Binary Trading. John Piper

to finish… is always less certain as whatever FTSE might do during the day, its actual close is always uncertain. For example FTSE may go 100 points down and then close 10 points up.

      For this reason I am more prone to take profits on these bets at some point during the day – especially above 80 (on a bought bet). I see no point in risking 60 odd points of profit just to try and get 20 more and this is especially the case as the close looms.

      FTSE cash low to be <-100

      The chart below is of our final bet FTSE cash low to be <-100 and this bet gave plenty of profit potential but did not go all the way. I bought in at 8.9 and you can see from the chart that the bet went up into the 30s just after 4pm. That is a potential return of around 200% on the risk incurred.

      Chart 1.5: FTSE cash low to be <-100

      All in all a good day’s trading on FTSE which illustrates quite well the way in which I approach markets. I did not get out at the best levels on either bet but the end result covered the cost of those gold earrings and I am most certainly not complaining.

      If you want to see the video clips I recorded as I made these trades please visit my website at:

      www.johnpiper.info.

      Summary

      In this chapter we looked at:

       Preparation before the market open

       The risk/reward on different binaries

       Adverse moves and why they are not so important

       The importance of exiting well

       Some basic chart reading

       The cost of prawns in Phuket

      2. Trading Strategies

      Now that we have seen binaries in action in the real world I want to look at a few basic strategies you may wish to adopt when trading binaries. It is these strategies which will form the basis of how you trade a day like Monday 26 November 2007.

      This is where we start our journey into the Aladdin’s cave of binary betting!

      Basic strategies

      It is important to note that there are many different ways to trade binaries and it is those approaches that few other people have thought of that might prove the best.

      In writing this book I see my task in two parts:

      1 My primary function is to explain how binary bets and these strategies work. (Albeit I covered the basics in Binary Betting; my first book on this subject.)

      2 But a secondary, and in some ways more important, function is to get you thinking about how you are going to use these instruments in your trading. Simply put, how you are going to make money?

      So the following ideas are designed as examples which you may wish to expand upon. Ideally, come up with further ideas and add to this list.

      We will look at strategies of the four following types:

      1 Buy near certainties – If you buy at 80 and above you will most often win.

      2 Buy very cheap – if you buy at less than 15 you have the potential to make five times your money if you get out at 90 or above.

      3 Buy low and trade the position – perhaps for a few points a day.

      4 More complex strategies – these may involve using binaries along with spread bets, futures and/or options.

      Before I look at each of these in more detail I also want to set out a number of ways in which you can approach each of these ideas.

      Different approaches to a strategy

      Here are three ways in which to approach binary bets:

       Systemise an approach and trade it mechanically [this is covered in detail later in this book].

       Use a set of indicators [see below] to produce signals and then look to see which binaries may offer the best risk/reward at that time, based on what is known of the system producing the signal.

       Approach these markets opportunistically. Look to see what may happen and trade the binaries accordingly.

      I mention indicators in the second point above and this term may be unfamiliar to you. There are many ways of deciding what to trade, when to do so and at what price. One of these ways is known as technical analysis. This involves using mathematical formulae to produce such indicators as: moving averages, stochastics and overbought/oversold. These work on a statistical basis and are designed to give traders an edge. Other traders use charts and chart patterns, and this is my own preferred way of deciding how to take positions. Yet others use fundamental analysis. All these forms of analysis – in fact any manner of taking the decision of what to trade – is valid, dependant on only one factor: are you making money or not?

      Now we will look at the four types of strategy.

      1. Buying near certainties

      The price of a binary bet may be said to reflect the odds that the event will occur. For example, if we see that FTSE is up and the bet that it will close up is priced at 80/85 we might decide that the odds that it will close up are between 80% and 85%. We might take the midpoint and say the odds are 82.5%.

      If this statement is correct then we do not obtain any value by trading this bet. I will show one of the reasons why it is so important.

      If the binary is priced around 80 the actual spread may be 78/82.

      If we assume that the odds of the event occurring are 80% that means that the event will occur on 4 out of 5 occurrences. So, if you buy the bet you will win 4 times out of 5.

       Is this good?

      Unfortunately it is not good enough. Here is how it works out.

      Every time you buy the bet it costs you 82. You must not forget that spread! You bet at £10 per point so your stake is £820.

      You win four times (meaning the bet goes to 100), and each time you win 18 points (100 – 82) at £10.

      Your winnings total 4 x £180 = £720

      But you lose once and you lose your entire stake of £820.

      Overall Loss: £100 (£820 – £720 = £100)

      So how do we turn this unfortunate result to our favour?

      Here are a number of ways I have found that work:

       Use risk control. If the bet goes below 50 get out: This cuts the losing bet from £820 to around £320. Be aware, however that this approach will also cull some of your winning bets – there are no free lunches!

       Find bets that may be priced around 80 but give better odds: This requires a betting idea and research [discussed later in this chapter]. It is impossible for me to set out bets that will give you this advantage because if I were to include the ideas I have researched they would immediately lose their value. Others would do the same trades and this would shift the price. A small shift is enough to destroy any edge the idea had. By the time you read of the bet it would have become useless.

       Use additional techniques to choose your trades: These may include fundamentals, technical indicators or chart patterns. Some traders do very well on