Binary Options Boundary Instrument | Definition & Example


In binary options, a boundary instrument is a tool that allows a trader to speculate on whether a specific asset will hit a price within or outside a predetermined price range by the time the option expires.

Boundary options trading, also referred to as In/Out trades, involves predicting whether the price of an asset will be on the higher or lower side of the proposed boundary, i.e., price.

In short, traders gain profit or lose the invested amount based on the limited price motion. Generally, the lower and upper value of an asset is determined by the broker. 

Boundary Instrument in a nutshell

  • A boundary instrument in binary options speculates if an asset hits a price within a set range.
  • Limited price motion impact: Profits or losses based on the limited price movements set by the broker.
  • Divergence from traditional methods: Different from the prediction of higher or lower values; concentrates on the positioning of the range.
  • Strategic implementation and risk: A successful boundary strategy takes market conditions into account, favors the stability of bearish trends and optimizes expiry times for risk management.

How are Boundary Options different from other trading methods?

While in other trading methods, traders have to predict if the price of an asset will be higher or lower than a given value, boundary options are different. Here, traders have to analyze whether the price of an asset will be In/Out of the predetermined price value. 

Also, boundary options trading does not have a short expiry time, say 60 seconds. Again, it’s because short expiry times can be risky. 

Example: How do Boundary Options work?

To understand boundary instruments work, i.e., In/Out trade option, here’s a quick example. Let’s say you are trading on the currency pair EUR/USD. At the given time, its value is $5. Its bottom value is $4, and its upper value is $6. Now, if the value of EUR/USD stays within the range and you have trade In, this means you have made a successful prediction. 

How can you build a successful boundary strategy in trading?

To build a successful boundary strategy in trading, you must become proficient at studying and interpreting the price performance history of chosen assets, as a top priority. Many traders have based the construction of their boundary strategies on Technical Analysis, which they have specifically utilized to evaluate the highest and lowest levels that the price of an asset will attain within a selected time period.

When undertaking this task, they have also found that another essential objective is to identify the median or average level about which price will tend to oscillate during the lifetime of the strategy. Basically, the determination of these three vitally important levels, i.e. upper, lower and median, is essential to the successful execution of a boundary strategy.

What is the out boundary strategy?

The out boundary strategy is an important variant of this tool. In this case, you are required to identify two preset levels that price will break above or below before expiration in order for your trade to finish ‘in-the-money’ at expiration. As the ‘out strategy’ is deemed to be riskier than the standard version, it normally attracts higher payout ratios. However, you can attempt to design a safer bet by reducing the distance between the upper and lower levels.

When to use a boundary strategy for Binary Options?

You can successfully deploy a boundary strategy for Binary Options whether the market is bullish or bearish. However, the former conditions are associated with increased risks because of the larger price fluctuations generated whenever an asset is being purchased. Consequently, if you are a conservative trader who would prefer to shun excessive risk, then bearish trends may suit you better as asset prices tend to be more stable.

Consequently, you are well-advised to fully assess the prevailing market conditions before you implement a boundary strategy. If you conclude that volatility is low and that the price of an asset has been range-trading for some extended time period, then you should opt for the standard version. In contrast, the ‘out’ variant is more effective when excessive price movements and high volatility are prevalent.

You will also need to accurately determine the optimum length of your expiry times. This is because risk exposure will significantly rise with longer periods, as the possibilities of break-outs will increase dramatically. As such, if you are thinking about deploying a standard boundary strategy, then you should select a shorter expiry time. In contrast, an ‘out’ boundary strategy will have a greater chance to record a profit if longer expiry times are chosen. You will discover that each binary options broker will offer a different selection of expiry times for use with boundary strategies. However, none of them support the very low time-frames for this purpose, such as the 60 seconds

Many traders elect to instigate boundary strategies when prevailing market conditions do not favor either CALL or PUT options. Such strategies have proven to be very successful if implemented by professional traders who have undertaken the necessary due diligence before execution. As a certain amount of skill and experience is required to proficiently perform such tasks, boundary strategies are not classified as suitable for novices.

This is because you will need time to master the skills of evaluating the historical trading performances of assets in order to detect quality entry opportunities. However, if you are prepared to persevere with the intricacies of this binary strategy, then you will find that it is capable of generating consistent and worthwhile profits.

Boundary strategy summed up

  • Boundary strategy works in both bullish and bearish markets.
  • Bullish conditions pose higher risks due to larger price fluctuations.
  • Conservative traders may prefer bearish trends for stability.
  • Assess market conditions before deploying the strategy.
  • Choose optimal expiry times based on risk exposure.
  • Success requires skill, experience, and due diligence.

Is the boundary strategy worth learning it?

Yes, it’s worth it. Every trading instrument is different, and each of them has pros and cons. This means to utilize any given instrument to its fullest; you need to understand it inside out.  A boundary instrument, a trading tool specialized in binary trading, offers a very unique approach by predicting whether the price of an asset will stay within a certain range. A trader needs to carefully analyze historical performance by using strategies like technical analysis.

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About the author

Marc Van Sittert
Marc Van Sittert is an experienced Binary Options Trader and coach who is originally from South Africa. He started his career in 2014 by trading old-school Binary Options online. His main focus is on short-term contracts with 60-second trades.

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