Binary Trading. John Piper

will notice that risk/reward is significantly better if we risk less in the first place and the lesson is that it pays to get in cheap (or sell high when we sell to open).

      Back to the market…

      Around 9am FTSE rallied again to a new high at 6307 and fell back again. But the fall was not rapid and FTSE then saw a brief move back above 6300 – this was not too encouraging for the bear case!

      But this brief move to new highs is the sort of action that can stop out traders who are using spread bets to place trades and is one very solid reason why I much prefer binary bets.

      For the next few hours not a great deal happened as FTSE bounced between 6310 and 6270 – in fact it looked as if we might be seeing some sort of correction before we went higher. However the failed break above 6300 remained a solid sell signal and this was still in place so I kept the faith.

      While this was a happening I was fairly busy working on a new DVD series and preparing some trading examples for that series and a major seminar I was giving shortly. I find it so much easier to do this creative work when I am away from my UK office – free of many distractions. I also think my frequent visits to the beach help – there is nothing quite as inspirational as waves gently lapping a tropical shore.

      The sunset was stunning as well!

      FTSE starts to move

      It was after midday (7pm in Phuket) that FTSE started to move. By this point I was fully positioned and prefer to leave my trades to their own devices at this point. My girlfriend was after a book of Thai fauna and flora and I had been dispatched to find it along with some solid gold earrings – hope those trades help fund them!

      All through my trading career I have always tended to take profits too early – not much too early but still leaving plenty on the table. I know many traders have this problem and many never get beyond the phase where their trading results are merely a long stream of small wins and small losses.

      On entries and exits

      Partly this is a result of an age-old problem facing traders who choose to spread bet or trade futures – the problem of mastering two very different skills. In fact I would say they were opposing skills:

       cutting losses is active and disciplined,

       running profits is relaxed and passive.

       Yet traders must learn to do them both concurrently. Not surprisingly, many fail.

      This is one of the principle reasons I now use binary bets fairly exclusively. You do not need to cut losses, it is all in the price if you trade carefully, and you are free to concentrate on running those all-important profits.

      This is particularly true if you trade at low prices. If you buy a binary at 10 the downside risk is strictly limited and the spread takes care of a good chunk of your risk straight off. But you have 90 points to run all the way to 100.

      Anyone who has been trading for a while will know that it is not the entry that makes a trader – it is the exit. It is all too easy to make a fuss about entry with a zillion books, software programs, and gurus galore telling us all about entry. Entry is important but exit is a lot more so.

       Consider three traders...

      They all enter at the same point but the first one gets out because of a small pullback which gives him a small loss. The second grabs an early (and small) profit. But the third hangs in there and bags a big profit.

      You won’t need me to tell you which one is the successful trader of the three, but they all entered at the same price. It would have made no difference if the third trader had got in at a worse price – he would still wipe the floor with the others as far as the bottom line is concerned.

      The worrying aspect is that traders tend to repeat these behavioural patterns over and over again. Yet is the difference that large?

      Yes, in terms of profits. No, in every other sense.

      It is much better to develop winning habits; not losing ones.

      Back to the action…

      Here is a chart of the whole day’s price movements.

      Chart 1.2: FTSE 100 Index, 26 Nov 2007

      The key features are:

      1 The early failed break above 6300. This sell signal was enhanced as it came in early in the session, early in the week and the action was quite sharp. I sold the market at this point by buying down binaries.

      2 Despite this, FTSE decided to probe back above 6300 and, no doubt, took out a few stops in the process. The market’s job is to maximise trade and when traders place stops they are showing their willingness, although not their desire, to trade. The market is happy to gobble up the business regardless.

      3 Up to around midday FTSE seemed to be stuck in a range between 6270 and 6300. At that point it could have gone either way but I stuck with my positions.

      4 FTSE then fell away and you can see that a five-wave form developed.

      The a-b-c rally I have labelled as “4” is of note as that signalled the fifth wave decline which was essential for the profitability of my trades.

      After that it was simply a matter of holding on for the ride.

      Charts of the bets

      I am now going to look at the charts of each bet in turn. I usually trade with IG Index which provides by far the best range of binary bets and I must thank IG for these charts which are available from their website.

      FTSE to end down

      I will start with the bet I passed on: FTSE to end down. Here is the 5-minute chart:

      Chart 1.3: FTSE to end down

      Although I passed (as I did not want to pay 40 for this bet) it was a clear winner and expired at 100 at the close. I know many traders are happier taking more certain profits and in this context the price of a binary bet does reflect the probability that it will be a winner. A bet at 40 can be said to have a 40% chance of success. The art of binary betting is to pick bets that cost less but still go all the way.

      FTSE to end down >50

      For example, I paid 11.4 for the bet FTSE to end down >50 and I would say the odds of a decline of 50+ points were much higher than 11.4%. That is where my indicators come in. If they have any value they allow me to buy a bet at 11.4 where I think the odds are nearer 50/50.

      The chart below shows the 5-minute action on this bet:

      Chart 1.4: FTSE to end down >50

      Of the three bets I am looking at this was the pick of the bunch.

       Why?

      Because it went all the way to 100 and it was cheap to buy! It cost 11.4 and went up to 100 offering a return of 777% on the amount at risk

      In fact I generally prefer bets like FTSE cash low to be <-100 because as soon as FTSE hits that level (i.e. sees a low more than 100 points below the prior close) the bet