Gaining popularity amongst experienced traders seeking trading techniques that deliver higher profits, a binary options ‘ladder’ requires solid analytical skills and a strong understanding of financial markets.
What is a Ladder Trade?
A ladder binary option, as the name suggests, acquired its name from how it executes. That is, as a ladder has rungs fixed at equidistance that need to be climbed, a ladder trade is a type of binary option whereby the trader is given a range of typically three price levels and three payout rates for each. A ladder binary option trade predicts that that the market has to rise beyond or decline below certain price levels, all while the trade is executing. In order for a trader to profit from these trades the asset price must reach certain price levels while the contract remains open.
How to Profit
Binary option ladder trades are not necessarily “all or nothing”. Trading profits are earned on each specific trade if the set price level is reached. That is, a trader may earn the payout for the first and/or second price level if the target level is reached, but if the third price target is not reached, earn nothing.
Accordingly, the first offered return rate will always be the lowest, the second will be higher than the first, and the third will offer the largest return. This is because, according to ladder strategy, the first price level is most likely to be reached target while the third is the most unlikely to be reached.
It is no secret that integral to binary options trading is being able to successfully predict price movement. Only by a trader correctly identifying whether there is a bullish or bearish trend will the ladder strategy profit. Ladder traders are predicting an assets short term price behavior and are collecting their profits as the assets price climbs on the ladder.
In order for this binary strategy to succeed, the asset’s price should move in the predicted direction Call or Put, Up or Down and should reach the predefined price levels in the set time intervals.
Because ladder trading strategy states (in most cases) that the expiry time of the ladder will be set to the end-of-day, it allows a significant amount of time for each price level to be reached which is beneficial to the trader.
Identifying the Trend
For a binary options ladder trade, pivot points are used for analyzing short-term price movements. Pivot points display important price levels of the asset and assist in predicting future price movements. Using a 1 hour price chart, pivot points are identified by calculating the average of important price values, i.e. low, high, open and close, which were achieved during the period and charted as a support (S1, S2 and S3) and as a resistance (R1, R2 and R3). If the market tends to trade in subsequent time-frames above the pivot point, then it is considered to be advancing in a bullish trend. Alternatively, if price declines beneath this level, then it is deemed to be moving in a bearish channel.
IMPORTANT NOTE: While technical charts are often tasked with identifying the trend, a trader should remain aware of any significant economic releases which could cause a breakout or early reversal in the markets which could potentially render one or all of the three trades a loss.
Trading the EUR/USD currency pair which has a current value of 1.26077, the binary options broker will determine (by using an algorithmic function), a sequence of call/put anchor prices (above and below the current value) that are supported by the expiration period. In the example, imagine we have analyzed the market using short term indicators have identified that we consider that price will either remain at a similar level or potentially rise marginally before the expiration period. This means we could engage a Call ladder strategy.
Instead of executing one call binary option trade using the EUR/USD as the underlying asset with a target level of 1.26094 and potential payout of 164.81% with the short term expiry, a trader can mitigate their risk exposure by implementing three trades (the ladder) as opposed to just one.
How? The binary options broker will produce the following ladder with strike prices: 1.26094, 1.26048 and 1.26002 which expires (in the example) in just several minutes. We (as the ladder trader) would now open the 3 different Call/Put options on the EUR/USD with the 3 predefined strike price as opposed to one call trade with a 1.26094 strike price.
EURUSD (CALL) to be above 1.26094 – 164.81% Payout WIN $66.20
EURUSD (CALL) to be above 1.26048 – 40.47% Payout WIN $35.12
EURUSD (CALL) to be above 1.26002 – 3.55% Payout WIN $25.89
If, at expiry, price is above 1.26094, The potential in-the-money return for this ladder trade based on a $25 per trade price ($75 total trade) is $127.21.
Responsible money management ensures that the losses don’t mitigate the profits.