This strategy is exclusive to the binary options environment because its primary intent is to concentrate on the lower and upper prices of a select asset until expiration. As such, your attention is not directed towards selecting the direction in which the price of a chosen asset will advance. Instead, you will be attempting to forecast whether prices will remain within two predefined levels without breaking outside these confines when utilizing a boundary strategy. Consequently, you will acquire the opportunity to profit from trading binary options irrespective of which direction the price of an asset progresses as long as it resides within your chosen limits.
For example, envisage that you have implemented a boundary strategy utilizing the EUR/USD current option. Assume that you selected an upper boundary of 1.3350 and a lower one of 1.3300. The opening price of your trade is 1.3320 and your expiry time is 30 minutes. At expiration, if the price had consistently traded between 1.330 and 1.3350 then your binary option would finish ‘in-the-money’ and you would have collected a payout. Alternatively, if price has drifted outside these boundaries even once during the active life of your binary option, then you would be ‘out-of-the-money’ when the 30 minutes elapses.
The above diagram clearly demonstrates the primary concepts behind a boundary strategy. If the price of the asset remained within the displayed upper and lower limits, then the trade would be a winner. However, you will note that the price slips below the lower boundary towards the right of the chart, albeit for a brief period only. Even so, such a development would be sufficient to render the position with an ‘out-of-the-money’ status at expiration.
Designing a boundary strategy
In order to achieve consistent profits from deploying such a tool, 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.
Besides the standard version, there is an important variant of this tool, which is labeled ‘the out boundary strategy’. 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
You can successfully deploy a boundary strategy 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 strategy then you will find that it is capable of generating consistent and worthwhile profits.
(Risk warning: Your capital can be at risk)