The reversal strategy is one of the simplest strategies that new traders start experimenting with when trading binary options. In fact, traders can apply this strategy independently of any research. Find below a complete guide on how to trade binary options using the reversal strategy.
A Review on Trading Binary Options Using The Reversal Strategy
The price of an underlying asset can move in the opposite direction of the prevailing market trends. But, it can be quite difficult to predict price movements unless a trader has a thorough grasp of market trends.
Every asset type typically fluctuates between its highest and lowest price points. But, the price range has a median point towards which the assets always attempt to move at the end of a market trend. Therefore, it would be safe to assume that at the end of a price trend, the price of an underlying asset will reverse back to its average. One reason why price reversals can be difficult to predict is that it is equally difficult to establish when a price trend will conclude.
By applying the reversal strategy when trading options, you do not have to predict a precise reversal prior to entering a trade. Instead, you can jump onto the new price movement soon as it begins, thereby lowering your risks. This binary options strategy works effectively with shorter expiries; shorter trades ensure that you are not sealed into a long trade session while market trends are swiftly changing.
How to apply the reversal strategy
Traders use the reversal strategy in many ways to mitigate risk. One way to apply this technique is to trade based on the predominant trend and then stop trading as the price of the underlying asset gets closer and closer to a resistance point. You can start to trade again in the opposite direction the asset price reverses to. To catch the trend reversal in it’s wave, it’s important to keenly keep an eye on the price movement.
Both technical and fundamental indicators are essential in identifying price reversals as well as breakout out points, especially when unexpected market data is released.
For example, a typical starting point in applying the reversal strategy is placing a PUT option trade as the price of the underlying rises unimpeded. Alternatively, one might place a CALL option trade if the price of the underlying is declining unhindered.
On an advanced level, say a trader believes that the release of Samsung’s quarterly revenue growth data will cause Samsung stocks to rise. However, volatility in the stock market could create uncertainty as to whether the stocks will actually rise as expected.
In such an uncertain scenario, the best approach would be to mitigate risk as much as possible. Applying the risk reversal strategy, you can place both CALL and PUT options on the trade; this way, you have a higher chance of ending the trade in the money regardless of which side the price reverses to.
Advanced traders prefer to use the reversal strategy because it takes off the burden of predicting reversals in advance. Remember, that to make the most of this strategy, it is best to use shorter expiries such as one or two minute trades. This is a great technique for mitigating risks.
However, a trader can easily start trading based on a faux reversal given that the price of an underlying asset can fluctuate so much that it gives of misleading signals. It is important to closely monitor what you think could be a reversal before entering into a CALL or PUT option position depending on which side the price of the underlying market moves.
It also is important to use this strategy in conjunction with two technical indicators as Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD).
The reversal strategy is one of the simplest strategies that new traders start experimenting with when trading binary options Risk Reversal Strategy 88