Published On: Tue, Dec 25th, 2012

Rolling over and doubling up in binary options trading

It is virtually inevitable that every binary options trader will come into contact with rolling over and doubling up at some or other stage during their trading careers. With proper management these techniques could sometimes result in significantly increasing profits; without proper planning they could result in disastrous losses.

Below is a short summary of what these two concepts entail.

Rolling over

Consider the example of someone who purchased a 1-hour one touch binary option on the Euro/USD. If the price touches the strike price before expiration, this trader will win around 70%; if it doesn’t, he or she will lose the initial premium.

During the first 55 minutes the price doesn’t move much. Then, five minutes before expiration, it suddenly starts moving in the right direction and the trader is convinced that, given more time, it will indeed reach the strike price. So this trader decides to roll over the trade into the next hour by buying an additional hour.

This of course brings with it an additional premium – so if the price does not reach the strike price during the second hour, the trader’s loss will be bigger than before.

Rolling over should not be done without the decision to do so being based on solid ground. The trader should at the very least study one or two technical indicators and get a clear signal that the price is about to trend in the right direction. A decisive break through a moving average or the price emerging from the Ichimoku Kinko Hyo cloud could be useful in this regard.

Doubling up

This technique is related to but not the same as rolling over. In gambling it is known as the Martingale method. It involves placing the same bet a number of times in row until the desired result is achieved –every time doubling the bet size.

In binary options trading that would e.g. mean buying a call option and if the price does not go up, next time buy two call options. If the price still doesn’t go up then buy four call options and so forth – until at last the price do go up. The trade size would of course increase fast: from 1 to 2 to 4 and then to 8, 16, 32, 64 128 etc.

The logic underlying this is that, if done a sufficient number of times in a row, there is an increasing probability of eventually hitting a winning trade, recovering all losses and walking away with a small profit.

While this is theoretically true, the trade size might soon become so big that even a trader with a very large trade account would find it impossible to double up – in which case the whole account might well be wiped out.

The only sane way to engage in doubling up is to never do it. While it is statistically true that the chances of hitting 2, 4, 8 or more losses in a row get progressively smaller, all traders are familiar with the concept of a ‘drawdown’ – caused by a series of losing trades.

Only billionaire traders can afford to engage in doubling up and the chances are good they didn’t become billionaires by employing this doubtful technique in the first place.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.