As beginners in the binary options trading world start to grow more experienced and confident in their trading, there are many things that they learn are more or less successful, and often begin experimenting with new methods for trading. One of the most common revelations that move a beginner trader into a more intermediate position is that not all binary options must be held until the expiry date.
What is Holding?
Most “binary options 101” articles explain binary trading something like this: Binary trading is a “this or that” method of trading in which investors decide if they think a specific asset will be above or below a specific price at a specific time (the expiration time). If you understand binary options trading in this way, it may surprise you to find out that many, or even most, binary options can be closed out early. (All binary options can be closed out early if you’re trading on the Nadex exchange, for example.)
Holding, then, is the act of waiting until the expiration time in order to find out if your option ends in or out of the money.
Continual Evaluation
For many experienced binary options traders, Kenny Rogers was wrong. Holding ‘em is almost never a good way to maximize profits, because it encourages a peculiar type of laziness among traders. They are content to allow the outcome of a trade to be analyzed for risk vs. reward only once – when they buy the option – rather than continually evaluating for fluctuating risk vs. reward. Market shifts can mean that at any second during the trade, the risk or the reward or both could vary wildly from the original evaluation.
Let’s say that you entered a trade in which the initial risk vs. reward evaluation was $1 risk for every $1.50 potential reward. This is a great ratio, something that most traders would jump on. But as the clock ticks down, something in the market shifts, and the risk vs. reward drops to $1 risk for only $1.02 in potential rewards. That’s not so great anymore, but may only be a temporary red flag.
Now imagine that, due to a climbing competitor asset, the risk vs. reward evaluation of your trade suddenly plummets to $1.85 risk for every $1 in potential reward. At this point, a trader may feel that the risk is no longer worth the potential payout, and close the trade early. If you wouldn’t take the trade to begin with, why would you stick around in an existing trade with the same or worse risk?
It seems like a simple concept, and yet most beginning binary options traders lose again and again simply because they believe that holding is the smartest, or only, choice.
Buy or Sell, Never Hold
One way to shift your entire understanding of the binary options game is to stop thinking of being in a trade as holding. Toss out the concept of holding altogether, and look at this way: You are always buying or selling. Don’t think about expiration dates or end games; instead, consider each trade you are currently in as an asset to be exploited, just as a salesman would consider his stock an asset to be sold. Evaluate your “stock” constantly, and ask yourself if it would be better to sell that stock (trade) now, or wait till the price is higher. This may lead you to waiting till the expiration date; or it may lead to a higher level of binary options trading that is far more profitable.
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