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Binary options trading is a type of options trading that offers new and exciting opportunities for forex traders, thanks to which he can quickly make serious money in the market. A binary option has this name because a trader has only two possible outcomes: either at the end of the term, his option will be exercised in the money and the trader will make a profit, or the option will be exercised out of the money and he will lose all or part of his investment. The probable return on investment is fixed at the time of opening a position.
Trading binary options differs from most other forms of trading in that you do not actually acquire any ownership of the asset. Instead, you invest a certain amount of money in predicting that the asset’s price will move in a certain way.
The accuracy of your prediction will be determined by whether the option will be exercised in the money or out of the money.
History of Binary Options
Binary options have appeared on the market recently, but were initially considered “exotic” instruments in the illiquid market. You need a broker to trade binary options.
In 2008, when the Securities and Exchange Commission approved the list of binary options in the US, everything changed. From that moment, in May 2008, binary options trading appeared on the American Stock Exchange, and a month later – on the Chicago Board Options Exchange. Since then, many organizations have introduced sectors to provide brokerage services for binary options trading, and there are currently a number of trading platforms available on the market.
This market opening means that binary options have become more available and trading these instruments has become a much easier process. As a result, many people started trading this instrument and binary options became much more popular. These dynamics show no signs of slowing down, which indicates that an increasing number of traders are beginning to understand the benefits of trading binary options.
How binary options are traded
Trading binary options is truly easy. Once you have chosen a broker , registered and deposited a certain amount of funds, the entire trading process involves just a few steps. First, you will need to select an asset among those available, it can be individual stocks, indices, currency pairs and commodities. Each of them will show the current quote of the asset price, the option expiration time and the payout percentage if the forecast is correct.
You then make your prediction by choosing a call option if you think the asset’s price will be higher at expiration, or a put option if you expect its price to fall. Enter the investment amount, which will be fixed after you confirm the position. This will allow you to determine the payout you will receive if your forecast turns out to be correct.
At the expiration of the option, if the forecast is correct, you will receive the amount of your original investment plus a fixed interest payment. If your forecast turned out to be wrong, you either get nothing or receive a small percentage of the investment. It depends on the individual broker’s policy.
Assets you can trade on
Since trading in binary options is about predicting the direction of price movement, in theory, trading is possible with any change in the price that is quoted on the official exchange. In fact, you can only trade on certain types of assets. You can trade stocks of specific companies that are listed on the stock market, or full market indices like NASDAQ, FTSE, etc. You can also trade any commodity, for example, not gold or oil, or a currency pair, for example, EURUSD, which is quoted on the foreign exchange market.
These assets are known as the underlying assets because you never own them as an actual asset, but simply predict how they are going to change their price. On the trading platforms, the actual assets that are available for trading are quoted.
Trading currency pairs is especially attractive to currency traders who have some knowledge of the market. Since there are a large number of currency pair combinations and they are constantly changing in different directions, there are huge opportunities for making money.
The Forex market is the largest financial trading market in the world with the most liquidity. You can trade with zero commission and no spread , which will help increase profits for successful trading.
What you need to do to successfully trade binary options
If you are going to successfully trade on binary options, you need to study the asset on which you are going to trade as much as possible. For example, although you may have a fairly good knowledge of how the Forex market works, you will be better placed your positions if you have detailed information about the individual currency pairs you intend to trade. It is also important that the information is up to date and that you do not rely on outdated data. There are two types of analysis you can use to improve your chances of success:
- Technical analysis
Technical analysis assumes that assets are always valued correctly and that the price already contains the influence of one event or another. Hence, prices will always move in a consistent order, and based on past price movements, future price movements can be predicted.
One of the main technical analysis tools is the price chart, which is constantly updated showing the latest asset prices. Each chart can exhibit recognizable patterns that will indicate if price is likely to continue its current trend or reverse. Identifying these patterns and interpreting them correctly will allow you to predict the likely price movement.
- Fundamental analysis
Fundamental analysis is based on the principle that assets tend to be mispriced and that markets are constantly trying to fix them. These amendments are based on current events, and therefore you will have to constantly check news, messages and various publications in the media.
This type of analysis can be subjective because you form a view based on the events you see. However, you should view all levels of news data, depending on the asset you are trading on, from company level, industry and market levels to countrywide and global levels. Many events are interrelated and can affect the price of different assets and even different asset classes.
Each type of analysis will help you be more successful in your predictions. However, using a combination of technical and fundamental analysis will improve your chances of success.
What to look for when choosing a binary options broker
The growing popularity of binary options trading has attracted a number of brokers to the market. All of them will have some common features, but at the same time they will also have certain points that distinguish them from everyone else. In order to be able to trade, you need a broker, and it is important that you choose a broker that would provide the type and level of service you need. When choosing a broker, pay attention to the specific features that each of them offers and compare them with each other.
The trading platform is your access to the markets, and it is important that the platform is fully functional so that you are not limited in your choices. Equally, it should be easy to use so that you can focus on trading instead of working towards specific goals. The organization’s website and registration procedure is usually a good guide because if they are easy to use, then it is likely that the trading platform will be simple as well.
Most of the trading platforms use Internet technology, so you can access your account using a browser. Ideally, a mobile version of the platform will be available, giving you the ability to trade using your smartphone or similar device anywhere and anytime.
Some brokers can only offer a limited range of tradable assets in a relatively small number of markets; this can severely limit opportunities for trading and making money. What you really need is a broker that offers many different assets, covering as many global markets as possible. This means that you should generally have at least one open market to trade and that you should have a better chance of choosing which asset to trade, rather than being content with something simple just because that this is the only choice available to you.
Check and compare what each broker provides, and use the services of the one that has an absolutely high level of security.
You need to deposit money into an account to fund your trade and over time you will want to withdraw the accumulated profits. Make sure the broker will do it simply, quickly and inexpensively, so that it does not unnecessarily interfere with your trading and does not force you to wait a long time to receive your money. Choose a broker that offers several methods of depositing and withdrawing money, and whose process is not too complicated.
Some brokers offer bonuses. These can be bonuses given at the first registration, so you can make more trades and get started quickly, or they can be given in addition to any of your deposits. You can also receive bonuses and take advantage of specific financial events, or receive bonus discounts based on the number of your trading positions over a certain period of time. Regardless of the reason they were awarded, bonuses provide additional funds and offer you further trading opportunities.
However, if you are an experienced trader, then you probably want to have some degree of support for a while. If you are a novice trader, you want to be provided with information about binary options and how to trade them, as well as guaranteed help and advice readily available. As an experienced trader, you will need to keep up to date with information, prices, analysis and reviews.
Brokers offer different levels of service that are designed to meet the needs of different types of traders depending on the type of account chosen. Make sure you have a hotline, an email address and an easily accessible chat in case you get into trouble. Look at the type and amount of information provided to you and how often it is updated. Most importantly, make sure that you are provided with accurate and high quality information.
Some brokers offer different accounts with different features, targeting traders of different levels, from beginner to experienced professional. You can start by trading on a demo account without risking your money (and without depositing money into the account). However, some brokers require you to make a deposit even to trade on a demo account. After that, you can trade in the main account, provided the size of the deposit is small, to the point that you will use the upper limit of the range of your account, which would require much more funds on the deposit, but would provide a more personal and comprehensive service. Check the availability of your deposit and make sure it is the exact deposit that meets your needs now and in the future.
Most importantly, pay attention to the number of brokers, compare what they offer, and choose the best one for you.
Trading strategies you can use
Trading binary options is a simple process; each trade is a separate contract, however, by combining opportunities and tracking multiple assets at the same time, you can increase your performance indicator. There are various strategies that you can apply in different situations.
A reversal trading strategy can be used when the price chart shows that the trend is about to reverse . In this case, you will predict price changes in the opposite direction to the previous one.
A straddle strategy involves purchasing both a put and a call option on the same asset at different price levels. Both of your options will be exercised in-the-money if the price stays between these levels when they expire. Otherwise, you will have at least one in-the-money option successfully exercised, and thus minimize your losses.
The chain reaction strategy is applied when a change in the price of one asset affects the price of another. This can happen, for example, when a rising price of a commodity contributes to a fall in the company’s profits, and the price of that company’s stock falls accordingly. Buying a call option on that commodity and a put option on that company’s stock will result in both of your options being closed in the money.
You can use other strategies as well, and if used correctly, it will increase your profits or minimize your losses.
Why Binary Options Trading Is Getting More Popular
The growing popularity of binary options trading is due to a number of factors. One of the main ones is that binary options traders can be successful in all market conditions. You don’t necessarily need a growing market to make money trading binary options. If you have predicted that the price will move in one direction, then it does not matter how long the bull or bear market will continue (depending on your correct forecast). Actually market volatility often increases the opportunity for making money. Trading in the foreign exchange market means that you can exercise an option in the money if you forecast a fall or rise in the value of one currency relative to another. Constant changes in rates and the number of combinations available provide almost limitless opportunities for significant profits.
All markets are trend-following and you can make money on an uptrend by buying call options and also on a downtrend by buying put options. The whole point is to predict the direction of the market movement. Volatility brings uncertainty, but it can also provide you with opportunities to make money trading binary options. The key to this is to be prepared for what is happening, follow the signals, and then make a profit if the forecast turns out to be correct.
Another important factor is accessibility: since this is an open market, an increasing number of brokers are offering binary options as a tool on their trading platforms, which you can trade from your PC.
The main advantage of binary options trading is its simplicity, since each transaction consists of simple steps. You select the asset you want to trade, make your forecast as to whether its price will rise or fall over a certain period of time, and enter the amount you wish to invest. After that, you just wait for the option to expire to see if your prediction was correct.
First of all, trading binary options contains low risk, because you can invest small funds in each position, the amount of which you indicate at the beginning. The maximum investment amount is $ 2,500 per option, although it can be increased for some types of accounts. This way, you know the maximum amount you can lose and can limit it to the amount you can afford.
Despite the low risk, you can usually make high returns quickly. Binary options tend to expire within a few hours or even a few minutes, and if predicted correctly, you get a 70-90% return on your investment. This means that after completing a series of successful trades, you can have high returns in a short period of time.
The future of binary options
Binary options trading has come a long way in a relatively short period of time. As more brokers enter the market and traders understand the opportunities available to them, it is likely that binary options will continue to become more popular. Trading will become more flexible, and the increase in the number of mobile platforms will allow trading anywhere, anytime. The range of tradable assets will continue to grow, with even binary options on the Rainfall Index already present. Regardless of future circumstances, it is unlikely that anything else can be predicted for binary options other than a further increase in interest in them.