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7 Binary Options
Binary options trading is becoming increasingly popular all over the world and there is a lot of hype happening around it. It also leads to many people being so excited about trading that they don’t actually ask: what is binary options trading exactly?
If you are one of those traders that want to understand what it is and how it works, we are here to guide through the basics of binary options trading.
What is binary options trading?
Binary options, which is also known as digital options or fixed-return options among traders, is a special class of options. In it, the payoff is either a fixed predetermined amount or is zero.
With the standard high-low binary option, a trader would buy would a binary call option is they think that the price of underlying asset is going to go up. Consequently, they would buy binary put option is they think the price will go down. From here, the situation can have two possible outcomes: either a trader was right in his assumptions and receives a payoff or he was wrong and he loses his initial investment.
Since binary options have only fixed returns, it doesn’t really matter by how much the price of underlying asset has increased or dropped. The mere fact of increase/decrease is what’s important. The payout is fixed and is known before entering a trade. Normally it is around 70% or 80% of the amount invested.
One more thing that is important to mentions when talking about binary options trading basics is expiry time of a trade. It is customizable and ranges anywhere between 60 seconds and a few weeks. So a trader can decide himself when he finds out the outcome of each particular trade.
A Typical Binary Option Trade
So what does a typical binary options trade look like? Let’s take a look at the following chart.
As you can see, this binary options broker offers 85% payout for the EUR/USD trade and the binary call option in it is currently valued at $1.30.
So let’s imagine that a traders is tracking the price movements of it for a few hours and comes to a conclusion that the price will go up during the next 5 minutes. In fact, he is so sure of it that he decides to invest $100 in this trade. So he purchases a binary call options EUR/USD with the expiry time of 5 minutes.
And he is right! The price goes up with a small difference and is now $1.31. But the fact that it went up by only $0.01 is not what’s important. What matters is that it did and the trader receives 85% payout which in his case is $85.
The Best Binary Options Broker 2020!
Perfect For Beginners!
Free Demo Account!
Free Trading Education!
If we imagine that he was wrong and the price would actually go down instead, he would lose his initial investment.
The important lesson here that it wouldn’t matter for a trader if the price went up drastically (let’s say to $2.4) or went down by much (to $1.00). He only cares about the mere fact of the price change as it will determine the outcome of this particular binary options trade for him. And this is what binary options trading is about.
Binary Options Trading Explained
Interested in binary options trading? Want to learn more about it? Want to know how to get started? Want to know about the risks and the strategies? Want to know about binary options trading platforms. Then, this article is exactly right for you!
One of the most popular investment arenas in recent years has been trading the world’s currencies, due primarily to its flexibility, ease of access, and trading software that assimilates mountains of data to guide your every move in the market. Casualty rates for beginners, however, have been high and for good reason. Trading forex is very high risk. A great deal of preparation and practice trading are necessary if one wants to win in this genre. Most newcomers grow impatient, resort to “gut” gambling, and soon lose.
Learning and applying prudent risk and money management principles can be difficult, but the forex market has responded to these issues by offering “binary options”, a new way to play the game with currencies, as well as with stocks, commodities, and indexes. Trading binary options requires an entirely different approach, where much of the “headache” has been removed so that an investor can focus on the moment and directly on the price behavior for his chosen investment vehicle. Your downside risk exposure is “fixed” up front, as well as the amount of your position and your potential payoff.
What are Binary Options?
Binary options are now gaining in popularity more quickly than nearly any other area due to their simplicity. They may go by many names – barrier options, digital options, two-way-options, all-or-nothing options, and fixed-return options, to name a few. A basic definition from Investopedia.com follows:
“A type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money.”
These options allow the investor an opportunity for instant gains of from 70% to 85%, depending on the investment type offered and the marketing bias of the broker. Investors need only guess the correct direction of the market within a defined time period to cash in, or retain anywhere from zero to 15% of his capital at risk. The simplest form is a pure “high/low” or “Call/Put” bet, but “one-touch”, “no-touch”, and “double-touch” options allow for typical trending and ranging strategies, where technical competence may provide the trader with a competitive edge if he can use his charts and indicators prudently to support his decision making.
For a simple “high/low” example, the guesswork of making a trade has been taken care of for you. You are offered a special screen view of the pricing behavior for your chosen asset for the recent past and asked to predict where it will be at the end of a specified time limit, the “expiration point”. The potential “payoff” is stated on the screen, say 85% for example, and you decide the amount of your position. If you wagered $100 and the price finished in line with your prediction, you win $85 plus your $100 investment. If not, then you may lose $100 or, in some cases, you may receive as much as $15 back.
The other types mentioned above allow for some variation on this basic theme, but you can never lose more than you specify. There is no need for complicated risk management strategies or worries about leverage and its financial implications. There are no margin calls or fees, either. The rules are simple and straightforward, the reason why this type of investing is gaining widespread popularity.
How Do You Execute a Trade?
Binary options require a customized approach, quite unlike the typical Metatrader4 platform or any other general trading support software. Not all brokers offer these instruments because they must first develop a proprietary trading system that has been customized just for this primary task. Thankfully, most binary option brokers have followed a similar theme. Your trading “dashboard” will typically resemble the diagram presented below:
The five steps have been added for clarification purposes to illustrate how easy it is to execute a trade. In this example, the position is for $25, and the potential payoff is $43, the sum of $25 plus $18, or 72%. If you are wrong, then $2.5, or 10%, will be returned to your account. The two arrows on the left give you some sense of what others have predicted, and the pricing behavior chart gives you a basis for making your own prediction of what will transpire by the expiration time chosen in “Step 2”.
Is It a Good Time to Consider Binary Options Trading?
The reason for the apparent popularity of this genre is due to its inherent simplicity. Risk and reward variables are fixed at the outset. There is no need to set protective stop-loss orders or worry about margin calls. Your downside risk is known, based on the amount you choose to wager, and your potential return is also defined when the order is executed. For investment beginners, many of the complexities of risk and money management principles are removed from the investment decision upon execution.
Is now the time to jump in with both feet? As always, the answer to this question depends on your personal tolerance level for risk and your appraisal of the state of this industry. With each passing month, the number of new broker offerings hitting the market continues to soar. Competition is a good thing since it will improve payout criteria and your odds for winning, but you must educate yourself first and perform the necessary due diligence before choosing your specialized broker. There are many websites that can assist you with this task, and be sure to take a “test run” first by practicing with “free” broker demo systems before risking your personal capital. On this page we give you our list of trusted brokers where you can start binary trading with a demo account.
What Are the Key Factors for Success When Trading Binary Options?
Like any other investment medium, the key factors for success are three in number –
- Emotional control
Newcomers typically fail in the trading arena primary due to the last factor, emotional control. It can be easy to establish a position in the market, but then waver when it comes time to close it, whether it is a winner or loser. The goal is to maximize your “winners” and minimize your “losers”, but, unfortunately, beginners tend to get it the other way around.
Basic binary options remove the threats of emotional intervention, so to speak. The expiration time fixes the endpoint. There is no decision to make. For traders that desire more flexibility, brokers often offer “Rollover” or “Double-Down” features that allow the trader to extend time periods or increase his position if it appears to be a winner, but these decisions require an action on your part. You have time to think about the actions you might take, without changing a thing. You are in control of your position. Your risks only grow if you decide to allow them to do so.
The first two factors can be easily addressed. There are many tutorials, trading guides, and information available on the Internet today to acquire the knowledge necessary to understand and win with binary options. Most brokers take a great deal of pride in the instructional materials that they provide. With competition running so high, every broker wants to provide the best trading experience around, supplying all manner of tools to assist you in the process. Market data, commentaries, and fundamental event calendars are standard offerings in today’s market.
The “middle” key to winning is experience. Seasoned veterans generally swear by their practice regimens. Trading binary options is not the latest form of Internet “gambling” or an amusing video game. You must develop a disciplined approach to the market, utilizing the same analytical skills required in any trading market. Never risk any funds in this market that you cannot afford to lose. Your position sizes should never exceed 2% to 3% of your account value. You will have losing trades. Accept them, and move on. The goal is consistency with “net” gains where winners exceed losers over time.
What Should I Do Now?
If this medium has piqued your interest, then it is time to do some homework. Read up on the topic. Read our article about binary options trading strategy and signals. Study the various offerings of various firms and be sure to perform your own due diligence before selecting one for initial testing. Trading platforms are often proprietary, but easy to understand with online access from the Internet. Brokers tend to be offshore, but there are a few with offices in the United States.
Ever since this OTC mode of investing acquired SEC approval in 2008, brokers and investors have literally leapt into the space, leading to increasing popularity that has only continued without abatement into the current year. A few leaders have emerged, and many firms have added unique “twists” to differentiate themselves from their competitors, but caution is the watchword to keep in mind at all times. Stay focused on your personal objectives. Invest the time practicing with “demo” systems, and, when you feel ready, go slowly at first. No reason to rush, and enjoy the process, too.
One Touch Binary Options
In the world of binary options, there are a variety of structures which are designed to take advantage of any one particular scenario. This gives the trader a choice of option in order to best reflect his/her view of the market or particular asset. For the beginner, the different options can sometimes be confusing, so it is best to familiarise yourself with the various structures on off in the retail market. For this reason, we have dedicated these pages on our site to cover the various types of options available.
In this section, we will be looking at One-touch options, how they work, and whether they are an instrument worth considering. As stated, the most popular binary options are call and put trades, which allow the trader to profit from a correct prediction on whether the price of an underlying asset will go up or down. This is popular with beginners, as the concept is also simple to understand. Once you have grasped the basics of options trading, you may be tempted to move on to One-touch binary options, so now let us explain the basics on this type of option.
What is a one-touch option?
A One-touch option is a binary option which offers a payout once the price of an underlying asset hits a certain predetermined level. The buyer can set the position of the barrier and the expiry date, and the broker will offer the best payout (in theory) should the barrier be broken (triggered is the correct market terminology). As with all binary options, there are only two possible outcomes, so if the strike level is not triggered, then the option expires worthless and the trader loses the cost of the option price paid. This type of option is used when a trader believes the price of an underlying asset will pass a certain level in a set period of time (the expiry period), but does not believe that gains or losses may not necessarily be sustained. At this point however, it is also worth considering that in this expected scenario, the trader will also benefit from trading the underlying asset and naturally, monitor the position constantly. Indeed, based on the level of payout, with the benefit of technical analysis, placing a stop at a certain point can offer much better risk to reward as the binary option will only pay a set payout. The underlying position however, has unlimited gains, yet the risk is defined by the level of the stop loss – so discipline is required.
One-touch options are naturally less expensive than Double One-touch options, as in the latter case, there are more strikes, and therefore more chance of a strike price being triggered for payout. It is also worth noting, that One-touch options can also be traded at the weekends (in some cases) when global markets are closed. The key reason for the popularity of One-touch options is that they can offer large returns, but this will require the strike price to be placed some way away from the current market. In this case, the buyer is looking for a significant rise in volatility. Once again, this can also be expressed through traditional spot trading.
Having touched on Double One-touch options, let us now explain what they are.
What is a double one-touch option?
A Double One-touch option is a binary option that offers the trader an agreed payout if the underlying asset triggers one or other of two predetermined levels. In this case, a strike price will be placed on either side of current price. The trader will determine the level of both barriers, the expiry date of the contract, and the payout will be set based on these parameters. As stated above, either one of the strike or barriers must be broken before the option expires in order to receive the payout offered (at outset) by the broker. If neither of the price levels are broken the option is rendered worthless, and the trader loses his/her her premium paid for the option.
A Double One-touch option can be a great option to use if you believe the price of an asset will change dramatically over a set period, but you are not sure which direction it will take. A trader stands to benefit whether the price goes up or down, but will require higher volatility to achieve payout. In order to get an attractive payout, the strikes or barriers will have to be placed some way either side of the current market price. If the barriers are set close to the market, the broker will offer a very low payout percentage due to the higher chance of either level being triggered. As such, the better opportunities are likely to remain inside traditional spot trading, where traders can achieve greater returns in relation to risk (taken).
Five steps to start your one-touch options trading
- Find the best on- touch options broker – As with any broker, research is required, but this site will offer plenty of informative and helpful reviews as well as other binary options articles.
- Open a binary options demo trading account – Start by trying out a demo account, as this will give you risk free taste of how binary options work and what they can and cannot offer you.
- Make your first deposit – Once you have some trading practice under your belt you should be ready to trade with real money, though start small and limit your risk(as you should always do).
- Choose an asset – Trading with a small amount of money to begin with, invest in an asset you feel comfortable and familiar with.
- Try different strategies – See what works and what doesn’t work for you, in order to find your winning formula.
Tips on finding the best binary options broker
We will finish by recapping some of the points we have touched on in one of our other pages, by looking at finding the best binary options broker, and what you should look out for.
What Are Binary Options Trading? – Binary Options Explained With Example
Binary Options trading are known for their simplicity and all-or-nothing nature. Moreover, a few reasons are behind to give this trading type name binary option. Options are derivative instruments. It can be traded as forex pairs, cryptos, stocks, indices, commodities, etc.
Furthermore, for traders, it is a lucrative trading type because of it’s quick and high return percentage. But, according to the research, binary traders should pay close attention to the rules of trading before diving with real money.
So, consider this article as a guideline for beginners and hence, we will keep it as simple as possible. Let us start with the binary definition first.
What Is Binary Options Trading?
Abe Cofnas is a thought leader and analyst in the financial industry. We took a line from his book to explain the actual meaning of binary.
“The binary option is called binary because it fits the condition of being either right or wrong-all or nothing.”
On the other hand, the exotic option allows a trader to speculate on the price movements of various instruments. To trade binary option, you don’t need to purchase an underlying asset.
You rather predict whether the price will increase above, or decrease below the strike price or purchase rate. The strike price is the price, at which traders trade underlying assets. Market price must increase or decrease, by the time the trade expires.
The expiry period for binary options is very diverse. The time frame starts from 30 seconds and lasts up to a year. After prediction the price, you will select the call or put option, depending on the asset price movement.
If you guess accurately, you win a payout. But the wrong prediction will give you nothing. It is required to mention that the payout rate differs from asset to asset and broker to broker.
Speaking of assets, there are multiple trading instruments that you can trade as binary options. Before selecting any pair, find some strategies and rules on how to trade binary options .
We will explain all the terms and facts of the binary option below that will give you more knowledge to understand.
The Best Binary Options Broker 2020!
Perfect For Beginners!
Free Demo Account!
Free Trading Education!