Binary options are a contract between parties that hold some fiscal charge. The contract of these two parties, which consist of a buyer and a seller, is turned into a trade known as Binary Options Trading.
Binary means ‘two’ or ‘dualistic’; hence, it stands for two choices. The outcome of your profit-loss depends on either of these two options.
On the trading platform, there are some assets on which the investment is made. The trading is executed by selecting an up or down option, where the trader has to decide whether the price of the chosen asset will rise or fall at a particular time.
If your prediction is correct, you will get your invested amount combined with an extra return which is generally given between 70-85%. But for the wrong predictions, you will lose your money.
For example – you chose crude oil as your asset. The current price is $150.25, and you predicted that in an hour, it would rise. You placed a trade of $100, and the return offered by the broker is 85%.
As per your prediction, the price of crude oil rises and goes up to $160 by the expiration time. You will get your $100 back with an 85% return.
Irrespective of the fact that your commodity has risen to a small amount, you will get an 85% profit.
In the opposite scenario where your prediction is incorrect, you will not have any returns, and also you will lose the amount invested.
The movement of the price scale is not an aspect of the amount of your return; neither will it limit your loss.
How do Binary Options work?
What you will read in this Post
Three elements comprise this trading. They are as follows:
The first element is the selection of an asset. The most common assets offered are:
Some brokers also offer cryptocurrencies and events in their assets category.
#2 The Strike Price
It is the current price of an asset and important in judging whether the price will go high or below the strike price.
#3 Expiration Time
You can set the expiration time between minutes to hours and up to days and weeks on some platforms.
After selecting the asset of your choice and predicting its future at a specified time, wait for the result. Binary options work in a simple way. They are easy if you know how to evaluate the market and place the trade accordingly.
Trade types available in Binary Options trading
When the binary options were first introduced in the market, they had only one trade type, which meant the same. These were ‘High and Low’ / ‘Call and Put’ or ‘Up and Down.’
With the growth in the number of binary traders and its popularity, many other trade types were proposed. Here are some of the most used binary trade types.
#1 One-Touch or No Touch
In this type, you have three things to choose from. First is the asset in which you will invest your money, second is the price target, and last is the expiration time.
The price target can be set at any point but keep in mind that the farther the set barrier is, the more will be the return. If you set the target closer to the current point, which is easier to reach, the payout will be less.
If your asset reaches the set target point even once before the expiration time, you will get the profit. Before making a trade, two things are to be looked for-
- The Reach of the Price Target
Set the price target diligently. It could be in any direction and, with careful analysis, judge the flow of the price. While setting, pay attention to the trade cost and payout value.
- The Expiration Time
All it takes is one touch to give you profit, even if the market goes in a different direction afterward. Many platforms offer expiration time up to days, so set the time you think is enough to reach the triggered point.
#2 High or Low
The most used and popular type is choosing whether the asset will go high or low at the expiration time. Here, you have to examine whether the asset of your choice will end up above the strike price or not on expiration.
If you believe it will select high, and if not, select low. The time of trade’s termination can vary. This trade type is basic yet has its own risk. Therefore, before placing any trade, examine the price movements thoroughly.
#3 Range Trades
It is also known as boundary trade. In this trade type, you choose an asset and trade within the range of two triggered points. If the price stays between the boundary until expiry, you will win, and you lose if it passes the range.
For instance, the strike price of an asset is $50, and you believe that it is going to go high up to $60. You trade in the range between $50 to $60. If the price of your asset remained between this boundary during the entire trade, you would get your profit. If it surpasses $60 or falls below $50, you will lose the entire investment.
#4 Short Term Trading
Short-term or 60 seconds trading is used by many brokers, and seeing the upsurge in its popularity, many traders are inclined towards it.
It works like the high/low trade with an expiration time of 60 seconds. Some brokers in short-term trading also offer the trade termination time up to minutes.
#5 Long Term Trading
The opposite of short term, this trade type allows you to set the time limit up to days, weeks, or sometimes even months.
Most beginners prefer this type as in the short term the trade goes fast, and you have to be active and consistent all the time whereas, in the long term, you get more time to develop skills and study the charts.
As the name suggests, this trade type is performed in pairs. You have to choose which asset will perform better than the other at the expiry of the trade. You will gain the profit for your correct judgment, and for the wrong one, you will lose.
The pairing of currencies and stocks is very popular.
For instance, in the EUR/USD, you believe that USD will go higher than EUR and placed your bet. After the expiry, USD outperformed EUR, and because your prediction was correct, you won. In the opposite case where EUR goes above, you will lose.
Even if the pairing equally goes down, you will win as long as your asset has a higher value than the other.
In this type, the trade is broken into smaller portions which are then spread over different intervals. Each time when the strike price touches the triggered point, you will receive a partial bonus.
Your trade is divided into different strike prices with varying times of expiration. When you reach the first interval, you will receive some profit and so on.
For example- you are ladder trading the currency pair of USD/EUR, which you believe will go high. At noon, the value of your asset is $60. You chose three-strike rates and three different expiration times.
- 1st strike is set for the value of $60.85 with a payout of 40%; the expiration time is 12:20 pm.
- 2nd strike is set for $70 with a payout of 55%; the expiration time is 12:40 pm.
- 3rd strike is set for $70.45 with a 70% payout; the expiration time is 01:00 pm.
To win this bet, USD/EUR must reach $60.85 or above at 12:20 pm. If it happens, you will get the 40% payout, and subsequently, for every rung you climb, you will receive the mentioned profit.
Remember that the payout value will change according to the difference in the intervals. If the gap in the strike prices is small, you will get less payout because it involves less risk, and for a large gap, the profit will increase.
Basic terms used in Binary Options
When starting the trade in binary options, you will encounter many terms which you might be unfamiliar with but are important to make a successful trade. Here are the basic terminologies that every trader must know.
One of the most used words in the trading world is ‘asset.’ It is that underlying stock, indices, commodities, or currency you choose to trade-in.
It is the agent factor through which the deals are made.
- Expiration Time
It is the date or time when the trade terminates.
- Financial Instrument
A financial instrument means a contract with some monetary value and consists of a buyer and a seller.
- Fundamental Analysis
These are the examination of assets based on geographical, political, and macro-economic factors.
Many brokers use this term to display the result of your trade. It means that your prediction stands correct, and you will get the return.
In order to keep your spot open to the market, a deposit is required in your trading account, known as margin.
- Margin Call
It occurs when your account goes below the required maintenance amount of the broker. To avoid it, add extra funds to sustain the running losses.
- Strike Price
It is that rate at which the asset can be bought or sold, or at this rate, you can perform the call or put options.
It is the opposite of in-the-money. It is shown when the result is against your chosen option, meaning thereby, your prediction is wrong, and you have lost the money.
- Rate of Profit
It is that percentage of return you will get after your correct call.
- Technical Analysis
The examination of the market by taking note of previous trade records and price chart movement.
Best assets to trade in for dummies
There are many different types of assets present in binary options. As a dummy, find the asset you are most comfortable with. Following are the most popular assets used in binary trading.
- Currencies or Forex
The currencies are easier to deal with as compare to the other assets. It is also known as Foreign Exchange, Forex or FX.
In this asset, two different currencies are compared together, and you have to choose which one of them in the future is more likely to go higher than the other one.
For beginners, trading in commodities is one of the best options. Precious metals like gold and silver, coffee, petroleum, and oils are some of the popular choices.
Commodities are easy to understand because you can follow the global economic trends, and they are said to have low risks, but this does not mean that they are riskless. So attentively choose them.
Stocks are considered to be an asset for seasoned traders but grasping its concept is not that hard. Different brokers offer different stocks depending on the location of the brokerage firm, the country of the trader, and the type of platform in use.
You have to choose whether your invested stock will rise above or fall below the strike rate. The Apple stocks, Google stocks, and Coca-Cola stocks are amongst the most used stocks in the market.
Among all the assets, indices are deemed the most difficult to trade in because they don’t show a significant change in their value and sometimes go unnoticeable, making it hard to predict their value at the expiration time.
Depending on the broker and your location, the collection of indices may vary. DAX-30, FTSE-100, Dow Jones, S&P 500 are some of the most popular assets from this category.
In the trading world, stocks and indices are reckoned relatively riskier than commodities and forex. Hence, it would be best if you did not try to indulge yourself directly in this. It is advised for beginners to start with indices only after getting some experience and knowledge.
How to get started in Binary Options for dummies?
Starting as a binary options trader can be a bit overwhelming. With real money at stake and so much to understand, making your first call can be difficult and scary. The very first thing to do is to find the most trusted and reliable broker.
There is an abundance of brokerage firms that provides the services with different features and facilities. Analyze and then select a broker that matches your need.
- The first thing we recommend you is to begin your trading journey with a regulated and verified broker to save yourself from scams.
- Learn everything about the platform and trading. Before setting on risk, understand how your chosen platform works, its operational mechanics, and the percentage of profit it offers.
- Use the demo accounts. Many brokers have a facility where you can learn to trade with virtual money. There is no risk involved, and you can restock them anytime. This will let you understand the terminal and how to use the graphical tools.
- Once you get the hang of the trading skills, you can register yourself for the live account. Start slow with the minimum trading amount. Many brokers allow you to commence the trade with $1. Invest the amount carefully and never finance the asset more than you can afford to lose.
- The risk is high but is limited based on your trade amount. Analyze the chart movement of your asset and develop a strategy that works for you.
In the beginning, the trading process can be confusing, and the losses will be intimidating. However, it has a well-defined risk and possible rewards. Binary options trading platforms are designed for your ease. They are simple and comprehensive.
With the right broker and on-point guidance, you can move forward. It will take some time to win and establish yourself as an expert trader and for that, always keep an eye on the market trend, then develop the winning tactics.
Binary options trading is highly in demand. Many people are trying their hands to gain some profit. It is an easy concept, and with some knowledge, even a dummy can start the trade.
The only point to catch is to understand the ins and outs of the market and your asset. Then formulate a strategy. Many beginners rely on their hunches, but this won’t benefit you in the long run.
Since the risk is always involved, you need to develop new ways to ensure your win. Trading indeed is no piece of cake. Establishing yourself as a pro will take time but, remember, everyone starts with a zero; slowly and steadily, you will make your way.