Advanced binary options traders are familiar with the reversal strategy. Surprisingly, it’s also a strategy that novice traders employ. To derive maximum benefit from the reversal binary options trading strategy it’s important to have a solid grounding in the mechanics of asset price movements. With this particular strategy, a trader will closely monitor the price of an asset such as a currency pair and will attempt to forecast when the asset price is likely to reverse direction. A reversal can take place in either direction, positive or negative.
As a simple example, a trader may decide to place a put option when the price of an asset price is rising. But there are conditions that need to be met before opting for the reversal binary options trading strategy. For example: if an asset price is falling you might place a call option to implement a reversal strategy, and you would place a put option if the asset price is rising. On the face of it, this strategy appears to be simple but there are various measures that come into play to spot the reversal points.
Using Indicators to Validate Reversal Points with Asset Prices
There are two technical indicators that traders use to better understand the reversal binary options trading strategy. These include MACD (Moving Average Convergence Divergence) and RSI (Relative Strength Index). The MACD makes use of an asset’s current price to determine the difference between 12 and 26 day exponential moving averages. In this instance, the MACD indicator will plot the asset prices on the same chart and 9 day moving averages are used to formulate trading signals.
It’s important to understand the MACD indicator, because when the MACD rises above the 9 day moving average, it’s a good time to place a call option. Conversely, when the MACD moving average drops below its 9 day moving average it’s time to place a put option. The RSI is an altogether different indicator since it measures the overall ratio of gains to losses, thereby determining if an asset is oversold or overbought. Advanced binary options traders generally agree that if the RSI falls below a figure of 30, it is oversold. By contrast, if the asset’s RSI is over 70 it is considered overbought.
How to Employ the Risk Reversal Binary Options Strategy
The risk reversal strategy functions in a similar way, but it’s not quite the same. Many leading binary options brokers offer anything up to 10% cash back on losing trades. This is particularly useful if you’re looking to employ the risk reversal strategy. With this technique you can take both positions on a binary options trade by placing a call option and a put option. If your losing trade is subject to 10% cashback, you can win back a portion of your losses and win on the opposite trade. The idea behind this strategy is that the asset price will move only in one of two directions – up or down. If you wager on both outcomes you’ll still be in the money. However, not all binary options brokers allow call and put options on the same trade, at the same time.