If you are a beginner with no experience, this binary options trading guide will go over the essentials you need to know before starting.
Binary options are a simple financial instrument allowing the investor to speculate on the future price of an asset. This short-term limited-risk contract can be traded hundreds of times and bought and sold within minutes.
With binary options or digital options, you'll have two outcomes if the contract is held until its expiration: you'll receive a fixed profit or lose it all. There are only two outcomes, hence the name binary. Keep reading to learn more about binary options trading, types of binary options, and a step-by-step guide to trading binary options.
Table of Contents
Understanding Binary Options Trading
When trading binary options, the trader knows how much they will gain if the market goes as they predicted. Typically, the payout percentage in binary options trading is between 70 to 95%.
For example, if a trader invests $100 on an underlying asset like the price of gold, they can profit from $70 to $95.
In simpler terms, binary options are a yes or no proposition that will either provide you with a fixed payout or have you lose the investment when the option expires. Binary options have a capped risk.
Unlike forex trading, the process of trading binary options is simple.
Here's an example for better understanding…
Suppose there is speculation in the commodities market that the price of gold will go above $1,500 at 3:00 p.m. today. If your analysis suggests an increase, you buy the option. In contrast, if your market evaluation indicates a drop in the price at 3:00 p.m., you sell the option.
The option's price remains within a hundred dollars and has a bid and ask price. If the binary option has a bid at $50 and an offer at $60.50 at 2:30 p.m., buying the option will cost $60.50, whereas selling the option will get you $50, excluding fees.
If you buy the option $60.50 at 3:00 p.m. and the price of gold goes up to the $1,500 threshold, your binary option expires and is now valued at $100. In this trade, you have made a profit of $39.50. On the contrary, if the price moves below $1,500, your option's value will become zero.
The bid and offer values of options will keep changing until the option expires. Your position can be closed before the expiration date and time for maximum profit or a minimal loss.
Virtually every binary option results in your proposition turning out true or false. If the proposition is true, your option gains value, and when the proposition is false, the value drops. Traders associate binary trading with a game where someone else loses trades when you make a profit and vice versa.
Each trader puts up a certain price or capital for their trade. The trader purchasing the option at 60.50 has a maximum risk of losing $60.50. Likewise, the trader selling can suffer a maximum loss of $39.50
Key Facts about Binary Trading
Whether you are among new traders or seasoned in binary trades, you always need to consider the underlying asset, strike price, payout, and expiry time. Besides having strong money management skills, making a binary trade requires the trader to pay attention to the strike price as you'll decide whether the market you are trading in will move higher or lower than the strike.
- In binary trading, you have a fixed return and limited risk, depending on the trade amount.
- Losing trades means you might lose your trade amount.
- Investing too much capital is never a good idea as there is always a high level of risk involved with the trades.
- Winning the majority of your trades is crucial for long-term success.
- There are no hidden costs involved with this trading as the risk and profits are listed and have a fixed amount.
- It's the simplest trading method to trade and doesn't require someone to be a financial expert.
How to Start Trading Binary Options
To start trading binary options, you'll need to dedicate time to learning the trading basics. Once you've laid the foundation, the next step is to pick a reliable Binary Options Trading Platform and the right broker. You can read our analysis of the top brokers for Binary Options here.
1. Learn About the Binary Options Markets
Most platforms offer educational videos and in-depth articles you can review to educate yourself on binary options trading and help refine your trading strategies.
2. Choose a Binary Options Broker
As regulators around the globe have started regulating binary options, sketchy firms and brokers are disappearing, allowing reliable binary trading platforms to shine. Still, searching and comparing what these brokers offer will lead you to pick a dedicated platform and a broker. To make it easier, create a list of the top brokers/platforms, and compare their services, offers, and the minimum deposit required. Pick a reputable one with an easy-to-use trading platform and app for trading binary options.
Once you've short-listed the available brokers, review the asset lists the broker offers. Most offer binary options trading for forex pairs, stock indices, and industrial commodities. These lists are available on each platform and primarily include popular stocks.
3. Open a Demo Account
Once you feel confident and understand underlying market trends and related terms, you can open a demo account and start practicing the skills you've developed. Apply your technical analysis skills, evaluate the risk involved, study financial markets, or follow other binary brokers to see how well you can handle the virtual funds provided in the demo account before trading in a live account.
4. Getting Familiar with Market Trends
To trade binary options, you must make a yes or no proposition. For example, if you think the price of an asset will be more than the price at a certain time, you can either buy or sell. While trading binary options seems like a simple process, it's not.
A binary options trader must have the adequate market knowledge and the ability to study related influencing factors to make an accurate prediction. Although no one can see the future, successful binary options traders always evaluate past events linked to the asset and anticipate the future market price and trends to make their move.
Most financial markets are affected by everyday events, political changes, international relations, current affairs, and technology. All these events and changes directly affect how the market will move forward. To become an informed trader, you must stay up-to-date with current affairs and the latest news and study world affairs while building a perception of how this information can influence a binary options trade.
Here are some ways you can start gathering relevant information:
- Use social media to follow different binary options traders and binary options brokers.
- Dedicate time to learn about conducting a technical analysis.
- Read about fundamental analysis and understand how the research provides valuable insights about the market.
- Study different chart patterns available in your binary options trade platform.
- Get the help of an economic calendar and stay updated with the latest financial news.
5. Choosing the Right Market
No matter how many assets are listed on your binary options trading platform, you must pick a few you are interested in trading in. When choosing the right market, you need to consider the contract duration, choose a market with an ideal strike price, and have opportunities that favor your trading plan.
Lastly, do consider where your interest lies. For example, trading options related to currencies will be feasible if you are interested in politics and current affairs.
Types of Binary Options
There are four different types of binary options:
High/Low or Up/Down Trades
The most common type is where the trader has to predict whether the final price of the option will be more or less than the current price when the trade expires.
Range or In/Out
When trading this binary option, the traders have to predict whether the price will fall within the set high and low thresholds or increase beyond the set high or low figure.
Touch/No Touch
These binary options have an already determined level, typically more or less than the current price. In this binary trade option, the trader predicts whether the actual cost of the option will touch these set levels. The option will pay out if the price touches the pre-determined price level before the contract's expiration time.
Ladder
While an Up/Down trade uses the current strike price, the ladder-type option has preset price levels that progressively increase or decrease.
Conclusion
As binary options are based on a true or false proposition, the profit and loss potential is influenced by the buying and selling price of the option. While the profits and losses are limited, this trading method allows traders to bail out before the option expires to secure a profit or minimize loss.
Trading binary options is simple, but it doesn't mean anyone can make easy money. A high level of experience and knowledge of the relevant markets is crucial if you want to make your trades profitable. The reality is most retail traders lose money when trading binary options.
