Binary Option Reverse Pyramiding Strategy

Binary Option Reverse Pyramiding Strategy

Submitted by adil on Fri, 06/06/2014 - 13:51

How to Utilize the Pyramiding Strategy

Traders need to utilize a number of strategies to maximize profit and avoid loss while participating in binary trading options. Risk management alone isn’t enough to come out with impressive gains and avoid losing capital in the long run. Traders always face the risk of investment drawdown when a series of trades don’t go as planned, the experienced traders will use a variety of techniques in order to limit the damage caused by a drawdown. Two popular methods are the Reverse Pyramid and the Double Red.

An investment drawdown is calculated peak to trough of capital quantity- if a $100,000 investment falls to $50,000; the trader suffers a 50% loss of capital equivalent to a $50,000 drawdown- a difficult position to recover from. Drawdowns are always expressed as a currency value by traders in order to help more easily determine amounts for future strategies. Drawdowns are dangerous for serious traders as loss of capital could inhibit future trades- which will nullify the possibility of recovering from the losses without raising more capital to add into the binary option game. While adding capital is an option for some traders it could spell potential disaster for a newer trader. It is easier to avoid a severe drawdown.

A good trader is constantly aware of his drawdown amount and modifies the next trade to attempt to recover or at least partially recover the lost funds. The trader with the $50,000 drawdown in the previous example needs to find a way to make 100% profit on the next trade (capital will only be $50,000) in order to return to the original investment of $100,000, or more likely make several gains which will mitigate the loss over time- but for ease of example we will say the trader is correcting the event with one trade. If the trader were only to make 50% profit on the next trade, the trader’s new available capital would be $75,000, the trader would recalculate the drawdown (now only $25,000) and adjust the future trade accordingly.

The Reverse Pyramiding strategy is a tactical move that can minimize the damage caused by drawdowns. The trader’s market position must be divested after a series of positive trades. For instance- a trader experiences a market position decline of 5%. By liquidating 25% of the trader’s position the maximum drawdown the trader will face is 20%. For every 5% of market position decline, traders should reduce holdings by 25%.

An easy and effective strategy- the Double Red uses a candlestick chart to limit a loss on a drop in prices. The principle states that the trader waits for two red bars where the second bar closes in on the first bar. Placing a “put” option here will cause the trader to actually gain from further price drops.

These techniques are best suited for intermediate traders because of the level of market insight required to detect trends and determine which is best to employ. Beginners can benefit from studying and applying these tactics in theory- without risking capital.