A 5 minute Binary Option strategy involves using one of shortest expiry times available for Binary Options. There are indeed some brokers who will offer expiry times such as 60 seconds and 30 seconds but these are mostly speculative and should be avoided.
What is interesting about a 5 minute binary option strategy is that you can utilise a number of tools and indicators that work best for shorter dated trades. This strategy also allows the trader to enter as many trades as possible within the trading day.
The main technical indicator that the trader will be using is moving averages such as the simple and exponential as well as Bollinger bands. The trader will also be using candlestick indicators with a time frame of 5 minutes.
Setting up the Strategy
Before you trade with a 5 minute binary options strategy, you will need to set up your platform and charting environment in order to provide yourself with the most information in order to trade.
The first step is to plot the individual candlestick bars. These should be set on the 5 minute horizon as this corresponds to the expiry time of the individual options.
You will then need to set up the charts with the appropriate indicators. In this case, we will be using the Bollinger bands as our moving average indicator. This is because they have an upper and lower limit around the mean. These can sometimes also act as resistance and support levels.
The best Bollinger Bands indicators to use for this strategy would be the (2, 20) bands. These bands use the 20 period lookback period together with the upper and lower bands that are 2 standard deviations above and below.
What to Look For
A 5 minute binary options strategy tries to establish whether the candle that starts on the entry of the option will end up above or below the open price on close. This will determine whether the option will expire in or out of the money.
This is why the trader will need to examine each of the individual candles in order to make that decision. This also has to be combined with an analysis of where the price is in relation to the Bollinger bands.
Therefore, the trader will be looking at indicators that are either projecting bullish or bearish sentiment. This could allow the trader to form the right opinion of where the preceding candle will end up.
Resistance Levels and Formations
As mentioned, the Bollinger Bands are sometimes seen as key resistance and support levels for the price of an asset. As such, the trader can form a view around the candle that is likely to form based on where the price is in relation to the support and resistance levels.
For example, in candlestick analysis, a three method formation is a collection of 5 candles where the middle three candles are smaller in size than the 1st and 5th and are also a different color. This can either be a bullish or a bearish three method formation. You can see examples of these in the chart below.
If the three method formation occurs around a bollinger band support or resistance level then the trader is likely to form a view on whether it is likely to break the resistance / support or rebound from it.
When the 5 minute candle is used, the trader can then enter either a PUT or a CALL option based on the readings that he / she is getting from these two indicators.
In the below chart we are going to analyse a 5 minute binary option strategy. This is the price of Bitcoin in USD. As one can see, there was a point at which the top of the Bearish three method formation touched the upper Bollinger band and rebounded.
This therefore confirmed the suspicion of the trader to enter a 5 minute PUT Binary Option on Bitcoin. The trader would have won this trade as it would have ended up in the money.
Band Riding with Three Candles
There are also cases in which the price of an asset rides the top Bollinger band on the way up or the bottom Bollinger bands on the way down. This can either be a bullish or a bearish indicator.
Candlesticks can also be helpful in this case and especially when you have a particular formation of three candles. These could either be the “three white knights” or the “three black crows“. These are three candlesticks of the same color that are either increasing or decreasing in price.
What is important to note for the 5 minute binary option strategy is that the three white knights are a bullish indicator and the three black crows are a bearish indicator.
Therefore, the white knights will sometimes form while riding the upper band of the Bollinger indicator and the black crows will sometimes form when riding the lower bands on the way down.
When the trader observes the candles together with the bands they can form an opinion of what the next candle is likely to be and hence what sort of binary option they should purchase, a CALL or a PUT.
In the below chart of GBPCHF we can see that there appears to be three white soldiers that are on top of the upper Bollinger bands. This is indeed a bullish sign for the trader and hence an indication that he should enter a 5 minute binary call option on GBPCHF.
The result would have been a 5 minute binary option strategy that ended in the money and was hence a win. Indeed, the trader could have also entered a long 5 minute call option on the next candle and this would also have been a win. Band riding is often quite a momentum based strategy.
One of the more simple candlestick patterns that only involves two candles is the engulfing pattern. With this, a candle is “engulfed” by the second candle with a much larger body and of a different colour.
This can either be a bearish engulfing pattern or a bullish engulfing pattern. In the case of a bullish engulfing pattern, a larger green candle is engulfing the smaller red candle. The opposite can be said for the Bearish engulfing pattern.
When these patterns are observed on the edges of the Bollinger bands then the trader can also take a view on the whether the next candle will be an up or a down candle. Hence, the engulfing pattern can be used to determine whether the pattern is likely to break through the upper / lower bands or rebound from them.
For example, in the below chart of brent crude Oil, we have a Bullish engulfing pattern that breaches the upper Bollinger band. This is a bullish indicator and hence is an indication that the next candle will end up on the open.
Indeed, if the trader had entered a 5 minute call option on Brent Crude on the applicable candle, the trade would have ended in the money and the trader would have got the win on the option.
Keep it Risk Controlled
Although the 5 minute Binary Option strategy can be a profitable strategy, one needs to keep in mind that it can be risky if trade size and draw down limits can not be met. The trader should not enter an option that is more than 2.5% of the capital on the account.
Having a daily trade loss limit is also a prudent move. This can either be based on a value number or number of trades. Moreover, the trader should not trade for the sake of entering a position. All of the indicators should confirm the trade that he is entering. There are a number of other Bollinger Band and candlestick indicators that you can look for.