New to trading can be difficult, especially when learning complex structures of trading and investing large amounts of money into a new world full of risks. However, trading binary options is as simple as flipping a coin.
Binary options are getting extremely popular in Europe, United States and Russia. Nadex, CBOE, EUREX have already listed binary options where they are traded extensively. Large numbers of brokers are now offering services to trade binary options online. And many people today are asking:
What are binary options?
Binary options is an option contract with a fixed amount of payoff or nothing at all. It involves all features of traditional (vanilla) option contract; underlying market asset, strike price and expiration date, but with distinctive payoff structure.
In binary options trading, trader can have only two situations; win or lose, as simple as that and as exciting as betting. One can start-off with a low account balance and trade in different markets and different assets: commodities, indices, currencies and stocks.
If prices are expected to move in upward directions at expiration time, call option is placed, and if prices are anticipated to be lower than current prices at expiration time, put option is placed.
Binary options trading example
If a trader invests €100 in a commodity (for instance Gold) with an insight that gold prices will go upwards at expiry time, and it does, then he is ‘in-the-money’, irrespective of how much increase he has perceived he can make a profit of 65-95% (depends on a trading platform). However, if at expiration, prices are not in accordance to the expectancy, trader is ‘out-of-the-money’ and loses its initial investment. Yet few brokers pay a certain percentage (5-10%) as a payback on initial investment if the option expires out-of-the-money.
This is how it looks in real life:
Assume that you want to trade currency EUR/USD binary option. Here is a little overlook how would it look like:
When all necessary fields are filled, system will calculate possible earnings if your trade ends in-the-money after 8 minutes. Which in this case would be €182 of your €100 initial investment. These earnings vary from broker to broker.
After pressing Buy button, system’s going to accept your transaction and usually it takes few seconds to process it.
Then you just have to wait until your trade expires or while you are waiting you can make another trade on other assets (or the same, depends on a broker and their limits).
After 8 minutes you will see that your trade has expired and system will process your transaction. In this example we made a purchase on a price increase (Buy option). As the market price is higher than the target price, we gained a profit of €82.
As you can see in previous picture, new exchange rate between EUR and USD was higher than 1.10403 (it was 1.10344) and we made a nice profit in 8 minutes.
In this example we used 24option trading platform.
How to begin trading binary options?
- Find a broker
- Open an account and deposit funds
- Choose an asset which one you would like to trade
- Pick a price direction of the asset
- Choose a trading amount
- Buy an option and wait until it expires
- Check your results
These steps are necessary to make a trade but it is recommended to understand and analyze assets before you invest. Sometimes people don’t have enough experience and they believe that they could get lucky and win few trades blindly without any reason by choosing a particular direction of an asset. It might work for some time, however this is not a long term strategy that’s going last forever. If you are just getting started, we would recommend you to look for some help from additional sources i.e. binary options trading signal providers. In that case you would have a professional help from an outside. Look closely what they’re doing. That might give you some experience and knowledge by seeing what professionals are doing. Try to understand why they are making these decisions.
Another option that might be worth considering is to open a demo or practice account with a broker. This would give you some real experience and after few days you are going to feel comfortable with the system and most importantly, you will have a full understanding how does it work.
Can you make money from trading binary options?
The simple and short answer is yes, trading binary options can score high if played carefully but where is profit there is a chance of losing. As it’s a win or lose situation, you can lose money but never more than the initial amount. Binary option offers a greater control over risk exposure – traders know what kind of money is on the line and can act accordingly.
Why so many people choose binary options?
One of the reasons why binary option trading is experiencing exponential growth is that you can profit in all market conditions. For instance, A and B both decide to invest. A goes for stocks, selects highly profitable company X for its investment in an ideal market situation whereas B invests in binary options. Both start off by making profit, B more quickly as his investments are short term (usually of an hour, day or week). Suddenly with recession hitting the economy, A loses out its money with a decrease in the stock prices and waits for the economic crisis to fade away to close a position in profit. Economic recession may also put B on the losing side, but only for a while. He has multiple trading breaks. After observing bad economic conditions, he quickly places a put option to offset his loss even in the recessionary period.
Binary option trading is an art of making money out of the market. It’s an all or nothing game and if played well – can be highly profitable. Remain alert, stay calm, take opportunities to make a profit and act promptly to avoid any loss. There are many strategies that traders use to hedge against the loss, learn them.