26 Dec, 2023

Digital Options Trading Strategies Basics

Online trading strategies basics: why use them and which strategies are the best
Online trading strategies basics: why use them and which strategies are the best

Trading strategies are the bread and butter of all traders, regardless of their style or finances, that they use to make money. Options strategies are numerous, but you don’t need to know them all, as your main goal is to choose one or create one and stick to it throughout your career. 

It doesn’t mean that you are going to use only one trading strategy for your entire life. However, switching between them too frequently may lead to negative results. If you want to learn more about options and strategies, then you are in the right place. This article will provide you with the basic information about those tactics, why and how to use them, as well as some examples of strategies that you can apply right away when trading on the Binolla platform.

What Is a Digital Options Strategy and Why Use One?

The importance of options trading strategies is hard to overestimate. Imagine that you work for a manufacturing company and create chairs. You have an assignment to make one. You can’t start working right away without having a blueprint at hand. A strategy in trading is this blueprint that you apply to the market to find entry points.

When you look at a naked or even armed chart without a strategy, you see nothing. You can define trends, but you don’t know when to enter the market. With a strategy, be it simple or even complex, you increase your chances of profiting.

Why Using Strategies is Crucial?

There are plenty of reasons why using such tactics is important. We have put together the key ones:

  • Systematic trading allows you to focus on the essentials and not sink beneath the waves of data that come from all sides, including macroeconomic statistics. Moreover, using a strategy based on technical analysis allows you to find entry points even without relying on fundamentals. This is one of the greatest advantages of such an approach, as it allows you to focus on the price instead of thinking about the upcoming market data releases;
  • By using strategies, you will be able to predetermine your future performance and watch your current results from a systematic point of view. Chaotic trading, on the other hand, does not allow you to analyze anything about your trading outcomes. If you simply buy Higher or Lower based on your market perception, you can only see where you were right or wrong, but you can’t draw any conclusions. When you use a strategy, you will have answers to all your key questions about the mistakes that you have made. Moreover, this will allow you to avoid them in the future;
  • Strategies will help you curb your emotions. Emotional traders often make ill-considered decisions that are based on their desire to make a profit instead of on the situation on the charts. When using a trading strategy, options traders focus on entry points, and they resist the urge to win back or trade winning streaks (like tradeblers do). Conversely, options trading strategies allow traders to overcome fears that prevent them from entering good positions when they arise;
  • Last but not least, overtrading is also harmful, as it may lead to huge losses. If you are opening a lot of positions throughout the day, you will be tired soon and, therefore, make a lot of mistakes. An options strategy will control your trading routine so as to limit the number of your positions to a reasonable one.

Types of Digital Options Strategies

There are several types of options and strategies that you can use in your everyday routine. Some of them are based on the current trend, and others allow you to catch counter-trend or reversal movements. The most popular versions of tactics that you can use in trading are presented below.

Trend Strategies

Many professional traders use directional movement to find entry points. Trends can be of two types – uptrends and downtrends. While the first is defined by higher lows, the latter can be established when the highs become lower. 

The example above shows the uptrend and the possibility of earning money when the price hits the trendline and jumps off it. This is one of those classic strategies that are mainly used by professional traders, regardless of the market they trade. 

The idea here is to build a trend line along the uptrend and wait for the price to bounce off it to buy a Higher contract. The strategy is very simple, but you have to learn how to draw trendlines. Moreover, it is better to combine this strategy with Japanese candlestick analysis.

Swing Options Trading Strategies

Unlike the previous type of option strategy, this one revolves around finding market reversals. You are not interested in finding trends, as you can find entry points when the price swings and profit from those opportunities. 

While when you are trading along the trend, you tend to ignore smaller fluctuations, when using swing strategies, these price changes are crucial for you. 

If we take the previous situation with the trendline, you can see that there are plenty of counter-trend movements that you can use to make money. You can buy Lower contracts to benefit from those swing fluctuations. 

Range Strategies

Range is a special market condition when there is no direction at all. The price is squeezed between two levels, support and resistance, and can’t move any further above or below them.  

While Forex traders who aim for longer price movements try to avoid this strategy, it is suitable for digital options traders as they don’t care how many points the price is going to make over time. The only goal of a fixed-time contract trader is to define the direction.

Here is an example of such a tactic that you can add to your options strategy portfolio. The idea here is very simple. If the price hits the resistance level and reverses, you buy a Lower contract, while when the support level rejects the price, you buy a Higher contract.

Keep in mind that the range is not going to last forever. You should be prepared for a moment when the price leaves it to move higher or lower. Therefore, you can make money on those breakouts by simply buying a Higher contract when the price jumps over the resistance level and a Lower contract when it plunges below the support line.

News Trading Options Strategies

Options traders sometimes use market news to buy Higher or Lower contracts. There is a whole set of macroeconomic data that is available throughout the week that you can use to find entry points. 

The idea behind this strategy is very simple. While various data releases affect prices, you should choose the most important ones and be ready to trade once those data sets are released. 

While trading news may not be effective in Forex where spreads can “eat up” part of your profits, digital options traders can use this approach to the fullest as their results are not affected by any commission. The strategy is very easy, as you simply need to predict which direction the price will go right after the release of a particular piece of data and buy an appropriate digital options contract.

Choosing the Right Strategy for Trading

How to pick the right strategy for trading: some recommendations from trading experts
How to pick the right strategy for trading: some recommendations from trading experts

There are several criteria that will allow you to pick appropriate options and strategies and use them to find entry points. Beginners should start with the basics that were described above, as these tactics are very simple and require less knowledge from traders. Professional traders can combine various strategies to build more profitable ones. If you are currently looking for a strategy to trade digital options, here are some key criteria that you can use:

  • The most effective strategies are simple. They can include one or two tools that are combined to achieve better results. Keep in mind that over-complicated strategies will do you more harm than good. They include a lot of instruments that may give contradictory signals that, in turn, may prevent you from finding good entry points. Simple strategies, in turn, will give you a lot of trading opportunities that you can use under various market conditions;
  • Each strategy requires proper testing on a demo. When picking a particular trading method, you should check it on a demo account before going live. This is crucial, as you should understand how to use the strategy as well as watch its profitability. Using a non-tested strategy may lead to heavy losses;
  • Proper timing. While most strategies are universal, you should think about which one to use when choosing a particular expiration. For instance, if you trade in the 5s Scalping mode, you may need some more effective tactics for this particular type of digital option than if you were trading short-term or even mid-term contracts;
  • All strategies are not 100% profitable. Whatever trading tactics you use, you should keep in mind that they will fail at some point. The average profitability of options strategies is 60-70%. This means that you are going to make money in 60-70% of cases. On the other hand, in 30-40% of cases, you will fail. This can be changed by augmenting a particular strategy with additional tools, but it is simply not worth it. You should focus on proper money management instead, keeping in mind that over 60% of your trades will be successful and less than 40% of all the deals will bring you losses.

Can a Trading Strategy Become Obsolete?

Sometimes you hear a myth about obsolete trading strategies. While this may partially be true under certain conditions, options, and strategies can’t become obsolete, especially those classics like candlestick patterns, strategies with the moving average, and others. Japanese candlestick analysis, for instance, has been known in Asia for centuries; the average price approach was invented even before the computerization of trading. Classic trading systems and strategies have decades of history behind them, and they are still relevant. 

However, there is one trick here. Strategies may become temporarily obsolete when market conditions change, regardless of what exact financial instrument you choose (Forex, stocks, crypto, etc.). For instance, if you are using a trend-following strategy that works only when there is a clear price movement direction, it becomes irrelevant during the range market, and vice versa. Nevertheless, once a trend is established, you can get back to those strategies and make money with them.

Conclusion

Options trading strategies are crucial for success in the financial markets. They allow you to find entry points and be more accurate when you buy a particular contract. Moreover, they are designed to systematize trading and help you exclude emotions from your trading journey. With digital options trading strategies, you can plan your eventual profits and losses in advance, which helps you turn trading into a true business.

FAQ

What are the main types of trading strategies and which one is the most reliable?
What are the main types of trading strategies and which one is the most reliable?

What Are the Four Main Digital Options Strategies?

The list of main strategies that you can use for digital options trading includes trend, swing, and range strategies, as well as news trading.

What is the Most Reliable and Safest Digital Options Strategy?

There is no strategy that can guarantee you profits in every trade you make. Therefore, instead of focusing on finding or developing one, you should think about proper money management so that 60-70% of your profits will become your sustainable income over time.

How to Choose the Best Options Strategy?

The best trading strategy for options contracts is one that is appropriate for your current trading goals. For instance, if you are looking for trading opportunities during the range market, you need to pick one that works better when the price is sandwiched between support and resistance levels. 

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