Guide to Binary Options
What Are Binary Options?
Binary options are financial assets traded on different instruments and in every market. Binary options are “all or nothing” trades. Total profit or potential loss is known before the trade is made. This straightforward nature requires zero complicated calculations.
If an investor is informed through news announcements, global trends, or quarterly reviews, they may be able to determine in which direction an asset’s price may move. Making a binary options trade based on this information could generate a significant profit.
Another benefit to binary options trading is the many choices of derivatives. Commodities, stocks, and cryptocurrencies are a few areas binary options are traded. Examples of binary options trades include aluminum and corn for commodities; Apple and Google for stocks; the dollar and the Euro in Forex; and Ethereum and Litecoin in cryptocurrency.
The term “binary option” refers to an investor earning a fixed payout by predicting a trade’s outcome from two potential results. It’s like flipping a coin. If correct about whether heads or tails will come up, the trader receives all the agreed-upon money. If wrong, they lose the stake on the option. Either they win, or they lose – it’s that simple.
What are the Benefits of Binary Options?
The obvious benefit of binary options investments is simplicity. Binary options are flexible. They let an investor trade in a variety of markets under a variety of market conditions.
Investors choose between short-term or long-term investment windows. Their duration lasts between 10 seconds and a year. Losses are limited by the initial stake placed into the trade. Many investors earn pay-outs of up to tens of thousands of dollars.
Best Binary Option Brokers
Many brokers offer binary options trading. They differ in regulation, safety, trading tools, trading assets, support, fees, and other factors. We selected the top two options brokers with the best reputation to profile.
Our Top Choices
IQ Option (Best Binary Options Trading Platform)
USD 10 Account Minimum
Average fees of 1.2 pips (EUR/USD)
Best For Binary Options Trading
IQ Option is the best online broker for options trading They have low spreads, a sophisticated trading platform, free demo account options, and responsive customer support. It is a great choice for options traders, using a feature-rich and easy-to-use trading platform. IQ Options is excellent for traders at all levels from beginners to advanced. With 16 million accounts and 3.6 million trades per day, IQ Options offers a transparent trading platform for trading forex, stocks, binary options, and cryptocurrencies. The trading experience on their proprietary web, desktop, and mobile platforms is easy to learn and navigate. It offers a variety of charting tools that help traders predict future market movements.
IQ Option is a trustworthy online broker subject to the highest standards of regulation and safety in the industry. It is a CySEC authorized company with a 100% clean regulatory history.
5 of 5 Stars
Olymp Trade (Best trading technology – beginning and advanced traders)
Offers social trading
Proprietary trading app
Founded in 2014 in St. Vincent, Olymp Trade is a popular online trading platform. They are a member of the International Financial Commission, a third-party regulator guaranteeing security against fraudulent brokers. This IFC clearance gives Olymp Trade a high degree of market trustworthiness.
Olymp Trade provides a customized platform designed by experienced programmers, traders, and financial analysts. It is clean, organized, easy to navigate, and customizable. It provides a great user experience. The platform access is via dedicated Web, desktop, and mobile smartphone/tablet apps. The deposit minimum is $10. They provide easy access to training and educational materials to all members of their platform.
4 of 5 Stars
Binary Option Origins:
Knowing the history of binary options is helpful for new and beginning traders. Binary options (known as “digital” options) began several years ago. Large brokerages had sole access to binary options at the start. After the 2008 recession, the US Securities and Exchange Commission (SEC) allowed binary options to trade through an exchange.
After a decade, binary options are globally available. The demand for them continues to increase. Since investment amounts on binary trades are small, demand will increase.
Types Of Binary Options
There are several types of binary options available. Here are four most popular:
This option answers the question, “Will the future price be above or below the current price at a specific point in time?” This type of binary is the most frequently traded.
In/Out (Range or Boundary)
With this option, the trader predicts a range of prices based on whether or not the price will finish inside or outside of those boundaries.
This type of binary option predicts whether the price will “touch” a specific level between the start of the trade and its end. The trade is completed when the “touch” happens.
The “ladder” binary option is similar to the up/down trades. The crucial difference is future prices are predetermined.
Binary Options Endpoint
A critical component of binary options trading is knowing when the trade ends. This is the “expiry time.” It determines whether or not a trader made or lost money. The time frames vary from 30 seconds to one year, but they all end at a predetermined time.
While the 30-second expiry time exists, most day traders use a 5 to 30-minute expiry timeframe. This both increases profit potential for profits and limits loss risk. By shortening the expiry time, traders complete more trades within a single day. This increases profit potential.
Option Trading Legality
Although debated on national television, binary options are legal. While some companies use binary options to operate scams, most of them follow laws and regulations.
Frauds And Scams
Government regulators search for brokers promising “quick cash.” This is the sign of a scam. Binary options’ reputation was damaged by dishonest marketing. Most hope these are resolved. It’s wise to avoid “quick money” promises, telemarketers who claim to be brokers or claims that connect the word “free” with “binary options.”
Investors need a heightened awareness of and knowledge about fraud dangers and vet a broker before investing.
CFD Trading Vs. Binary Options
Many beginning traders wonder if binary options and CFD trading are the same things. While similar in many ways, CFD’s present unlimited risk. For example, if the price goes up, the change in value must be paid by the seller. If the price goes down, the seller is paid.
Binary options work differently. Their risk is limited. If a trader places a call option at 10%, it doesn’t matter if the price sinks by 99%. They will lose 10%. If the price goes up 99%, they will only earn 10%. Profits and losses are limited. Binary options and CFDs are considered day trading.
To find a suitable online trading platforms for options trading check this article.
The Pros and Cons of Trading Binary Options?
Since the direction is the only determining factor making a binary options trade, the decision is simple. Bet high or low. Traders need not worry about market timing since binary options trades have an automatic expiry time.
Low Financial Risk
Trading gold, crude oil, or stocks, there are hundreds of factors to track and evaluate minute to minute. Binary options trading is a financial tool. Risk is controlled using few parameters.
investors have greater control over binary options than other forms of trading. The profit (or loss) is locked in before the trade begins.
Returns of 10% to 20% are considered excellent in some forms of trading. Some brokerages claim the ability to produce up to an 80% profit on each trade.
Binary options investors have greater flexibility in markets they choose to trade. Most traders lock into a specific market like energy or precious metals. Binary options traders trade in many global markets in their time frame.
Binary options trading is available 24 hours a day. A trader finds real-time charts indicating market conditions. Many join global groups of traders trying to maximize profits.
There are four variables to remember considering trading in binary options. Risk tolerance, capital requirements, trading style, and the benefits vs. risks of binary options.
Reduced Trading Odds
While some brokerages promise 80% pay-outs on single trades, this occurs when the expiry date is in the future. The higher the probability of trade success, the lower a trader’s percentage will payout.
Limited Trading Tools
Binary options trading is simple. Most brokerages offer simple trading tools for binary traders. Several online resources offer robust tools and graphs to analyze and support binary trading decisions.
The Price Of Losing
By design binary options trading ensures the odds are against the trader. Traders must win 55% of their trades to break even.
Many brokers set restrictions on the value of each trade. If a broker set a $75 minimum trading limit and their account had $450 in it, they are limited to 6 trades. If a trader took losses on those six trades, they’d be unable to continue trading.
What Are The Steps To Becoming A Binary Options Trader?
The pathway to becoming a binary options trader is simple.
Step 1 – Find A Broker
Finding a broker is a difficult and important decision a trader makes in day trading. How does a trader determine which broker is right? We recommend IQ Option UAE for investors is based in the emirates.
If the plan is to day trade binary options with high frequency, traders will spend a lot of money on commissions. The key is broker transparency. This helps investors know the cost of each trade and what they need to make on each trade to pay fees.
Most brokers require a minimum deposit of $50 to trade options. Starting out as a binary options trader, it may be worthwhile to find a broker who offers a low minimum deposit.
While not required, focusing on a specific asset type helps beginning traders. Finding a broker who specializes in a trader’s asset interest accelerates success.
Always verify a broker is registered and compliant with the proper regulatory bodies in each region.
Trading of binary options is done through a trading platform. Traders spend many hours per day on that platform. Make sure investors like it, provides the data needed, and is easy to use. Without a proper platform, it’s impossible to make profitable trade decisions. Before selecting a trading platform, do some due diligence. Compare and contrast platforms and checking trader reviews.
For day traders, maximizing time correlates to profit. Errors, system problems, or poor support causes significant losses. Verify the broker offers 24/7 customer support in the preferred format (live chat, phone support, email, etc.)
Many brokers offer valuable mobile apps for enhancing day trading from phones or tablets. Check with brokers about compatibility and tools that best support trading.
A technique brokerage firms use to attract customers is creating offers around their services. Examples are online courses or certain “fee-free” trading situations. Be sure to check their offer to see what extras benefit a trader’s situation and strategy.
Be wary of offers that seem “too good to be true.” This is a technique scammer use to attract victims.
After filtering through hundreds of brokerages offering options trading services, most traders arrive at a list of 2-3 they like. The decision is difficult. Since the “perfect broker” doesn’t exist, better brokerages established “demo accounts.” Traders sample the platform and “play” with virtual funds using different assets and options.
Demo accounts update using live data but do NOT use real money. They are an excellent place to practice trading. This gives experience with trading on their platform and helps investors learn their system. Using a Demo account traders improve their trading skills while saving for the initial deposit of capital needed opening their trading account.
Our brokerage recommendation for trading binary options is IQ Options. Read our detailed review, insights, and trading experience.
Step 2 – Which Market And Instrument?
Binary options are traded on any asset from Forex, stocks, wheat, or Google. It is best to start with an asset class a trader knows. This shortens the learning curve.
Step 3 – When To End The Trade?
Profitable binary options traders balance the number of daily trades with price movement. Day traders focus on shorter trades. These have expiry times from 30 seconds to 6 hours. While a higher trading volume results in higher profits, it’s advisable to trade based on accurate data, not only the number of possible trades.
Step 4 – What Size Trade?
The more a trader bets, the more they make. In contrast, the more they bet, the more a trader loses. Careful risk management helps them make enough disciplined trades to make a profit without risking everything in a single trade.
Step 5 – Which Option To Choose?
After going through the previous steps, a trader should have a list of options. That may be a large list. This is dangerous for a beginning day trader. The temptation is to focus on trades with substantial returns. And it’s better to focus on safe trades. These guarantee a return. The goal isn’t just to win, it’s to win over and over again.
Step 6 – Confirm The Trade
This is the final step. After the previous steps, traders should feel confident about their choice. The only thing they need to do is wait for the trade to expire, collect their payout and repeat the process.
Binary options are straightforward compared to other asset type trades. The strategies are less complicated. And traders need a strategy.
A strategy helps limit emotional decision making when trading. A subtle emotion, overconfidence, leads to long-term errors. The best way to limit emotional decision-making is to follow a strategy.
A allows traders to repeat their successes. Without a strategy, traders will never know if profitable trades were due to intelligent decision making or luck.
Building A Strategy
Two important parts of a binary options strategy are creating signal and money management.
Step 1 – What Is A Signal, How to Create One?
A “signal” is the direction a price will go. Knowing the signal allows traders to predict price movement. Technical analysis and news are the two key ways of creating a signal.
It is possible to predict price movements in advance if traders identify patterns using financial charts. Using appropriate charts and identifying data patterns in those charts is the first step in building a strategy.
Since those patterns form the foundation of a strategy, traders should check their brokerage has the right research tools available.
This research is not nuanced like other forms of market analysis. Common indicators such as price actions, trends, mirrors, support and resistance levels, and MACD indicators are useful in options trading.
If conducting technical analysis is not a trader’s strong point, many base decisions on the news. A benefit of this approach is information is easy to understand. Techniques for using the news as a primary data source are to examine company financial report releases or global news affecting a market.
A negative of depending on the news for information is key details for a particular strategy may be missing from the report. This could leave investors with insufficient data to make a trading decision.
By staying up to date on market changes, investors make trades before most others.
Step 2 – Trade Amount
It is a good idea to keep things simple beginning to trade. A straightforward strategy sets a fixed amount to trade each day. This provides predictable income and helps a trader know when they are “done” for the day.
What is the Martingale Strategy?
The idea behind a Martingale Strategy is to quickly win back what a trader lost. They try to do this by trading more than they would after a loss. For example, an investor who loses on a $500 trade would bet more on the next bet (around $1000) to quickly recuperate the lost money.
With a series of losing bets, this strategy goes very wrong quickly. This strategy works best used in conjunction with mistakes or accidents to estimate predictions.
If in the learning phase, it likely was a strategy error that needs fixing. If this is the case traders, focus on identifying and correcting the error quickly so they generate income.
What Is The Percentage Strategy?
Many binary options traders recommend a system based on percentages. This means traders identify a specific percentage of total funds they are willing to risk and make a bet for that amount. For example, with $20,000 available to trade, a 1.5% risk rate would mean trades would not exceed $300.
Traders adjust trade amounts based on risk assessment. If, for example, the risk rate was 10%, a trader could make larger trades, and substantial profits (or substantial losses). Maintaining a low percentage helps prevent prevents traders from betting more than is affordable.
What Is The “Straddle Strategy?”
A straddle strategy is where a trader places a bet on both sides (increase AND decrease) in asset value. This is best used during periods of high volatility and rapid prices changes. This way the trader profits on both the increase and decrease in price at the same time. Since this strategy is based on rapid movements over short periods, it works best in 60 seconds to five minutes trade intervals.
Should Traders Use Algorithmic Trading And Bots?
A benefit of using a strategy, is it automates after the strategy produces a consistent profit. Different software services provide “bots.” These rely on algorithms and signals that the trader programs in.
All the analysis and trading are done by the bots. Bots execute more trades than humans since they are integrated into the trading systems. This increases profit potential.
The “quality-of-life” improvement provided by bots is significant. It is worth researching and discussing with brokers the availability and use of algorithmic trading. Some brokerages have created bots traders use. Others give investors tools to build a bot and program it according to a trader’s preferred entry points and moving averages.
Algorithmic trading with binary options is risky. If there is a mistake in the program given to the bot, that mistake will be repeated, and traders lose a lot of money.
Is Timing Important?
The timing of trades affects both strategy and success. Some strategies perform with expiry times of five minutes. Others are successful with 15-minute or 60-minutes time frames. All strategies and time frames produce significant profits. Combining the right strategy with the right timeframe increases profit potential.
Success in binary options trading depends on finding a strategy that complements an investor’s trading style. To do this, choose the trading instrument. Use a trusted system to manage money, patterns, and charts to identify signals and other indicators about when the trade should occur (and in what direction).
When starting something new, it’s good to practice. Demo trading accounts help.
Learn to Trade Binary Options
To succeed at trading, start learning and never stop. Each day, markets change, and this means traders need to change with them. To help, we provide a short list of resources to immerse oneself in the world of binary options trading.
Every day, a new webinar, video tutorial, or course becomes available. These tutorials walk through the process of making trades. This is useful starting on a new piece of software or brokerage.
Books & Ebooks
While internet influencers proclaim, “books are dead” and “nobody reads anymore.” The reality is more books and ebooks are sold today than ever before. Financial literature like Joe Duarte’s book “Trading Binary for Dummies” or other more technical manuals give invaluable insights into binary options day trading. By reading these expert books, traders learn in days or weeks what took them decades to master.
Forums & Facebook Groups
An overlooked benefit of social media is beginners contact and communicate with experts in the market with leaders who would be inaccessible. If in the right forum or Facebook group, traders might get online feedback from experienced traders about situations specific to their trades. While not the same as having a true “mentor,” this support is invaluable. It accelerates the ability to participate in binary options trading.
PDFs & Instruction Guides
Similar to the video tutorials, instruction guides, and PDFs provide a breakdown of steps that are clear and easy-to-follow. These instruction manuals are free and downloadable. Traders on a platform get instant access.
Copy Trading/Social Trading
Copied trading or social trading is an area of social media experienced traders post results and information from trades for others to follow. Traders analyze strategies and model their success. Many social trading networks are paid. Evaluate them carefully by checking the reviews.
Newsletters & Blogs
Company newsletters and blogs from individuals who are “in the know,” help traders stay aware of new developments that could cause markets to change.
Each recommendation is important for successful binary options trading. Maximize using these free resources before paying for advanced material.
A best practice of many successful traders is keeping a trading journal. By recording every trading results, investors gather data to answer “Why?” questions.
“Why was that trade successful?”
“Why was that trade unsuccessful?”
Since few beginning traders cannot afford a mentor (costs exceed $50,000/year), their best teacher is their past. With accurate data, they answer those “Why?” questions. The record helps answer questions from government tax authorities if audited.
Having the right strategy is one part of successful binary options trading. Another Central component is the ability to control emotions. Overreacting causes expensive mistakes. For example, becoming overconfident leads to trades larger than a trader’s affordability. In contrast, being fearful cause trades that are small and limit profitability.
This is why we have a strategy. If the strategy is based on technical analysis and accurate calculations, money will be made. If decisions are based on emotion, future success as a day trader is doubtful.