Your Starting Guide to Binary Options
Have you ever wondered what the term “binary option” means?
If you’ve looked into online trading and financial investment before, then the answer is probably “yes.” Usually, the term “binary option” refers to a kind of trading term, where you get a fixed payout by predicting the outcome of a trade from two potential results. It’s a bit like flipping a coin. If you’re right about whether heads or tails will come up, you’ll receive all the money agreed to. If you’re wrong, then you lose the stake you made on the option, and that’s it.
The reason that binary options have their name is that there are no extra possibilities that might happen. Either you win, or you lose – it’s that simple.
What are the Benefits of Binary Options?
The most obvious benefit of binary options investments is that it’s incredibly simple. There’s a basic yes or no proposition to consider – and that’s all. Binary options are also very flexible. They allow you to trade in a range of markets, including Forex, commodities and indices, and a variety of market conditions.
With binary options, you’ll also be able to choose between a short-term or long-term investment window, with durations that last anywhere between 10 seconds and a whole year. While your losses are limited by the initial stake that you place into the trade, you can earn huge payouts, up to tens of thousands of dollars.
What Is Binary Options Trading?
Binary options are a financial asset that can be traded on any instrument and in (almost) any market. Binary options are considered “all or nothing” trades because the total profit or loss is known before the trade is ever made. Their straightforward nature means that there are no complicated calculations that need to be done.
When you’re adequately informed through news announcements, global trends, or quarterly reviews, you may be able to make an accurate determination about the direction a price may go. Making binary options trade based on this information could generate significant profit for you.
Another significant benefit to binary options is that you can choose from many different kinds of derivatives. Commodities, stocks, and cryptocurrencies are just some of the areas that can be traded using binary options. Examples include aluminum and corn for commodities; Apple and Google for stocks; the dollar and the Euro in Forex; and Ethereum and Litecoin in cryptocurrency. All of these can be traded with binary options.
A Quick Summary
Knowing how and where binary options came to be can be very helpful when you start trading binary options. This is especially true when beginners are attempting to shift to full-time trading. Binary options (also known as “digital” options) came about many decades ago. In the beginning, only large brokerages had access to binary options. After the 2008 recession, the US Securities and Exchange Commission began allowing binary options to be traded through an exchange.
More than a decade later, binary options are now accessible to the entire world, the demand for binary options trading is continuously increasing and, since the investments on binary trades are so small, demand is likely to only increase.
What Types Of Binary Options Are There?
There are many different binary options types that can be treated. Four of the more frequently treated are listed below.
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, by far, the most common.
In/Out (Range or Boundary)
With this type of option, a range of prices is determined based on whether or not the price will finish inside those boundaries or outside of them.
When you set this type of binary options, your position indicates whether the price will “touch” a specific level between the start of the trade and the end. The trade is considered complete as soon as the “touch” happens.
The “ladder” type of binary options is similar to up/down trades with the crucial difference that the future prices are predetermined.
When Do Binary Options End?
One critical component of binary options trading is knowing when the trade will end. This is known as the “expiry time.” The expiry time is the point that determines whether or not you have made or lost money. These times frames can vary from 30 seconds to a year, but the unique variable is that they will end at a predetermined time.
While 30-second expiry times to technically exist, the majority of day traders use the 5 to 30-minute expiry timeframe. This increases the potential for profits while still limiting the risk of loss. Also, by shortening the expiry time of your binary options trades, you can complete more trades within a single day. This, in turn, increases your potential for profit.
The Legality Of Binary Option Trading
Even though it’s occasionally debated on national television, binary options are legal. While some companies use binary options to operate scams, the majority of companies follow the laws and regulations correctly.
Frauds And Scams
Government regulators are actively looking for brokers who promise “quick cash” as this is a sign of a scam. The reputation of binary options was damaged by such dishonest marketing, but it is hoped that the problem will be resolved quickly.
Even though binary options are legal, it is wise to avoid “quick money” promises, telemarketers that claim to be brokers or any claim that connects “free” with “binary options.”
You should always be aware of and knowledgeable about the dangers of fraud and carefully vet any broker you come in contact with.
CFD Trading Vs. Binary Options
Many people wonder whether or not binary options and CFD trading are the same thing. While they are similar in many ways, CFD’s have potentially unlimited risk. For example, if the price goes up, the change in value must be paid by the seller. Alternatively, if the price goes down, the seller gets paid.
Binary options work differently because your risk is limited. If you put in a call option at 10%, it doesn’t matter if the price sinks by 99% you will only lose 10%. Conversely, if the price goes up by 99%, you will only earn 10%. Both the risk the potential for profit are limited. Both options are considered as day trading.
If you want to find the most suitable online trading platforms for options trading then check the article here.
Should You Trade In Binary Options?
There are four significant variables to remember when considering trading in binary options. Those factors are your risk tolerance, capital requirements, trading style, and the benefits and risks of binary options.
Despite the long list of benefits to binary options, there are several risks.
Reduced Trading Odds
Even though some brokerages promise 80% payouts on single trades, this usually only occurs when the expiry date is far in the future. Also, the higher the probability of your trades succeeding, the lower your percentage of payout.
Limited Trading Tools
Binary options trading is simple by its nature. Because of this, most brokerages only offer simple trading tools for binary traders. Recently, however, several online resources have begun offering more robust tools and graphs that help analyze and support binary trading decisions.
Price Of Losing
The design of binary options trading is such that the odds are slightly against you. In other words, you must win at least 55% of your trades in order to break even.
Many brokers set restrictions on the value of each trade. For example, if a broker were to put a minimum trading limit at $75, and your account only had $450 in it, you would only be able to make six trades. If you take losses on those six trades, you would be severely limited in your ability to continue trading.
Below is a short list of benefits to binary options trading.
Since the direction is the only determining factor went making a binary options trade, the decision is very simple. You can choose to bet either high or low. It’s also important to note that you don’t need to worry about timing the market. Since binary options trades have an expiry time, this is automatically taken care of.
Low Financial Risk
When trading gold, crude oil, or stocks, there are hundreds of factors to track and evaluate from minute to minute. On the other hand, binary options trading can be one of the few financial tools where the risk is controlled using very few parameters.
You have greater control over binary options trading than other forms of trading since the profit or loss is determined before the trade begins.
While returns of 10% to 20% are considered excellent in some forms of trading, some brokerages claim the ability to produce up to 80% profit on each trade.
Binary options traders also have greater flexibility in the markets that they choose to trade in. Most traders are locked into a specific market such as energy or precious metals. However, binary options traders can trade in almost any market at practically anytime.
Since binary options trading is available 24 hours a day, you can always find real-time charts indicating market conditions and join worldwide groups of traders who are trying to maximize their profits.
What Are The Steps To Becoming A Binary Options Trader?
The pathway to becoming a binary options trader is just as simple as binary options themselves.
Step 1 – Find A Broker
Finding your broker is probably one of the most difficult, and most important, decisions that you will make in day trading. So how do you determine which broker is right for you?
If you’re going to day trade binary options with high-frequency, you’re going to spend a lot of money on commissions. The key here is broker transparency. This lets you know in advance how much each trade will cost and how much you need to make on each trade in order to pay the fees for each trade.
Most brokers require a minimum deposit of approximately $50 in order to begin options trading. When first starting out as a binary options trader, it may be worthwhile to find brokers who offer low minimum deposits.
Focusing on a specific asset type – though not required in options trading – can be beneficial for beginning traders. Finding a broker who specializes in your asset of interest may accelerate your success in that asset class.
You should always verify that your broker is registered and compliant with the proper regulatory bodies in your region.
Trading binary options is done through some kind of platform. You will also spend many hours per day on that platform, so you should make sure that you like it, it provides the data you need, and it’s easy for you to use. Without the proper platform, it’s almost impossible to make profitable trade decisions. Before paying for a trading platform, do your due diligence by comparing and contrasting platforms and checking reviews from other traders.
For day traders, maximizing your time directly correlates to your profit. Because of this, errors or problems in systems or support can cause significant losses. Be sure to verify that your broker offers 24/7 customer support in the format that you prefer (live chat, phone support, email, etc.)
Smartphones and iPads have come a long way in recent years, and many brokers now offer valuable mobile apps for enhancing day trading. Be sure to check with your brokerage about compatibility and the tools that would best support you in your trading.
One technique that brokerages use to attract customers is through creating an offer around their services. Examples of this would be online courses or certain trading situations that are “fee-free.” Be sure to evaluate their offer to see what extras are beneficial for your specific situation.
However, be wary when the offer seems “too perfect.” This is also a technique that scammers use to attract victims.
After filtering through the hundreds of different brokerages that offer options trading services and arriving at a list of 2-3 that you like. Now is when the decision becomes more difficult. Since there’s no such thing as a “perfect broker,” the better brokerages have set up “demo accounts” where you can “play” with different assets and options.
Since demo accounts are updated using live data but do NOT use real money, they are an excellent place to practice trading. This gives you experience with trading, but it also helps you learn the systems that the brokerages use.
Using this technique, you can improve your trading skill while saving for the initial deposit of capital you will need when you open your trading account.
Our recommendation for trading binary options is IQ Option platform. You can read our detailed review, insights and trading experience here.
Step 2 – Which Market And Which Instrument?
Since binaries can be traded on pretty much anything from Forex, stocks, wheat, or Google, you can trade in pretty much anything. However, it is wise to begin with an asset class you are already familiar with in order to shorten the learning curve.
Step 3 – When To End The Trade?
Profitable binary options trading balances the number of daily trades with the movement in price. Day traders usually focus on shorter trades with expiry times from 30 seconds to 6 hours. Even though a higher trading volume potentially means higher profits, it’s advisable to trade based on accurate data, not just the number of trades possible.
Step 4 – What Size Should Your Trade Be?
The more you bet, the more you could make. In contrast, the more you bet, the more you could lose. Careful risk management will help you make enough disciplined trades to make a profit without risking everything in a single trade.
Step 5 – What Option Should You Choose?
After going through the previous steps, you should have a list of options to choose from. That may, in fact, be very large. This is a dangerous situation for a beginning day trader as the temptation is to focus on the trades that have the most substantial returns. However, it’s almost always better to focus on the trades that are relatively safe as these virtually guarantee that you will get a return. Remember, 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, and after all of the previous steps, you should feel very confident about your choice. The only thing you need to do now is wait for the trade to expire. After that, you just collect your payout and repeat the process.
Strategies for binary options are more straightforward than trades for other asset types, so the strategies for them are less complicated. However, you must have a strategy.
One primary reason why you must have a strategy is that it helps limit emotional decision making when trading. One of the most subtle emotions, overconfidence, always leads to errors in the long term. The time tested way to limit emotional decision making is to follow a strategy.
A second primary reason a strategy is essential to professional trading is that it allows you to repeat your successes. Without a strategy in place, you never know if your profitable trades were because of intelligent decision making or just luck.
Building A Strategy
Two critical parts of your binary options strategy are creating your signal and money management.
Step 1 – What Is A Signal, And How Do You Create One?
A “signal” is the direction that a price will go. Knowing the signal allows you to make a prediction about that price movement. Technical analysis and the news are the two main ways of creating a signal.
It is possible to predict price movements in advance if you are able to identify patterns using financial charts. Using appropriate charts and identifying the data patterns in those charts is the first step in building your strategy.
Since those patterns form the foundation of your strategy, you should triple check that your brokerage has the right tools available for your research.
But remember, this research does not have to be as nuanced as other forms of market analysis. Common indicators such as price actions, trends, mirrors, support and resistance levels, and MACD indicators are all useful in options trading.
If technical analysis is not your strong point, you can also base your decisions on the news. One benefit of this approach is that the information is easy to understand. Techniques for using the news as your data source are to look at the release of company financial reports or global news that affects an entire market.
One negative of depending on the news for your information is that key details for your particular strategy can be left out of the report, leaving you with insufficient data to make your trading decision.
By staying up to date on market changes, you should be able to make your trades before most traders. A few useful new sources for trading information are:
(Insert your own list here)
Step 2 – Trade Amount
It is always a good idea to keep things simple when beginning to trade. A straightforward strategy is to set a fixed amount to trade for each day. This provides you predictable income and helps you know when you’re “done” for the day.
What is the Martingale Strategy?
The idea behind the Martingale Strategy is to quickly win back what you have lost. This is done by trading simply trading more than you usually would after a loss. For example, a person who loses on a $500 trade would bet more money on the next bet (around $1000) in order to quickly recuperate the lost money.
Obviously, if you make a series of losing bets, this strategy could go very wrong, very fast. This strategy is best used in conjunction with mistakes or accidents in estimation to predictions. If however, you are still in the learning phase, it’s more likely that it was an error in the strategy that needs to be fixed. If this is the case, you should focus on identifying and correcting the error as quickly as possible so that you can go on to predictably generating income.
What Is The Percentage Strategy?
Many binary options traders recommend a system based on percentages. This means that you identify a specific percentage of your total funds that you are willing to risk and then make a bet for that amount. For example, if you have $20,000 available to trade, a 1.5% risk rate would mean that your trades would be at most $300.
You would then adjust your trade amount based on your risk assessment. If, for example, your risk rate was 10%, you could make larger trades, and therefore more substantial profits (or more substantial losses). Maintaining a low percentage helps prevent you from trading more than you can afford.
What Is The “Straddle Strategy?”
In simple terms, the straddle strategy is when you place a bet on both the increase and decrease in value of an asset. This is best to use during periods of high volatility because the price change can occur rapidly; thus, you can profit on both the increase in price and the decrease in price at the same time. As this strategy is based on rapid movements over short periods, it works best in 60 seconds to five minutes intervals. However, it can apply to periods of up to one day.
Should You Use Algorithmic Trading And Bots?
One of the benefits of using a strategy is that it can be automated after that strategy is producing a consistent profit. Different software services provide “bots,” which rely on algorithms and signals that you can program beforehand.
All of the analysis and trading is done for you by the bots. This is beneficial because the bots can do more trading than you can since they are directly integrated into the trading systems. This increases your potential for profit.
The “quality-of-life” improvement provided by these bots is so significant it is worth researching and discussing your brokers offering regarding the availability and use of algorithmic trading. Some brokerages have a bot that you are allowed to use. Other brokerages give you tools so that you can build your own bot and program it according to your preferred entry points and moving averages.
However, algorithmic trading with binary options can be risky because if there is a mistake in the program that you have given to the bot, then that mistake will be in repeated rapidly and you can lose a lot of money in a short period of time.
How Is Timing Important?
The timing of your trades can dramatically affect the strategy you choose and the success you have. Some strategies performed well with expiry times of five minutes while other strategies are more successful with 15 minute or 60 minutes time frames. All strategies and all time frames can produce a significant profit. However, combining the right strategy with the right timeframe will significantly increase your potential for profit.
Success in binary options trading depends on finding a strategy that complements your style of trading. In order to do this well, carefully choose the instrument you’ll be trading. You should then use a trusted system to manage your money. The next step is to use patterns and charts in order to identify signals and other indicators about when the trade should occur and in what direction. All of these things together for your strategy.
As always, when you start something new, it’s good to get some practice in first. Demo trading accounts were invented for precisely this purpose.
To succeed at trading, you should start learning now and never stop. Each day, the markets change, and this means you need to change with them. In order to help you with that, we have provided a short list of resources below that you can use as you immerse yourself in the world of binary options trading.
Each day, a new webinar, video tutorial, or video course becomes available. These tutorials can be beneficial as they walk you through the process of making your trades. This is particularly useful when you have first started with a new piece of software or a new brokerage.
Books & Ebooks
While many internet influencers exclaim that “books are dead” and that “nobody reads anymore,” the reality is that 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 the world of binary options day trading. By reading the books written by experts, you are able to learn in days or weeks what took them decades to master.
Forums & Facebook Groups
One often overlooked the benefit of social media is how beginners are able to contact and communicate with experts in their market that they would otherwise be inaccessible. This means that if you’re in the right forum or the right Facebook group, you might be able to get online feedback from experience traders about situations that are specific to your life and your trades. While not the same as having a true “mentor,” this is support can be an invaluable as it accelerates your ability to profitably participate in binary options trading.
PDFs & Instruction Guides
Similar to the video tutorials, instruction guides and PDFs provide you with a breakdown of steps that is clear and easy-to-follow. These PDFs instruction manuals are almost always completely free and downloadable, so you get instant access.
Copy Trading/Social Trading
Copied trading or social trading is an area of social media where experienced traders post their results and information from their trades for others to follow. You can then analyze their strategies and model their success. Many of social trading networks are paid, so be sure to evaluate them carefully by checking the reviews.+
Newsletters & Blogs
Similar to staying up to date with the major news outlets, company newsletters, and blogs from individuals who are “in the know,” can help you to stay aware of new developments that can cause your markets to change.
Each of these recommendations is important for successful binary options trading. Maximize on these free resources before you pay for more advanced material.
One of the best practices of many successful traders is to keep a trading journal. By keeping a record of all of your trading results, you are gathering data that you can utilize to answer the question of “Why?”
“Why was that trade successful?”
“Why was that trade unsuccessful?”
Since very few beginning traders are able to afford a mentor, which in cost upwards of $50,000 a year, your best teacher is your past. If you have accurate data, you can answer his questions. In addition, having this record helped you to answer questions from your government tax authority in the case of an audit.
Having the right strategy is only one part of successful binary options trading. Another Central component is your ability to control your emotions. Overreacting emotionally can cause you to make expensive mistakes. For example, becoming overconfident can cause you to make trades that are larger than you can afford. In contrast, becoming fearful can cause you to make trades that are too small and therefore limit your profitability.
This is why we have a strategy. If your strategy is based on technical analysis and accurate calculations, you will make money. However, if you start basing your decisions on your emotional response, your future success as a daytrader is doubtful.
- 1 Your Starting Guide to Binary Options
- 2 What are the Benefits of Binary Options?
- 3 What Is Binary Options Trading?
- 4 CFD Trading Vs. Binary Options
- 5 Should You Trade In Binary Options?
- 6 Summary