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Good day! Today we will talk about binary options. In this review, we will analyze: what binary options are, talk about the advantages of binary options over other trading instruments, study financial terms, list the assets to which binary options apply, see examples of trading operations in practice, and also study several trading strategies.
What is Binary Option?
A binary option is an option that determines the final result of the transaction in terms of 0 or 1. In other words, it is a derivative financial instrument characterized by fast terms of the transaction, in which the trader is asked to predict one of two options for the market behavior in relation to the underlying asset: either the asset grows or falls within a predetermined period. At the same time, a successful forecast provides the trader with a return on the invested amount and, accordingly, the earned profit. An unsuccessful forecast, accordingly, entails a loss of investment. When trading binary options, the software platform displays the profit that a trader can help out.
It is generally accepted that operations with binary options are one of the most uncomplicated ways of trading in the market, since it involves trading in the framework of short-term prospects and operates with high profits. It is not surprising that such operations are very popular among traders around the world.
Benefits of Binary Options
Speaking about the advantages of binary options over other trading instruments, it should be mentioned:
- The obvious ease of circulation (you just need to predict: the asset will close positively or negatively within a certain time frame);
- Accessibility for understanding the principles of the instrument and the absolute transparency of transactions, which can be checked by any arbitrary external indicators of market dynamics (you can work with options through any trading platform, which does not oblige you to check exclusively with its authentic monitoring system. That is, you can be sure of the legality of closing the transaction according to any third-party source);
- All that a trader needs to take into account at the basic stages of trading is only the market rate of the asset, on which he buys an option;
- Limited risk and fixed returns (known in advance). Therefore, you will not lose or win more than your contract suggests;
- Binary options are easily adaptable to most assets and, accordingly, common trading strategies and approaches to trading;
- In addition, the ability to conclude a large number of short-term contracts for various assets allows a trader to conclude deals 24 hours a day, five days a week.
Also, a novice trader interested in working with binary options needs to learn a number of basic financial terms:
- Winning option – an option with a profit;
- A losing option, in turn, implies a loss;
- A no-win option is a situation in which the contract expires at the same asset price at which it was purchased. Such cases imply a full refund of the contract value;
- Execution price is the price at which the asset is purchased at the time of purchase of the contract;
- The expiration price is the price at which the asset is sold at the expiration of the option’s expected expiration date, which in turn determines whether the option is winning, losing, or not winning.
Assets covered by binary options:
- Currency pairs – an option predicts the growth or fall of one or another currency in relation to another within a certain time frame;
- Stocks – an option predicts a rise or fall in the value of a company’s stock within a specified time frame;
- Indices – Again, an option predicts an index rise or fall.
Types of Binary Options
Let’s take a look at how to work with the four most popular types of options.
We need to correctly choose the direction in which the price moves after a certain time.
- Option type (High / Low, touch, range, spread)
- Option expiration date (timeframe)
- Bet (bet amount)
- We predict the movement of the asset (up / down – buy)
Trading results (forecast – below)
Touching implies trading within a certain range. If the price touches the upper or lower line of the border indicated on the chart, then we make a profit.
Trading results (forecast – up)
The top line is displayed on the chart, which must be touched by the price to receive payment.
This type of option implies price movement within a certain price band. We can expand the corridor by choosing a longer option period. In this type of option, we do not trade up or down.
Trading results (within the range)
The spread implies the opposite situation. Our goal is to get the price out of the trading range to the upper or lower side. This tool is good for trending markets.
Trading results (above the range)
Binary Options Trading Strategies
Martingale strategy for binary options
To understand the Martingale strategy, imagine a coin game. Let’s say you are constantly betting the dollar on one of the possible options that comes up either heads or tails. With the expectation that the bet will win sooner or later, you increase each new bet in proportion to the previous one, and then the first successful deal will cover the losses from all previous ones.
How does this principle apply to working with binary options?
Each additional option that you buy must be twice the price of the previous one. Let’s say you bought a share for $ 10, so you should buy the next one for 20. Moreover, each winning trade will not only cover the losses from the previous ones, but also bring a guaranteed profit.
At first glance, it may seem that the Martingale strategy is rather complicated, but every trader is able to understand the principles of its operation and successfully make money on binary options trading.
We open the option in an arbitrary direction. Lot – $ 5. Let’s review the trading results (forecast – below)
Our contract ended with a loss. Given the 65% payout, we need to increase the bet from $ 5 to $ 15. And again we bet on a fall.
Trading results (forecast – below)
Having received a payment of $ 24, we pay off our bet, we get a profit of $ 9, which completely pay off our previous, lost bet in the region of $ 5. Here’s a simple trading system. If we lost again, we could increase the bet to $ 30 and it would compensate us for the two previous unprofitable bets.
As we know at the time of the news release, there may be a strong price movement on the market. This type of trading strategy involves working with contracts of the range type. The direction of movement of quotes is not taken into account. We buy a range contract, focusing on high volatility at the time of the news release.
The most optimal price movement occurs during the news release, at a time when bulls and bears cannot find the necessary price equilibrium. As a rule, a news signal provokes a strong trading impulse, so it is important to foresee that our contract closes 20-30 seconds after the release of strong news.
In other words, the strategy involves opening an external contract 5 minutes before the release of important news for the market (for example, Non farm payrol). We recommend trading traditional currency pairs.
Since the standard range is quite easily overcome within the framework of such market events, the price by the time of expiration will change with almost 90% probability, and, accordingly, you make a profit.
Unfortunately, there is no strong news on the market at the moment. Therefore, I will try to explain the essence of the strategy schematically on the fingers. Our current price range on the current chart is 5 pips. Therefore, in the event of a strong news release, it will be broken in any direction (no matter which one) within a very short time. You can view the news in the economic calendar . Each news has a certain force, which is marked with asterisks or bulls. We are interested in extremely strong news.
Perhaps, on this, our research can be considered exhausted and it remains only to emphasize once again that such a tool as binary options really deserves your close attention and thorough study.
We would also like to wish our readers success in trading and increasing the number of profitable trades when working with binary options.