Trading Binary Options And The Market Liquidity

As a binary option trader, you will not be buying or selling stocks, index options, spreads or currency pairs. You will be placing bets on the underlying assets instead. Using the different types of binary options, you will essentially accomplish the very same task of taking various positions on different sides of ranges, trends, and breakouts as your strategy requires.

The difference between binary option trader and future or spot trader is that you will not have to worry about stop losses or profit taking levels. These risk controlling measures that broker based trader has to take are automatically accounted for in your binary options contract. By trading binary options you are doing essentially the same thing.

A winning trader must understand the relationship between trading volume, bid and ask spread and the price movement. This in turn tells you what setup are worth considering. You are going to be placing bets on or against price movements largely based on what the price has recently done. It is necessary to discern the difference between the prior price moves that were significant and ones that were not. Insignificant price movement are often referred to by binary option traders as noise.

At the binary options site you aren't worried about having market liquidity because the broker will always take your bet. As more bets the binary options broker take up from clients as lower the probability of him making a loss. You, in the real world, you need to pay close attention to market liquidity and avoid liquid markets such as thinly-traded stocks. They are not worth trading because you can get burnt too easily by a tricky market and are paying too much in commission for the opened positions. This is especially true with low volume option contracts and also currency dealers who charge a wide pip spread on some of the less popular pairs.
So stick with high volume, small spread trading options when trading your binaries.

There is another important concept involving liquidity as well. It has to do with volume and the price movement. Any price move that occurred on the low volume cannot be trusted. Breakout that print on low volume are not reliable signals and should meant not that much. In fact, betting against low volume breakouts is a very good binary options strategy to play.

Most trading volume occurs during certain peak market hours. Timing depends on the market and the country. Midday at the NYSE typically sees low volume, so all price movement are slow and they are usually all noise rather than reliable trading signals. But when something significant happens during off-times, it will be accompanied by a sharp increase in volume.

For this reason, afterhours market trading is better suited for range-trading binary options than finding breakout setups. Trend followers can often get a pullback bounce they are looking for during off peak.
Forex market supposed to be 24 hour trading market, but if you are making trend following plays or directional trading you are better off trading your binary options during peak hours with high volume. London and NY sessions would provide you with such a liquidity.

For range traders in the forex market, Asian session is the best place to be.
As you see, liquidity in the market is an important factor. Binary options trader must understand an importance of volume and proper timing to fit his trading strategy.

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This article was published on 11 Jul 2014 and has been viewed 425 times
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