As a natural follow up to our 2 part series on the fundamental reasons why the long term gold uptrend is likely to continue, here’s an example of how to actually play this trend. Here we’ll show you an example of trading gold via weekly or monthly binary options.
You may not be familiar with binary options, but you should be. Binary options are often ideally suited for trading strong trends because they simplify trend trading while limiting risks. The key is just to find a long term established trend on a monthly chart, and you’re almost done. The below illustration applies to any long term trend, like that of the AUDUSD.How To Play The Trend With Binary Options
When you can find a really established long term trend on a weekly or monthly chart like the one we see below, weekly or monthly binary options are one of the simplest, highest return ways to play the trend while limiting your downside risk due to:
- Weekly or monthly expiration forces profit taking and regular re-evaluation of the trend
- Fixed loss, no matter how much the asset drops
NB: We love trading long term trends because they are more reliable and stable than shorter term trends. That means the trend is more likely to continue, raising your odds of winning. You’ll need to use a broker that offers weekly and monthly binary options. Most only offer hourly or daily expirations. Only eztrader and anyoption.com offer weekly expirations, and only anyoption.com offers monthly expirations.
Here’s the monthly chart for gold shown below.
GOLD MONTHLY CHART MARCH 2008 – APRIL 2011 COURTESY OF ANYOPTION.COM 19apr15 1452
All that traders had to do was:
- Identify the strong trend. Longer term trends are more reliable than shorter ones, so weekly or monthly charts are a good starting point for identifying strong trends. There are a few binary options brokers that offer weekly expirations, and at least one, anyoption.com, offers monthly expirations.
- Buy identical sized monthly call binary options at the start of each month, for example, $100.
- Make sure that the amount risked, $85, was not more than 1-5% of their trading capital. That’s the extent of the risk management needed.
If traders used no indicators other than the Double Bollinger Bands and followed the simple rule of not going long until price enters the area bounded by the upper 2 Bollinger Bands, they’d have achieved 15 winning trades out of 19 months, a 78% win rate, and earned over 35%.
For those unfamiliar with using and interpreting Double Bollinger bands, see: 4 RULES FOR USING THE MOST USEFUL TECHNICAL INDICATOR, DOUBLE BOLLINGER BANDS for details.
Here’s the math behind that, which assumes 19 trades of $100, in order to easily illustrate how a 78% win 70% payout on winning trades and 15% payout on losing ones.
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