What are Binary Options
If you’ve been looking for ways to invest your money online, chances are you’ve seen at least one reference to trading binary options. However, if you’re only familiar with traditional equity assets like stocks and bonds, you probably don’t fully understand binary options just yet. Here’s everything you need to know about binary options to understand how they work and how they can be used by online traders.
What Is a Binary Option?
Binary options are simple trading positions based on the value of a given asset, usually a stock, commodity or Forex currency pair. In a binary options trade, a trader’s position is determined entirely by his or her prediction of whether the value of that asset will go up or down. If the prediction the trader makes is accurate, the trade will pay out with a predetermined amount of profit.
How Do Binary Options Work?
Binary options are an unusual trading vehicle in the sense that they do not involve ownership of an asset, and therefore are not technically equity-based investments. Binary options are, however, based on the values of the assets they are built around. Rather than equity value, the value that can be gained or lost in a binary options trade is provided by the pool of traders itself. With some options traders calling their positions correctly and some calling them incorrectly, value is transferred from those who make incorrect predictions to those who make correct ones.
Needless to say, in such a system, binary options trades need to have a definitive cutoff time. In binary options trading, this cutoff time is usually referred to as the expiry hour. Binary trades can, however, take place over many different time periods. In the early days of binary options, it was typical for brokerages to offer 30 minute and one hour time increments. As options trading has become more popular, however, brokerages have begun offering both longer-term and shorter-term options. Many binary options brokers now offer expiry hour increments ranging from 30 seconds on the low end to more than 24 hours on the high end.
In a binary options trade, the return level is set when the position is opened. Many traders actually prefer this, as it allows them to know exactly how much money they will make on their trade if they correctly predict the movement of the market in advance. In addition to this, many brokers are now offering risk management features that allow traders to take on lower risk in a binary position in exchange for lower returns.
How to Open a Binary Options Position
Though the concepts may sound a little complicated, opening binary options positions is actually very easy. To start with, you’ll need to sign up for an account with a binary options broker and deposit funds with which to trade into that account. Once that is done, you’re ready to open your first binary position.
The first step in binary options trading is to decide on the asset you’re going to trade on the value of. Most traders end up specializing in a single asset class, such as commodities, so that they can learn the exact ins and outs of how that asset class works and therefore make better predictions. However, in your first few trades, it’s okay to experiment and see what assets seem to work best for you. Just be sure that you’re putting adequate research into every trade, rather than just banking on the 50-50 chance of a binary options trade to come out in your favor, as this is a very poor strategy in the long run.
Once you’ve selected an asset to trade, the next thing you’ll need to do is decide whether the value of that asset will move up or down over a certain period of time. You’ll build this decision into the position by selecting “Call” or “Put” from the brokerage interface, with a “Call” option corresponding to a prediction of increasing price and a “Put” option used if you think the price of the asset will decrease. You’ll also need to set your expiry hour, as your prediction needs to be based on what you think that asset will do in a given time frame.
Finally, you’ll choose how much money you want to put into this binary position. Different binary options brokers have different minimum requirements, but £10 is fairly standard. If you don’t have a large amount of capital in your account, don’t put too much into any one position, as this drastically increases your risk relative to the amount of trading capital you have available.
How Much Money Can You Make on a Binary Options Trade
The exact return you’ll make on a successful trade will vary based on the asset itself, the brokerage you’re using and whether or not you employ any risk management tools. However, for binary options, returns of 60-70 percent are far from uncommon. This is a large part of what makes binary options trading so popular, as it offers some of the highest returns you’ll find in any investment market.
Understand, however, that even the most experienced traders don’t win on every position. Just because individual trades may yield 70 percent doesn’t mean that you’ll be able to make that kind of return each day, or even each week. If you trade wisely, research your positions and don’t take on too much risk at any one time, however, you should be able to leverage the high returns individual trades offer into an appreciable stream of income over time.
What You Need to Know to Trade Binary Options
If you want to become a successful binary options trader, you’ll need to dedicate yourself to a study of the markets. You need to be able to discern how different economic events, like jobs reports, will impact different assets for longer-term trades. If you understand basic economics and watch for trends in how assets move under certain circumstances, you’ll have a better chance of being an effective long-term trader.
Also important to a binary trader is price fluctuation analysis. Binary options trades, especially ones with very short expiry times, tend to work more on tiny fluctuations than on macroeconomic trends. This is why traders who plan to focus on short expiry times should learn to analyze charts of recent price movements. For example, most assets will have points above or below which their value has not broken recently. These points, known as support points, are good indications of where the value of an asset will find its minimum and maximum in the near future. Say, for example, an asset has fallen in value until it is near a support point it typically does not fall below. Traders relying on trend analysis would likely open a “Call” position, assuming the fall would reverse as the price neared that support point.
As a general rule, the more analytical methods you can master, the better off you will be as a binary trader. Combining multiple methods of predicting an asset’s value can help you come up with a more accurate prediction. The more accurate you are, the more trades you will be able to win on.
What Investment Goals Are Binary Options Good For?
If you are a conservative investor looking to make small, long-term gains for a retirement account, binary options probably aren’t the ideal investment for you. If, on the other hand, you want to conduct short-term trades for liquid income, they may be right up your alley. If you’re an investor who prefers diversity and wants to add an income-producing investment vehicle to an existing portfolio, binary options might also fit your goals, depending on how much risk you are comfortable with in active trading.
Conclusion Trading Binary Options
Binary options are an innovative and exciting development in the still-new world of digital investing. If you are looking for an active trading investment that can produce income in the short-term, binary options are one of the possibilities you should be looking into. Make sure to research carefully before you invest, and to choose a reputable broker with whom to do business, as both of these factors will be critical to your success as a trader.