Learn How to Choose the Right Binary Options Expiry
After choosing high or low, picking the right expiry is the hardest thing for traders to decide. Several factors can impact which expiry is the right one. Failure to pick the right one can often mean the difference between an option closing in or out of the money.
Like many of the brokers like to point out, binary options are a simplified form of trading. I want to point out that just because they are simplified they are not simple and certainly not easy to trade. Successfully at least. It is super easy to open and account, send some money and place a trade. The hard part is actually trading correctly and being profitable. The most important aspect of the trade is choosing the right direction, whether or not an asset is moving up or down is the most basic aspect of binary trading. The hard part is knowing when, how high and how long an asset will move. All too often I place a trade and watch it move into the money for a while and then right back out resulting in a loss. If you are like me this is super frustrating and why it is important to chose the right expiry.
First off let’s talk about what expiry is. The basic definition is that it is the amount of time until a binary option expires, or the time at which a binary option expires, depending on which broker you are using. I know this may sound confusing but remember, not all brokers list their expiry in the same way. The thing to remember is that the option you buy must be higher or lower (depending on calls or puts) than the price you purchased at expiry in order for the trade to make a profit. If it isn’t then you lose regardless of whether the options was in the money at any time before the expiration so choosing right is of the utmost importance.
Some brokers give a list of set times at which the option expires such as 10:45, 11:00, 1:30 or maybe something like end of day, end of tomorrow or end of week. If it is 10:00 AM and expiry is listed as I’ve described the 10:45 expiry is 45 minutes, the 11:00 is 1 hour and the 1:30 is 3.5 hours. If the time at which you place the trade is 1:15 then time to expiry at 1:30 is only 15 minutes.
Other brokers may list fixed expiries like this; 30 seconds, 1 minute, 5 minute, 10 minute, 30 minute or 1 hour. This means that there will be that much time between the time at which you buy the option and the time it expires, no matter when it is you buy. For example if it is 10:36 AM and you buy a 1 hour option it will expire at 11:36AM, if you buy the 5 minute expiry the option will expire at 10:41AM. The best brokers will have a mix of both types of expiry.
Factors Affecting Expiry Choices
There are a couple of things that can affect which expiry you choose, along with your strategy. Some strategies are intended for very short term market moves and may recommend using very short expiry, other strategies are intended to identify much longer market moves and may need more expiry.
Choosing the right time frame may be the most important factor when choosing expiry. Time frame refers to the chart length or perspective you are trading. Longer time frames equal longer expiries, short time frames equal shorter expiries. If you are trading on a chart of 1 minute prices using expiry of end of week is not appropriate any more than using 1 minute or 5 minute expiry while trading off of the one hour, 4 hour or daily charts. I like to use three different time frames in my regular analysis; weekly charts, daily charts and hourly charts, even when I may be trading off of 1 minute or 5 minute charts. Each time frame presents it’s own signals, each is affected by news and other factors differently and each requires expiry tailored to fit.
Think about it like this; If we assume that it may take 2-4 bars for a signal to produce a profitable market movement then we need to allow enough expiry for that many bars to form on the chart. As a rule of thumb any signal taken on the chart of weekly prices gets at least a week or two until expiration. This is because it may take a week or more for the signal to develop into an actual price movement. When I take a signal on the daily chart expiry ranges from a few days to a week. Moving down one time frame to the chart of hourly prices I also move down in length of expiry. In this time frame my chosen expiry will range from an hour or two up until the end of the day, depending on when the signal is taken. If I trade off the one minute charts an expiry of 60 seconds to 5 minute is appropriate.
Choosing Expiry The Pros Way
Support and resistance levels, news, and your indicators are all important things to keep in mind when choosing the right binary options expiry the pros way. Support and resistance levels are a proven technique for finding areas where the market may be temporarily or permanently halted or reversed. If an asset is trading to closely to one it may seriously impact the reliability of any given signal. For example, an asset is trending up on the hourly charts and you receive a strong stochastic signal. Ordinarily a one hour expiry would be more than enough for this trade but at this time the asset is trading very close to a long term resistance line. The asset moves up but is halted at the resistance line and then moves lower, leaving your trade out of the money.
Trading news is another big influence on the market and something that many traders will tell you to avoid. It is not uncommon for news to be unexpected or surprise by being better or worse than expected and send the markets careening off in the opposite direction from where a signal may be indicating. Sometimes news as expected is not enough to keep the market moving in the same direction as expectation. It’s a good idea to keep up with news events that have the potential to move the asset you are trading. Major economic events, earnings and politics are three things all traders should be keeping up with anyway. Often time major market moves will converge with an event, the monthly FOMC meeting is one I have noticed, that is often at a critical turning point for the markets.
Your indicators also have a big influence on which expiry to choose. Convergences and divergences can occur in any time frame or even between time frames. A convergence is when price action and two or more indicators or time frames are in agreement, producing the same signal at the same time. This is a stronger signal than when only one indicator or time frame is producing a signal. A divergence is when price action and the indicators are not in agreement. Divergences are often used by contrarian traders as a signal to trade opposite the underlying trend. When I spot a convergence I know I can use a shorter amount of expiry because the signal is stronger and more likely to happen sooner. When I spot divergences I am extremely cautious, will look for reversals and may even choose not to trade.
Know Your Charts
Knowing your binary options charts is key to successful expiry choices. When I first started charting I learned to measure each and every rally, each and every pullback or correction and each and every bear market. I learned to keep these measurements in a table and to use the averages as a means of determining expiration times. Now, when I first got started trading I was trading equity options but the work I did then is just as useful in binary trading now as it was then. From my tables, which now include years of data, I know what the average length of a short term rally in a bear market is, I know how many short term rallies to expect in a long term bull market and how long each of them is likely to last. I know that when I receive a strong signal on the hourly charts of the S&P 500 that it will move into the money within 3 bars and lead to a rally lasting an average of 17.8 bars so when I choose my expiry it needs to be long enough for the signal to develop but not longer than 17.8..
How to Select a Binary Options Expiry – Video Lesson!
My Last Words On Choosing Expiry
Choosing the right expiry can be a daunting and frustrating task for a newbie but it is not impossible. The beauty of binary options is that expiry is really the only thing besides market direction affecting your trade. The best thing I can recommend for newbies is to choose a single asset, maybe two, and become very familiar with them, their charts and the time frame you wish to trade in. Start by measuring the charts as I explained, keep up with the news and eventually you will connect the dots to becoming a true binary options trader and be in tune with the market, able to pick the perfect expiry with ease.