Trade the Boundary Option and Get it Right!

by Girvan Lambert

The boundary option is a peculiar binary option sub-type: it features two strike-prices instead of one. It also carries a number of different names, among which In/Out trade and Tunnel trade, all meant to illustrate the actual nature of the trade as accurately as possible. The boundary trade is about a price-range instead of a single strike price, and it has traders trying to predict whether the asset price will stay within that range or not. This is why one needs two target-prices: they will determine the upper and lower limits of the above said range. Not all binary option brokers feature the boundary option, and among those that do, some do so under rather disadvantageous circumstances (obviously, disadvantageous from the trader's perspective). Why would one want to go for the boundary option instead of a straight-up Touch/No Touch or Put/Call trade though? Does it present any advantages?

Well, most of the strategies we have thus far discussed have been based on chart patterns. The proper identification of these patterns - upon which such strategies ultimately hinge - is no easy task though. It is one thing to point them out on an example-chart and it is an entirely different exercise to actually spot them on the go in a real-money trading situation. The strategy used for the trading of the boundary option is only dependant on the finding of a period of market consolidation. Such a period is relatively easy to anticipate and then to exploit for profit through this trade.

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The first step for traders looking to give the boundary option a go is to steer clear of platforms which limit one's choices when it comes to this type of trade. Brokers running such platforms will establish the limits of the trade and the trader will have to work around the values provided by them. The trade conditions are usually also limited to the asset price being required to be strictly inside or outside the trading range upon expiry.

There are platforms out there though which will not impose such limits on tunnel trades. Traders are allowed to set their own strike prices for the trade and the trade conditions aren't quite as draconian either. With that in mind, the trade example we shall use to illustrate how this type of binary option trade should be "played" is an Out trade, the boundaries of which we can obviously set, and the trade conditions of which make it profitable if the asset price strays outside the limits even once before expiry. Now then, the increased odds offered by the "goes outside" variation of the trade are obvious. The boundary trade should always be traded on the Out component of the contract, simply because - statistically speaking - the nature of the market makes it much more likely for an asset price to fluctuate than to stay put for a longer period of time.

For the actual strategy, we only need one tool, the more-than-obvious automatic pivot point calculator. We also need to look for a period of market consolidation, as said above, which is likely to occur right before big announcements and economic news break, when traders are choosing to err on the side of caution, for fear not to be caught on the wrong end of a massive swing. For its part, the automatic pivot point calculator can be obtained for free, for the MT4 platform. The calculator will draw its three support and three resistance levels on the chart, together with its daily pivot. From here on out, the strategy is obvious: we'll just use the two pivot levels closest to the maximums and minimums registered by the asset-price, during the consolidation-period. The Out trade is then placed, and the expiry of the trade set to 24 hours (in case we have used an hourly chart for our analysis). Those who want to play it really safe, and find the above said boundaries way too restrictive, can expand them to the next pivot level in each direction. The same trade is then placed, with a 7-day expiry this time around.

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