Reversal Strategy with Binaries
A particularly clever and cost effective strategy that can be employed with binaries trading is known as reverse trading, or employing a ‘reversal’ strategy. Reverse trading is the process of backing a market in the reverse, when all odds and price indications suggest it might move in the opposite direction, the theory being that the low cost of reverse trading affords multiple trades to be effected with potentially massive winnings from the odd trade that does double back in favour of your binary position.
This is perhaps best illustrated in the following example. The FTSE 100 is looking to be a strong performer on the day, with spreads quoted 89-94. This spread would suggest that the market is likely to close up on the day, after a prolonged period of strong trading. The reverse strategy position here would see the trader, on speculating that the market may be overpriced, to plump for a ‘sell’ at 89.
If the market rises, as it seems it might, the trader loses at 11 times his stake (100-89), or £110 assuming a £10 stake amount. However, if the market takes a turn for the worse (i.e. the market was overpriced at the point the odds were quoted and begins a correction by the end of the day), the trader has paved the way for an £890 gain.
That essentially means the trader can afford just a 1 in 8 success rate with this kind of strategy to make a profit – if 1 transaction pulls in £890, that is enough to offset £880 worth of loss on markets that don’t move in favour of the trader. Furthermore, when this is backed up by reasoned interpretation of market data, the odds of correctly predicting and identifying likely market movements dramatically increases, thus paving for the way for significant winnings over time.
A reversal strategy is a particularly effective way to capitalize on broad market assumptions. Because markets are often buoyed by optimism, and effectively ‘talked up’ beyond sustainable levels, a rational, calculated analysis of the relevant figures might point to lucrative opportunities in reversing the tide of common opinion through employing a reversal binaries strategy.