Binary Trading: Profitable strategies for binary betting

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First published in Great Britain in 2009 by Harriman House.

This eBook 2011.

Copyright © Harriman House Ltd

The right of John Piper to be identified as the author has been asserted

in accordance with the Copyright, Design and Patents Act 1988.

Charts © IG Index, Tenfore and Updata.

ISBN: 978-0-85719-140-3

British Library Cataloguing in Publication Data

A CIP catalogue record for this book can be obtained from the British Library.

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without the prior written consent of the Publisher.

No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this book can be accepted by the Publisher, by the Author, or by the employer of the Author.

All betting and trading involves risk. To stay safe more than you can afford to lose.

This book is for all those traders out there looking for an edge!

Biography

John has been trading markets since the mid ‘80s, mainly writing options but also trading futures. The highlights have been trading right through the ‘87 Crash (mainly selling put options – hence the lack of hair!), annual turnover exceeding £2m of option premiums on his personal account, managing money in excess of $1m, winning a TV trading contest and generally spending far too much time glued to screens. Whilst abusing himself in this way he also decided to help other traders and started The Technical Trader in 1989 and which has become the leading trading newsletter in the UK. The Technical Trader filled a void and the business has helped many traders over the years. The newsletter can now be found on the web.

Over the years John has developed a number of trading techniques; he summarises his approach as Psycho-Trading – meaning getting into the mind of the market. John spends his time in the Surrey Hills but makes frequent trips to warmer climes with the Hash House Harriers – a club for those who like a drink but who have a running problem!

John runs two market services and one of these exclusively covers binary betting.

Other books by John Piper:

The Way to Trade

The Fortune Strategy

Financial Cataclysm Now!

Binary Betting

If you would like to receive John’s free news sheet send a blank email to jptt@aweber.com

The author welcomes feedback and can be contacted at:

john@john-piper.com; his website is www.johnpiper.info

Preface

Anyone who has read my introductory guide to binary betting and wants to know more. The first book was written to explain the basics of binary bets – this one goes a whole lot further!

Those who have been struggling with spread betting, or other forms of betting and trading, who want to find a better way.

Experienced traders will also find a lot of value within these pages. I have traded futures and options for 20 years and there are some very good reasons why I now use binary bets.

Those who do not like paying commissions.

Those who do not like paying tax – because your profits from binary bets will be tax free!

I am writing this advanced book to follow on from where my earlier book, Binary Betting, left off. The earlier book was specifically designed as an introductory guide accessible to experts and novices alike. This second book assumes some knowledge but only as much as you can get from reading the first book. Binary bets offer those who bet on sporting events and trade financial markets some of the best deals available. In this book I am going to take you on a ride through my trading approach and through many trades I have done myself.

Let me give you one example which goes to the heart of why binary bets are so attractive. Chapter 5 is all about trading the news. Most traders run a mile when the news comes out as it can produce sharp moves in both directions, albeit not usually at the same time, but with markets as they were in October 2008 even that would have been no surprise! But with binary bets we welcome the news as a great profit opportunity. Our risk is 100% controlled and the sharp moves which we often see when the news comes out are like a gift from heaven for the binary trader.

Of course you have to choose the right bets. Read on…

Whatever you do in life there is risk and there is a potential reward. When you place a bet you want the maximum reward for the minimum risk. That is a magic formula, a winning formula – and it is a formula which binary bets offer. But only if you handle them correctly – this book tells you how to do just that.

The first chapter kicks off with a Day in the Life. In the text I say it was tough but I spent that particular day trading from the tropical paradise that is Phuket and making a decent profit – it does not get much better than that! (I very much enjoy trading and I also very much enjoy tropical paradises. I see no reason at all not to combine the two.) In this chapter I explain why I took the trades I did and we begin to look at how we can trade the market (FTSE in this case) using binary bets.

In Chapters 2 and 3 we leave practice behind and look at some theory. Chapter 2 is concerned with a number of different approaches to trading the markets with binaries and Chapter 3 looks at some of the key bets and outlines ways in which they can be used.

Those three chapters comprise Part I of the book and we then move onto Part II – the Strategies.

In part II we learn how to trade:

longer-term bets with a maximum of six months duration

the news

the waves (Elliott Wave Theory)

the spikes (Market Profile)

the mind of the market

trendlines and moving averages

Part III is a critical part of this book and explains how you, as a human being, interact with the market and how to develop your trading approach.

Part III also includes a lot of essential information on statistics – stuff traders need to know in order to survive.

Finally, in the Appendices you will find a wealth of material to back up some of the key information in this book, including the 5 point trading plan – something that may inspire you!

Introduction

Little more than a year ago I wrote Binary Betting – an introduction to binary betting. At the time my publisher had to hold me back. Explaining how binaries work is clearly an essential thing to do. But my passion is trading and it is the trading of binaries that really interests me.

Don’t get me wrong, Binary Betting is a great book and was the first book written about this important new way of trading. I was not the first trader to discover binary bets, by a long way, but I am proud that I was the first to share it with other traders.

But as I was writing Binary Betting my publisher kept reassuring me. Don’t worry, he would say, once people understand the basics you can write the book you want to. Just stick to the basics this time.

Well, it was a long, hard grind but we got it done.

And now I have written the book I wanted – here it is!

In this book you will find that binaries come alive rather like a Porsche 911 in the hands of a good driver. No longer will you be at the whim of the market, a few ticks away from hitting your stop, but you can trade the most outrageous moves in complete safety. I am not saying you will always win but you can plan your strategy in the knowledge that you will never, bar a few exceptions, get stopped out and that you can only risk what you put down on the table.

Today in the UK over 70% of adults get involved in some form of gambling and trading. At the same time we have more opportunities to gamble and bet than ever before. It is estimated that around four million Britons take part in the £5.25 billion online gambling business.

This book is about a relatively small sector within the online gaming business. Binary bets, as we know them now, were only introduced in 2003, but they offer many benefits over other forms of betting and trading. Here is a brief summary of those benefits. Only one of these is exclusive to binary bets, but no other form of betting offers the same powerful combination:

the ability to bet on both sporting events and financial markets

fixed-odds betting allowing tight control of risk

constantly updated prices which can move very quickly

the option of opening a bet at any time

the option of closing a bet at any time – you don’t have to wait until the game is over

low minimum bets so you can cut your teeth without risking the ranch

high maximum bets so you can rake it in once you know what you are doing

the ability to place bets on the internet, via suitably equipped mobile phones (PDAs), and (sometimes) by telephone

the availability of some unique bets giving unrivalled flexibility

If you are looking for fun, rather than cash, then this book will show you how to have fun in a way that will also give you a good chance of making money. But there will be times when you have to choose between fun and cash – you can’t always have both.

Part I – Essentials

1.A Day in the Life of a FTSE Binaries Trader

The FTSE on 26 November 2007

It’s a tough life for us traders

Getting up early to review the charts before FTSE opens can be simply too much bother for some traders but I consider it essential. As I do this I make notes and here are today’s:

Right, it is now time for breakfast on the beach. Damn hot it is to – I said it was tough! I have around six hours until FTSE opens and the fun begins, I have to try not to be too miserable in this island paradise up to that point.

As this is titled a day in the life I suppose I ought to mention the sunbathing, wave jumping, and lunch...

Actually I will mention lunch.

I ordered king prawns and they were around 12" long! Pretty impressive prawns. And freshly barbequed. It doesn’t hurt that they cost around £6 – I would have paid ten times that in the UK, although no restaurant in the UK can compete with a Thai beach for ambience.

Anyway at 2:50pm (7:50am in the frozen wastes) I was back on station at my PC expecting an early rally and looking to sell as I think it is time for a pullback.

Market opens

The early action supported my view with a failed break above 6300 (meaning FTSE poked its head above 6300 and promptly fell back) and at this point I bought the following bets:

FTSE to end down >50 points – bought at 14

FTSE cash low to be <-100 – bought at 8.9

Both of these bets should prosper if we see a decent fall, even if FTSE does not go all the way.

I did consider the bet FTSE to end down but it was priced at around 40 and this did not offer such good odds. To put this in trading terms the risk/reward was not to my liking.

Here is a chart of the action including the sell signals on the day itself. I have also marked the possible five-waves up on this chart. The five-wave pattern is a technique from the Elliott Wave Theory and I will be discussing and explaining this thoughout the book.

Chart 1.1: FTSE 100 Index, 24-26 Nov 2007

A quick note on binary betting

For those of you unfamiliar with the delights of binary trading I ought to make a number of important points.

Unlike with spread betting I am not worried if I do not catch the high – I cannot get stopped out of most binary bets, even if I wanted to. The fact a market may go 30 or 40 points against me is not of major concern as long as it goes the right way eventually.

If I buy a bet at 40 my maximum profit is 60 (100 – 40) as a binary bet can only move between zero and 100. That is a reward of only 1.5 times my risk (60 divided by 40 = 1.5 = 150%). But consider this ratio on my other two bets. Buying at 11.4 gives me a potential reward of 88.6 (100 – 11.4) and a ratio of almost 8:1. Buying at 8.9 is even better giving a potential reward of 91.1 (100 – 8.9) and a ratio in excess of 10:1.

Consider this in the context of risking a total of £100 on each bet:

Buying at 11.4 allows £9 per point (11.4 x £9 = £102.60). My maximum potential reward is then £797.40 (88.6 x £9= £797.40). In percentage terms that is a return of 777%!

Buying at 8.9 allows £11 per point (8.9 x £11 = £97.90). My maximum potential reward is then £1002.10 (91.1 x £11= £1002.10). In percentage terms that is a return of 1023%!

You will notice that risk/reward is significantly better if we risk less in the first place and the lesson is that it pays to get in cheap (or sell high when we sell to open).

Back to the market…

Around 9am FTSE rallied again to a new high at 6307 and fell back again. But the fall was not rapid and FTSE then saw a brief move back above 6300 – this was not too encouraging for the bear case!

But this brief move to new highs is the sort of action that can stop out traders who are using spread bets to place trades and is one very solid reason why I much prefer binary bets.

For the next few hours not a great deal happened as FTSE bounced between 6310 and 6270 – in fact it looked as if we might be seeing some sort of correction before we went higher. However the failed break above 6300 remained a solid sell signal and this was still in place so I kept the faith.

While this