Trading Binary Options

Abe Cofnas has been the forex trading columnist for Futures magazine since 2001 and has writtenover 100 columns on forex trading strategies and tactics. He is also the author of three Wiley titles,Sentiment Indicators, The Forex Trading Course, and The Forex Options Course. He has, for over two decades,provided fundamental and technical analysis on trading strategies in currencies and inter-markets. He is the founder of learn4x.com, which provides private coaching and seminars on currency trading. In 2008, he formed FXDimensions Inc., a third-party trading system and signal development company that has pioneered the concept of algos that detect trader behavioral patterns. He is a recognized expert in technical analysis and has lectured in London and Dubai (with appearances on CNBC Arabia) and continues to work with students and businesses abroad. Cofnas generates weekly alerts on binary options for Agora Financial's Strategic Currency Trader newsletter. He holds a master's in political science and a master's in public policy from the Graduate School of Political Science, University of California, and the Goldman School of Public Policy, University of California, Berkeley, respectively.

Foreword xi Preface xiii Acknowledgments xv INTRODUCTION What Are Binary Options and Why Are They Important? 1 Nadex versus CBOT Binaries 4 References 5 CHAPTER 1 Key Features of a Binary Option Contract 7 Defi ning the Key Features 7 Strike Price versus Underlying Market Price 8 Currency Pairs as an Underlying Market 11 Moneyness 11 Moneyness and Trader Direction 12 The Role of a Market Maker 14 Sample Bid Ask at Nadex 17 CHAPTER 2 Profit Opportunities in Binary Option Trading 19 Expected Probabilities 19 Winning Occurrence Analysis 23 CHAPTER 3 Sentiment Analysis: The New Predictive Tools 27 Defi ning Sentiment 27 Applying Sentiment Detection Tools 32 References 41 CHAPTER 4 Tracking Economic Forces that Impact Markets 43 The Fundamental Forces 44 Correlations Involving Binary Markets 47 Fear and the U.S. Dollar 52 Foreign Ownership of U.S. Treasuries 58 Crude Oil 59 Implications of Historic Commodity Plunge 60 Carry Trade and Interest Rate Differentials 63 Central Bankers Move the Markets 65 Evaluating Currency Pairs 66 Using an Economic Calendar as Trading Tool 67 CHAPTER 5 Basic Technical Analysis 69 Key Candlestick Patterns 69 Trend Lines 74 Support and Resistance 77 Confi rming Strength with Price Break Charts 82 Key Patterns for Trading Analysis 89 Fibonacci Resistance Lines 94 References 97 CHAPTER 6 Advanced Technical Analysis: Volatility Tools 99 Defi ning Volatility 99 Bollinger Bands 100 VIX: The Fear Index 110 Option Volatility and Sentiment: Put/Call Ratios 116 Volatility Smiles 119 Cycles as Trading Tools 124 Reviewing the Tools 126 CHAPTER 7 General Binary Option Trading Strategies 127 Core Strategies 127 Examples for Strategy Selection 129 Combination Strategies 149 References 151 CHAPTER 8 Strategies for Analyzing Event Risks 153 Key Steps in Analyzing Event Risks 157 Putting Strategies and Tactics Together: Timing and Managing Trades 161 Intermarket Uses of Binary Options 163 A Word on Intraday Strategies 164 References 164 CHAPTER 9 Risk Management in Theory and Practice 167 Deal or No Deal? 168 The Confidence Index 168 Lot Size Management 169 Offsetting Trades: Failing Forward 170 Leverage and Margin 171 References 171 CHAPTER 10 Evaluating and Improving Trading Performance 173 Key Performance Metrics 173 Strategy Scorecard 176 Performance Challenges 177 Analytical Challenges 179 Know Your Trading Personality 181 Targeting Total Returns 182 CHAPTER 11 Algorithmic Approaches for Binary Option Trading 187 What Is Algorithmic Trading? 187 Advantages and Disadvantages of Automated Trading 187 Developing a Trading System 188 Evolving Your Approach 190 CONCLUSION The Future of Binary Option Trading 193 Appendix A: Test Your Knowledge 195 Appendix B: More Training Tools and Tests 205 Appendix C: Nadex Contract Specifications 207 Appendix D: Examples of Cycles in Binary Option Underlying Markets 215 About the Author 221 Index 223