The Double-Red strategy is an easy to grasp, high-risk and high-reward binary options strategy, but requires more than just the technical know-how at the implementation stage. Although simplistic in nature, the strategy demands a great deal of risk-taking, quick decision-making and faster execution. Hence, we can deduce that in hindsight, it is a strategy that is mostly practiced by experienced traders, and novices should first carry it out thoroughly on a demo account for at least a year.
What is Double-Red?
As the name suggests, the strategy refers to two red candlesticks appearing sequentially in a price chart of an asset. The strategy is more effective and less risky when the close of the second candle falls below the lowest part of the first candle; this validates the strong bearish action in the asset and increases the profit probability. It is a bearish strategy where the trader buys a PUT binary option when the mentioned condition is met. The price chart tracked is a 5-min candlestick, and the PUT option should have an expiry of no more than 15 minutes. Hence, the trader should have a strong affection to the candlesticks and a keen eye to capture the Double-Red pattern at the earliest and make a trade. Time is of high essence considering the high-frequency trading that is a part of this strategy.
Effective implementation is the key
The efficacy of this strategy increases multi-fold when the price of the chosen asset is trapped in a tight range, or the asset is less volatile. The upper end of this range is called resistance and holds significant importance for the trader. These resistance levels should be identified on weekly or monthly charts of range-bound assets. Then, the resistance point is tracked on a 5-min candlestick chart. As soon as the first red bar is observed near the resistance level, the wait for second candle starts. If the second bar closes below the low of the first candle, then the pattern is confirmed for the strategy, otherwise the wait may get a little longer.
This strategy can prove to be highly rewarding if it is successfully executed, sometimes, returning up to 300% on a single trade. Without doubt, luck also plays a significant role in the profit potential of this trade. In the event highly negative news related to the tracked asset hits the market, a consequent strong bearish action can lead to huge appreciation in the price of the bought PUT.
As with any other strategy, risks remain in this one too. However, the risks are substantially higher in these short timeframes. Volatile assets can trigger stop-losses due to their vicissitudes and hence, are best avoided. Extreme losses can also be incurred when positive news hits, which goes against the basic nature of this strategy. Good employment data and monetary policy announcements from federal banks lead to a frantic upsurge in the asset price which is an example of positive news. Hence, the Double-Red strategy should be applied when no immediate news or events are to take place in the counter.
Conclusively, it can be said that the highly profitable strategy comes with its set of huge risks, which can be mitigated after careful but quick deliberation by the trader. The PUT option should be bought only after clearly knowing the risk-reward ratio in the asset involved.