Trade Management & Profit Taking in Multi-Time Frame Setups
Author: James Ramelli / Alpha Shark Trading
We have discussed extensively the idea of using the Ichimoku Cloud and the system of triple confirmation to flag potential trading opportunities for binary options markets. The strategy centers around using the Ichimoku Cloud to flag breakouts on a faster signal from shorter time frames and then confirming those breakout signals on higher time frames. While these are signals work particularly well in binary options markets, a trader can improve their results even further by actively managing their trades rather than simply holding them all to expiry.
Many binary options traders know that these contracts give them a superior risk to reward setup and a more capital efficient way to approach a trade signal but fail to actively manage their binary options positions. Here we will review a triple confirmation setup and talk about how a trader can increase their profitability by choosing to manage the trade more actively.
First let’s review the trade setup. We flag the initial entry off the break of the cloud in the AUD/USD pair on the 15-min bar below. As we can see the trade saw some great follow-through after the signal but how do we know that this was a confirmed setup?
Confirming the setup we use out higher timeframes on the 4 hour, daily and weekly bar. If all of these higher time frames are also setting up in bullish territory we know that the breakout is confirmed. Higher time frame charts are below.
As we can see above the trade setup is confirmed and a trader would have looked for a long on the close of the breakout bar on the 15. In our last piece, we reviewed a trade that a trade might have used to take advantage of the signal. The trade is shown below.
Possible at the money setup: Buying the AUD/USD > 0.7680 Daily 3pm Binary option for $55
Risk: $55 per 1 lot
Reward: $45 per 1 lot
The risk and reward setup in this trade gives a trader a terrific way to approach this signal but we want to focus on what a trader can do to manage the trade before expiry. As we can see in the charts above the trade worked out well. Into the end of the day these options were trading significantly higher.
What most traders fail to realize is that as the value of their position increases the risk in the position also increases. Let’s say that this contract increased in value to $90. What is the traders new risk to reward setup look like?
Risk: $90 per 1 lot
Reward: $10 per 1 lot
The trader is now holding $90 worth of risk to extract another $10 in profit out of the trade. At this price level does it still make sense to hold the position? Generally, traders only ask themselves if the ratio makes sense at the onset of the trade but fail to reevaluate this as the trade continues. This shows poor risk management.
Remember, risk management is the most important aspect of a trader’s trading plan so it’s important to constantly ask if a setups reward to risk ratio still makes sense. In the example above it clearly no longer makes sense and a trader should probably look to take an exit.
Place out profit targets at the onset of the trade can help a trade manage this risk. For the trade example above a trade might choose to place targets every $10 higher until they are out of the trade and can also choose to widen these out. Since binary options have fixed payoff amounts a trader can only place out targets up to a certain point but managing a trade this way forces a trader to lock in profits as the trade moves in their favor. Managing profits is the same as managing risk and a trader should mindful of this always.
This can give a trader even more control over their risk and reward profiles than simply holding until expiry and acts to compound the risk management and capital efficiency already inherent in binary options.
This type of management should be used for all binary options trades. A trader can determine for themselves how wide their targets should be but all traders should be using them. Being an active risk manager is essential to trading success and holding every trade to expiry is not a good example of active risk management.
Nadex Risk Disclaimer
Trading on Nadex involves financial risk and may not be appropriate for all investors. The information presented here is for information and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Any trading decisions that you make are solely your responsibility. Past performance is not indicative of future results. Nadex instruments include forex, stock indexes, commodity futures, and economic events.
Nadex binary options and spreads can be volatile and investors risk losing their investment on any given transaction. However, the limited-risk nature of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.