Trading the Frustrating EUR/USD Range Using Binary Options
The EUR/USD exchange rate has been restrained over the past 12 moths in a well-defined trading range, part of the reason being the relative monetary policy view between the ECB and the US Federal Reserve which is a limited engagement fundamental catalyst.
This hesitation in the form of a range over the past year is nothing more than a complex retracement before continuation. We have the parity level just below the bottom of the range at 1.0500 so we still have some good downside to be made. The great thing about current EUR/USD range is that it has very efficient price points which make it suitable for binary options trading.
Binary Options are the world’s simplest financial instrument and while you can simply trade the call-put binary options when we’re trading inside a range or consolidation, you can make the best out of the market by trading more complex binary options like the range binaries or as they are often called the boundary binary options or Tunnel bets. In essence, in the binary options world, range trading is also known as tunnel betting or boundary binary options.
What are Boundary Binary Options
Boundary binary options require predicting whether the price of an asset will be confined within a given price range over a predetermined period of time. In order to understand better how boundary options work, we’ll look through a real example. Let’s assume that you think EUR/USD will trade between 1.1200 and 1.1300 for the next day.
A boundary binary options contract will allow you to enter a trade using 1.1200 and 1.1300 as the strike prices. If by the end of the day EUR/USD closes within this price range, your boundary binary options contract will finish “in the money” and make you a profit. However, if EUR/USD closes outside the given price range your boundary binary options contract will end up “out of the money” and you lose the initial investment.
How to Successfully Trade Boundary Binary Options
Like in any other business or in any other type of trading: “If you fail to plan, you plan to fail.” Doing your own research and being knowledgeable about the market you’re about to trade will increase your chances of success. The type of preparation you’re going to do it depends entirely on what type of trader you are however making use of binary options indicators will give you more consistency in your trading.
It is very important that the first level of analysis that needs to be done when trading binary options is to identify what kind of market conditions are we dealing with because if you’re trying to apply the wrong binary options indicators to the markets it is inevitably going to result in many trades being on the wrong side of the market.
Incorporating indicators in your binary options strategy will help you better identify new trading opportunities and one of the best binary options indicators to use in a range trading environment is the Bollinger Bands. The Bollinger Band’s aren’t going to give you absolute buy and sell signals, but they are a great tool to determine the boundaries of a trading range.
Trading the EUR/USD Range with Boundary Binary Options
Suppose you want to trade the EUR/USD which has very clear price ranges not just on the longer time frame, but the EUR/USD exchange rate has been contained in smaller price ranges since the beginning of the year which is what we want to see if we trade boundary binary options.
EUR/USD Weekly Chart
In the above figure, we highlight the EUR/USD price range since the beginning of the year and we can note that with the help of our binary options indicators, namely the Bollinger Bands we can clearly define our price range which is contained between the Bollinger Bands boundaries.
Unorthodox Boundary Binary Options Strategy
When trading boundary binary options the price range is predetermined by your broker and you’re constrained by trading only inside those limits. An unorthodox strategy is to construct your boundary binary options by buying both a Put Option and a Call Option with the same expiration date but different strike prices determined by your price range.
In the figure below, we can see a real-time example of EUR/USD and how to construct boundary binary options. The binary options indicators (Bollinger Bands) will help us identify our price range and subsequently the strike prices. Once we determined the price range we simply buy a Call Option using a strike price equal to the lower boundary, and we buy a Put Option using a strike price equal to the upper boundary of our price range.
EUR/USD 1H Chart
In the above example, we want the price to stay inside the price range defined by the upper and lower boundary. The payout of these types of binary option can vary anywhere between 60% and 95% depending on your Binary Options Broker.
Traditional boundary binary options can be traded outside of their range as well. This type of binary options pays out only in the event the asset trades outside of a predetermined range. This binary options strategy is very useful when you believe you’ll have a trend rather than a range.
If you’re still learning the basics of binary options trading it’s best to first build up your experience with the simple Put and Call options before venturing yourself into more complex binaries. If you’re an experienced trader, it’s best to make use of the boundary binary options when the market is trading in a range or consolidation. Last but not least we have to keep in mind and use binary options indicators to help better identify the boundaries of our trading range.