and what duration to expect for the movement.
One of the very first things I ever learned to do was to “measure” my charts. I learned to measure each and every rally, in each and every time frame that I use and I have found that this technique is great for social trading binary options as well. Measure each and every bear market, being sure to measure the length of each leg as well. I was also taught to measure the height and lengths of triangle patterns, consolidations and reversals. I taught to do this so that I would know what the average number of legs in a primary bull is. So that I would know how long to expect a bear market in the secondary trend last and so that I would know how far on average a break-out of an ascending triangle would be. This may sound time consuming and maybe even a little confusing but it’s really very easy, especially with computers. Imagine doing all that math without a spreadsheet!
- I started with 5 year charts of weekly data- measure the length and height of any bull and bear markets you see. I measure from the highest intra-day high to the lowest intra-day low. Count the number of legs in each rally and in each bear market, measure each of them. If there are any trading ranges, consolidations or significant patterns present measure them as well. Enter each figure into a table in consecutive order, have the math program perform averages for you so that you know the stats for each category over the long term.
- Next I moved down to one year charts of daily prices. I always use candlestick charts because they make it easy to see the markets. I measure all the rallies and bear markets in this time frame as well. I enter all this data into another table I have made for this data. Now I know what the average movements are over the short term.
- I also trade near term positions using charts of hourly/30 data depending on the asset. It is up to you to choose which to use. Some assets don’t move as fast as others so they need the hourly in my opinion. Make the same measurements as on the other charts and log them into a table. Now you have the average data over the near term.
- Now you have to maintain your data. Each time the market completes a movement you need to update your tables. You will spend the most time updating the near term tables and the least time updating the long term tables.
I know from my own tracking data of asset XYZ that I can expect a long term primary trend to last for 3-5 years. Within that primary trend I can expect 3-5 bull markets with a corresponding number of corrections. Each bull market will last between 6 months and a year or so before correcting with each correction lasting from 1 to 3 months, give or take. When I move down to charts of daily prices I know that short term up trends can last up to a year or more with 3-5 bull markets and corrections along the way. Each of the bull markets in a short term up trend usually last about 2 months but can vary depending on conditions. Each correction of a short term trend usually lasts for 2-3 weeks but every up-legs there will be a major correction up to 5% or more that will coincide with an expected correction on the long term weekly charts. I think by now you get the idea of just how much information you can get from measuring your charts in this manner. Now, what do you do with the information.
How To Choose Binary Options Expiry
Choosing expiry is much easier when you have in depth knowledge of how far and how fast an assets movement will be. The trick is using the information gleaned from the tables you create to help you pick just the right entry. This is how it works. First identify/quantify the type of signal you are trading on. Is it a signal from a long term weekly chart or from a short term daily chart or from an even shorter term chart like hourly, 30 minute or 60 second. Is the signal a bull signal or a bear signal? Is it the weak first signal or the stronger second signal (most of my techniques will fire a first weak signal and then a stronger second signal)? Once you answer these questions you can move to your tables. Choose the data set that matches the signal you are taking, from there you determine an appropriate expiration.
For example; let’s assume we are trading a buy signal on the daily charts of asset XYZ. The signal is supported by a corresponding signal on the longer term charts so we are fairly certain of the trade. Indications are for a new up leg in a short term bull market that is part of a longer term bullish movement. Lets also assume that asset XYZ also performs in a similar fashion to what I described above . So, since we are expecting asset XYZ to enter a new leg of a short term bullish up trend, and since we my tables tell me that this type of signal usually results in a two month rally followed by a one month decline I can set my expiration accordingly. I will want to set the expiration far enough out for the asset to rally and move into the money but not too far out. In this case at least a week in order for the market move higher but no more than two months. If I think the signal is strong one week is plenty, if it is a weaker signal one month does better.
- Long term signal (weekly charts) – In my data long term signals take 2-4 weeks to move into the money and then continue to rally for 6-12 months. In this case I usually choose to trade monthly positions for this asset. You will need to create your own tables in order to predict long term movements for your chosen asset.
- Short term signal (daily charts) – In my data short term signals take 3-5 days to develop and begin to move. Bear signals are usually much quicker than bull signals. Once the signal begins to move into the money it could keep trending higher for 2 months or more before correcting.
- Near term signals (hourly charts) – In my data a strong signal on an hourly chart can last for 10-15 days. I only trade near term signals when they correspond to the underlying trend.
The same applies to longer and shorter term charts. Simply follow the guidelines set by your tables. Use the tables along side your trading diary and log books to help fine tune your system. I use several types of indicators and analysis in my trading so whenever I take a signal I always write down what kind it is so I can go back and see which ones work better than others. This (keeping a log) is much harder to do when you are trading a lot, especially with 60 second and other super short term expirys. You can still use my method of choosing expiry. When I want to day trade or see a good signal on a one hour chart I have data for that time frame too.
- Here are some tips on what to measure and track. 1) data for weekly, daily and hourly/30 minute charts 2) what the signal is 3) how long until moves into the money 4) how many rallies, declines in a trend 5) how long until correction/reversal 6) how long are corrections/reversals 7) average each data so that at any given time you know the expected length and duration of any movement in your chosen asset.
- You may also want to take note of any catalyst that occur alongside your signals. These could include news announcements, earnings, inventory numbers or economic data and many other market moving events.