Binary options represent an ever-popular trade with hundreds of thousands traders and enthusiasts engaging in the activity. Binary options are actually estimates of assets performance in a given time frame. The two options available to choose between are predicting a rise or a fall in value of the asset in question. While other investors actually purchase the asset they invest in and follow its value until they decide to sell, binary options traders actually trade futures on the market with a fixed potential payout and fixed risk. This means that the profit and loss in other trading branches are determined with the changing value of the particular asset, while binary options traders who predict the asset’s performance over a given time period without actually acquiring the asset only care for the actual movement (up or down).
- Bet on a price of an asset going up or down
- Risk only a fixed amount
- Like risks, gains are limited as well with binary options trading
The investors in other branches profit or lose the difference in asset value from the point they purchased it, to the point they sold the asset. However, the word binary itself denotes having two parts, where you purchase a future at a price with a chance for it to settle at $100 or $0.
Strike Price, Payout Offer, and Expiry Time
There are several very important parts to any binary option trade, most importantly: expiry time, strike price, and payout offer. To start off, the expiry time is the length of time you are predicting for. Expiry time presents the period from the point you buy the option to the point it closes, and it can be as short as a minute and as long as a month or, with some brokers a year. Expiration timeframes with binary options are usually shorter than with traditional options and many traders execute trades in short-term periods, often buying options in several instances.
- Expiry time: the length of time for which you are predicting a movement
- Strike price: the price at which you entered the trade
- Payout offer: the amount you stand to profit if you make the right prediction
The strike price is the price you entered the trade at, meaning that’s actually the target which determines whether your trade is a winner – depending on your decision and if the value of the asset falls below or rises above it. The payout offer is the return the broker promises if your trade is successful. Offers largely differ from broker to broker and some companies offer return percentages in case of losing too, but this always affects returns in case of a win too.
Binary Options Trading: Call or Put
When choosing options, there are two options available: Call or Put. Call means you choose to predict that the value of the asset is going to rise over the strike price, and if this happens you win the payout offer. Put, on the other hand, is an option to predict that the value of the asset will fall under the strike price in the mentioned expiry time, bringing you the payout. Obviously, you need to be familiar with the asset and market, and the more you know about it, bigger the chance you have to successfully predict the performance of the asset.
Types of Binary Options – Assets
There are different assets offered by the brokers around the world, and most companies offer trading with indices, commodities, stocks, and currencies. Indices or stock indexes are representations of the actual product and best show the performance of an industry, and as such forms one of the favorites in binary trading. The most commonly traded are CAC 4, DAX, Dow Jones, FTSE 100, Hang Seng, Nikkei, and NASDAQ. Commodity based options allow you to trade on the value of fixed commodities, again without the need to actually purchase and sell the assets. You simply need to decide whether you think the value of the commodity will rise or fall in a time period (i.e. expiry time). Most commonly traded commodities include gold, silver, oil, and copper.
Stocks are slightly different than indices, where you can trade hundreds of different stocks and shares. The biggest and the most interesting companies to stock options traders are Microsoft, Google, Coca Cola, Toyota, and Vodaphone, to mention just a few. And finally, currency trading is a separate type of binary options trading where you deal in combinations of major and some more exotic currency pairs, including US Dollar, Euro, UK Pound Sterling, Yen, and more.
Choosing Your Binary Options Broker
Choosing a broker is a very important part of your binary options trading career. You have to consider different factors when considering a broker and conduct an in-depth research and analysis.
- Finding reliable broker is paramount for your trading success
- Look for regulated and reputable brokers on the market
- Find brokers who offer wealth of educational materials and good customer support
Binary options are financial instruments and as such they have to be regulated and supervised, with many brokers accepting such processes. This should be an important consideration to any, and especially to new binary options traders, when choosing a broker. Other aspects to keep in mind are assets in offer, broker bonuses, account types, fees, educational materials, and ultimately customer care.
As said, one of the main aspects in choosing a trader is the regulation. Having a regulatory body over a broker of your choice provides more safety, security and protocols actually protecting the trader by law. In 2012, there were some significant changes to global understanding of binary options as it was classified as a financial instrument. This brought binary options brokers in Cyprus directly under regulation of the Cyprus Securities and Exchange Commission (CySEC). Thus, CySEC has become the first EU regulatory bodyfor binary options trading and its license is accepted by all EU countries, while no CySEC regulated brokers offer trading to US clients. Other prominent binary options regulatory authorities include Financial Conduct Authority (FCA) in the UK, Australian Securities and Investments Commission (ASIC), Investment Industry Regulatory Organization of Canada, and Commodity Futures Trading Commission (CFTC) in the US.
Platforms and Features of Binary Options Trading
A suitable trading platform where you execute the trades is important to traders for obvious reasons. There are several criteria you have to consider when choosing the software, including the interface, instruments, safety of your data, and the technical support. You will look for a simple and solid interface with a straightforward design and all features easily accessible. The appealing interface you need not only to enjoy the trading experience but also to enhance your trading. Safety and data encryption are an absolute necessity as well as conformance to all regulations and no manipulation. You will also look for a platform offering good and timely technical support, as it is important for a trader to be able to quickly and appropriately address any possible issues. The best binary options platforms will offer a simplified environment suitable for both beginners and experienced traders, with all the necessary features and instruments, most commonly including:
High / Low
High/Low is a basic instrument based on the current value, where the user decides whether the market will go high or fall below the current market price.
Touch / No Touch
One Touch instrument is developed and based on a target price, where you decide whether the value will reach the target price in the set time frame.
Boundary instrument is based on two target prices forming a range or the boundary, where you have to decide if the market value will be within or outside the range after the expiry time.
Account Types and Deposit Bonuses
Most brokers will offer different account types with different features based on the deposits a client makes. With account types varying from broker to broker, you will need to meet certain deposit requirements to qualify for different account types: Different accounts also come with specific features and bonuses that accompany them.
- Do your research on account types offered by different brokers
- Look for a broker that offers a Demo Account to get you going
- Find good deposit bonuses, but make sure to read the fine print
It’s very important to research the account types and the actual offer which can usually be found on the broker website. Best brokers will provide educational materials as well as demo accounts with all types of accounts, where some of them will even offer free and no deposit demo accounts for you to check out the platform and the trading experience they provide. Deposit bonuses are often related to the deposit amount and the account types, where brokers allow up to 100% deposit bonuses. It’s always important to consider all details of the bonuses as these are often tying and have requirements for releasing and withdrawing the money.
Educational Materials for Binary Options Trading
Educational materials on trading binary options are an important part of the overall customer care and clients should always require to be given a chance to improve their trading style and understanding. Most brokers offer free materials, as well as extensive training programs, webinars, and account managers with standard and/or VIP accounts. It is important to note that you become a part of a trading community with any broker and that you can get high-quality advice from other traders just by building connections.
Finally, most regulated brokers offer high quality customer support, with well-educated and trained staff offering competent and timely service 24/5 (and even 24/7 in some cases). The best binary options brokers offer support via e-mail, live chat, and telephone, often with toll-free lines. You will always want to check the customer support speed and quality before choosing and registering with a broker.
Choosing When to Trade
Once you have picked a binary options trading broker, deposited and started trading, you will want to know the most about the market you are trading in. Besides the basic and background knowledge on binary trading business, you will want details on any assets and industries you are trading with. Even if you’re not a fan, you will need to follow all news and general information channels as stories about the industries and separate companies always directly affect the value of the stocks and indices, while there are also many well-known factors about commodities and currencies trading.
- Always try to pick up as much information as possible from various sources
- Keep an eye out for breaking news that could influence particular assets
- Be prepared to react quickly
You will always want to have an eye out for breaking news and stories on the industry you want to trade and be ready to make decisions and react instantly. Many brokers offer their own news feeds which are, of course, highly useful, but we would recommend having your own news channels selection too.
Understanding the Risks of Binary Options Trading
One of the main reasons why the binary trading has become so popular is because you don’t actually have to buy or sell the assets, and the risks as well as the potential payouts are always pre-defined.
- Binary options trading does not come without its risks
- Always keep an eye on your trades and never take too many trades at the same time
- Pick the assets you know best and stick to them if at all possible
This means that the actual binary choice of ‘Yes or No’ limits the possibility of losing more than you have invested which is always included with shares, commodities and other assets you can make actual trades with. However, there are risks you have to be aware of, such as trading with assets you don’t know enough about or the possibility of taking up too many trades and not being able to follow up. This is an often rookie mistake and can easily lead to a downfall. As stated, the risk you take on binary options is capped, but this means your gains are always capped, too. Once your asset goes past your strike price, you get the same payout offer no matter how far it moves in your favor and this is the main reason why traders choose to trade multiple options at the same time.
The Bottom Line
Binary options are highly popular financial instruments, where based on a ‘yes’ or ‘no’ option you get a fixed payout offer and have both risks and potential gains limited. This attracted many enthusiasts to join the craze of trading binary options, without actually purchasing or selling the assets. You simply decide on the asset you want to trade, your prediction whether its value will go up or down in the certain expiry time, and the amount you want to risk. This short and simple process is only sometimes extended with early exits and similar instruments. The underlying assets for trading include commodities, indices, stocks, and currencies. The most important concept of binary options aside to not actually buying the assets is the fixed expiry time of your trade, where you are only concerned with a short time period and the actual value changes within it. As soon as the expiry time is over, you either win your payout or lose the investment. Winning returns are at average of 70% and go up to 85%, for some trades with prominent brokers. There’s also a lose payout with some brokers and those go up to 15%, usually affecting the win payout to go down a bit. Although the trade seems very simple and easy to conduct, it’s important to be knowledgeable and do your research when developing your strategy. To be profitable you will need a reliable strategy consistently winning more trades than you lose.