The reversal strategy is a very popular binary options trading strategy, which is used by both beginners and experienced traders. It is based on common sense yet herein lies the catch, in order to make profits while using this strategy, the trader should be able to exactly understand the trend of the market. Beginners, who employ this strategy, are reliant upon external or market news fed to them by the agent while experts have all empirical evidence plus market intelligence to bet in the right direction.
The principal is simple, follow the asset until the price reaches such a point where reversal in trend is imminent. The underlying price can either reach resistance or it can reach support, it may not reach any of these points yet reach to a certain point where it starts to begin trend reversal. In such a case, you get a put or call based on the direction of the price movement. The strategy can also be used if there are some unnatural or unexpected price positions held by the underlying asset. A case of a blue chip company having a temporary crisis or a company close to making a good announcement will be prime example of such case.
In order to end in the money, not only you have to guess the direction right but you also have to estimate the time. The price may ultimately fall but if you have purchased an option that says 5 days and the option ends up maintaining the price for 5 days, you will still not end in the money. In order to understand trends right, you should be aware of MACD, RSI, Head and shoulder tunnels and other available trend analysis techniques. You should also have access to empirical data and market information. Both these things are very critical as many options are cyclical in nature and understanding the start and end of cycle can be highly crucial.
To sum it up, despite the fact that it looks a simple to execute strategy, the pitfalls are real and false (fake) reversal points can lead to loss of money.