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What is binary options trading?
Binary options trading is a relatively simple way of betting on whether or not a certain outcome will occur. The name ‘binary’ (meaning ‘two’) reflects the fact that you must choose from just two scenarios – yes or no.
In financial trading, this is typically whether the price of an asset will be lower or higher than a certain level at a pre-determined point in time.
The most common type of binary option is a digital option, sometimes broken down further into ‘up/down’ or ‘call/put’ options.
With a simple call/put option, if you think the price of the underlying asset will end at or above the strike price, you buy a ‘call’ option. If you think the price will be below the strike price at expiry, you purchase a ‘put’ option.
If you are correct, the option is ‘in the money’ and pays out a fixed amount of compensation.
This compensation is typically money but in some contracts can be a quantity of the underlying asset itself.
If you are wrong, it is ‘out of the money’ and you receive nothing.
Because of this, binary options are sometimes called ‘all-or-nothing options’.
The attractions of binary options trading
Because you have just two possible outcomes to consider, binary options trading is considered simpler than many other kinds of financial trading.
Typically, all you need to decide is in which direction you think the price of the underlying asset will move.
Unlike with other forms of financial trading where your potential profit or loss is determined also by the size of a price movement, it doesn’t matter to a binary options trader how far prices have moved above or below the agreed strike price when the option expires. With binary options, a winning trade always produces the same payout.
The Best Binary Options Broker 2020!
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Because of this, you have a clear picture of your risk-to-reward ratio before you enter a trade.
This is in contrast to traditional options, where profits and losses can be limitless.
With binary options, therefore, you don’t have to sit at your trading terminal, anxiously watching prices – once you have made your trade, you don’t need to check in until the contract has expired. You also don’t have to worry about applying complicated risk management tools like stop losses.
Binary options are flexible, with brokers typically offering contracts for a wide variety of underlying assets – from foreign exchange or commodities to company shares or indices like the FTSE or S&P 500.
Contracts can also run for anything from 30 seconds to several months, depending on what your broker offers. This means you can tailor your trading to your own areas of expertise or trading style.
If you’re an experienced trader in other markets, such as foreign exchange or shares, you can apply some of the skills you have already developed.
Fundamental and technical analysis, for example, can both be used to help you form a view on future price movements.
The risks of binary options trading
With binary options, it is possible to lose all the money you have invested if none of your trades are successful.
Careful money management (see Lesson 6 https://learn.tradimo.com/lessons/1278) should however ensure that you do not wipe out your entire trading account.
An example trade
All or nothing call:
The current price of Uncle’s Apples shares is $10. If you think the price will go up and trade above $10 this time tomorrow, you can profit from this expectation by buying a one day binary call option.
Before buying the option you need to decide how much money you put on the trade. This will be your investment (your risk) and your payout will be a certain percentage of this amount. If the broker is offering a 50% payout, it means, if you win, you get your investment back plus 50% on top of it.
Let’s say you invest $20 in a one day Uncle’s Apples binary call option with a 50% payout. You come back same time tomorrow to see how your trade performed. You were right, the price is above $10 per share, that is, your option expired in the money. You get your $20 investement back plus 50%, that’s $10. So you get $30 altogether.
However, if Uncle’s Apples shares were below $10 when the contract expired, the contract becomes worthless. Then the option would be out of the money and you would lose your initial investment of $20.
Other types of binary option
With a ‘one touch option’, you predict that the price of the underlying asset will at some point during a defined contract period touch (reach or surpass) a certain level. If it does, you receive a payout. If it doesn’t, you receive nothing.
With a ‘no touch option’, you predict that a certain price will not be touched during the contract period, and are compensated if you are correct.
With a ‘double touch option’, you define two price levels and predict that at least one of them will be touched during the contract period. You receive a payout if this happens. If the price stays within the range of these two prices and touches neither, you receive nothing.
Note that the closing price at the end of the contract period is irrelevant with any kind of touch option. This makes them perfect for traders who believe that prices will be volatile but aren’t confident about predicting a sustained price move.
They are therefore particularly popular for trading volatile assets like foreign exchange and for very short-term trading with contract periods as short as one minute.
So far you have learned that:
- binary options got their name from the fact that there are only two scenarios to consider: the market ends up either above or below your target price when the option expires
- you get paid a set amount, typically a certain percentage of your investment if you are right or you lose your investment if you are wrong
- it is because of these two reasons that binary options have gained a huge popularity in the last few years
- brokers have created a variety of binary options contracts so you can take advantage of special market conditions, such as ranges, breakouts, tests of significant price levels and trending markets
Touch or No Touch Binary Options Trades and Strategies
One of the decisions you will of course have to make when you are a Binary Options trader will be just what type of trades you place. There are several different trades available and many of the most successful traders will use a series of different trades in the hope they can make continuous profits over the long term.
You will find that some trades may call for you to place a long term investment on them in the hope that over time the share prices of the companies you have selected or the price of the commodity will fall or rise as you predicted.
However, with news stories and financial data that is released by companies and countries always having an instant effect of many trading opportunities some much shorter term trades may be called for.
There is a type of trading opportunity known as a One Touch trade and unlike a long term trade where you will only find out when you have made a profit one those trades expiries a One Touch trade works in a completely different way.
By placing a One Touch trade that trade is going to end when the value of whatever it is you are basing the trade on touches one of the two different values as found on the trading platform. So if you think a trading opportunity will increase in value, then as soon as it touches on of the indicated value that trade will end and close.
Frequently Asked Questions
- How Can I Test Our One Touch Trades?
One of the easiest ways that you can experience placing One Touch Binary Options trades, and do so in a no risk trading environment will be for you to open up a demo trading account at one of our featured Brokers.
In fact by doing so you will not only be restricted to placing demo One Touch trades but you can place any type of trade available, which will of course allow you to see which ones appeal to you the most.
Which Brokers Offer One Touch Trades?
You will find that all of our featured Binary Options Brokers are going to allow you to place any type of trade you can think off! So if you do fancy placing several of these types of trades either in a free demo trade environment or for real money then feel free to sign up to any of our top rated Brokers as all of them are going to allow you to place One Touch trades via their respective trading platforms.
What is he Expiry Time for One Touch Trades
There is no set in stone expiry time for a One Touch trade, and with that in mind you should consider whether they are the type of trades you are interested in placing.
It will be at the moment in time that your chosen trading opportunity reach either the low or high value as indicated when you place the trade that is going to determine when the trade expires.
Are One Touch Trades Available on a Mobile Platform?
We are always being asked if there are going to be any compromises Binary Options traders are going to have to make when they opt to use a mobile device as the way that they place their trades.
Well, one of the main reasons we have chosen to showcase to you all of the Brokers listed throughout our website is that they offer both online and mobile trading platforms, on which you will be able to place exactly the same number and type of trades. So you will be able to place One Touch trades on any type of mobile device when accessing any of our approved Binary Options Brokers mobile trading platforms.
Can I Place Multiple One Touch Trades?
As long as the Broker who you have signed up to and whose trading platform you are logged into has One Touch trades listed then you are going to be able to place as many or as few of those types of trades as you like.
So if you are the type of trader who has a trading strategy calls for you to have several active and open trades in place then these are certainly trades worth considering utilizing.
What are Binary Options and How Do They Work?
What is a binary option?
A binary option is a financial instrument based on a simple yes or no question where the payoff is a fixed amount or nothing at all.
This means binary options offer defined risk and clear outcomes on every trade.
Each binary option trade starts with a question – will this market be above this price at this time? If the answer is yes, you can buy the option. If it’s no then you can sell the option.
The price of a binary is always between $0 and $100, and just like in other markets, there is a bid and ask price.
The binary options we offer are always built the same way. Each trade is easy to understand.
If you think about it, binary options reflect the way we think about things in our daily life. Things either happen or they don’t. With a binary option, payouts reflect that and are always all or nothing at expiration. You’ll find we like to keep trading simple.
You can also close a position early to lock in profits or limit losses.
As an active trader, we know you are busy scanning markets each day. You are dealing with complexity all the time. The last thing you need is to be slowed down with more complications and hard to understand details with a brokerage.
When you trade, we know you want to focus on the market and your position, not on a series of unnecessarily complicated products.
So we built an innovative full service exchange to trade binary options that lets you do just that.
How do binary options work?
There are three concepts to learning more about how binary options work; the underlying market, strike price and time to expiration.
Become familiar with those three concepts and you’ll understand the basics of binary options.
Let’s walk through the three parts of each binary option trade:
With binary options the amount you pay is the maximum you can lose. Because of that we say your risk is capped.
Maybe you don’t want to wait until expiration. You can place an order to close your position to limit loss or lock in profit early.
Along with offering clear outcomes and defined risk, we also designed our binary options to work in a way that offers unique leverage that enables opportunities to profit even from small market movements.
1 The first step is to pick the assets or event you want to trade. Each one is based on an underlying market and your trade is based on that underlying markets price movement.
2 Then you want to find a strike price that works for you. The strike is the price level you think the market will be above or below at expiration.
3 When opening a trade you will select an expiration day and time. The expiration is the moment of truth traders live for. This is when trading is over and the value of your binary option is determined.
How risky are binary options?
You always know your binary option risk reward ratio before you enter into a new trade. Your trade is fully paid for up front, which means you will never lose more than you pay. You always know exactly what you have at risk.
Trading also offers the opportunity to profit. Just like you know what you have at risk, you will enter each trade knowing your maximum potential reward.
We’re serious about helping you understand and limit your risk. Our goal is to let you define and understand it clearly and upfront on every trade.
It’s why we’ve worked to design and offer an innovative way to define and cap risk while also providing an affordable way to trade.
You can start with one contract at a time for less than $100, and decide your maximum risk and reward up front when you set up the trade.
Here’s how that works:
If you buy a binary option contract for $30, hoping to have it end at $100, your profit target is $70. This is $100 less your $30 investment. A loss would never be more than $30 no matter how much the market moves.
We think that hard to understand margin requirements, complicated fees and confusing payout structures can make trading riskier than it needs to be.
You can make those things part of your past by trading binary options with us.
How are binary options regulated in the US?
Binary options are legal and available to trade in the US only on a Commodity Futures Trading Commission (CFTC) regulated United States exchange.
We are a full service exchange located in the heart of Chicago’s financial district and we are regulated by the CFTC.
As the leading United States based binary options and spreads exchange, we are proud to say we are designated by the CFTC as a Designated Contract Market and Derivatives Clearing Organization.
What this means for you is we are a well-regulated and leading binary options exchange.
Our role as the leading US based binary options exchange is to match buyers and sellers in a fair, accurate and secure way.
That way you can trade multiple global markets with us from one account knowing your trades are fair and your money is safe.
Binary options trading example.
Let’s walk through a trade on the EUR/USD currency pair.
Here is how the outcomes work at expiration:
- If the market is at or below 1.1600 at 3AM ET the seller will get the $100 payout.
- But if the market is one tick or more above 1.1600, you get the full payout as the buyer.
If you don’t want to wait until expiration, you can close your position at the current market price. Your profit or loss in that case is the difference between your entry and exit prices.
Each binary option reflects a question. In this case, the question is, will EUR/USD be above 1.16?
We show that as EUR/USD > 1.1600
In this example, the option has 4 hours til expiration and it’s 11pm.
If you think EUR/USD is going to be above $1.16 at 3AM, then you would then buy the binary.
Trading With Fixed Price Options
The fixed price options are being used when trading the asset at a specified strike price within an expiry time allocated for that specific trade. Within that trading process, any of the call options can be used.
When we talk about binary options in general, we are talking about a placing a trade on a certain financial contract between a trader and a chosen broker, or between two traders. As any type of financial trading, binary options are generally considered to be risky which is always a probability with investments. There are no guarantees in trading, but with a combination of a sound strategy and an expert brokerage company, there are ways you can boost your profits potentially.
When it comes to the popularity of specific binary options types, No-Touch Options are undoubtedly at the top of that list. This options type is especially appealing to traders who are able to determine if an underlying asset price will go up over the range-bound. This is, obviously all done during a specific time frame. The longer the time frame the longer are the potential profits, but it does not guarantee that the risks associated with the trade won’t get higher as well.
No-Touch options also have a popular variety that the traders across the world really like – a Double No-Touch Option. This option variety offers a payout that is agreed on in advance, with a condition that the strike price goes beyond the double barrier level. That means that you as a trader will have to pay a premium to your broker which will grant you the possibility of choosing the expiry time, payout and barrier position. Keep in mind, like we already mentioned, there are never any guarantees when it comes to trading processes.
One Touch Options
These options enable the trader to win the trade if the asset price reaches a certain point. The important factor in this trading process is that the price touches either a resistance point or a support point, and naturally, within an allocated time frame.
Trading these options, traders are going to have to make great predictions regarding the asset price movement. If a trader’s prediction is correct, then the possible payout can be massive, depending on the initial investment.
This particular variety of touch options is a great choice for those traders that are good at predicting levels of fluctuation that the asset price might go over. The attractive characteristic is certainly the massive payouts that are possible if your assessment proves to be correct.
For this kind of trading, not unlike other binary options types, it is of the essence that you are well versed in market dynamics and have a great theoretical background. Ambitious traders will certainly revel in opportunities that this variety of binary options offers.
Range options variety of binary options deals with trades that predict that the asset price will stay within the designated range between two strike prices. Another version is that the price lands beyond one of the two strike prices, all within the allocated time frame.
What is important for traders to understand when it comes to range options is that those are neither call or put options, but rather enables a specific payout if the price is consistent within a fixed boundary. Obviously, boundaries are normally set higher or lower that the strike price.
Another important characteristic of range options is that they seem to be very simple in construction which results in easier and more accurate estimation possibilities. Also, considering they are one of the few structured options, it’s helpful for traders who feel more confident in such a trading environment.
When binary traders are in a situation where they are negotiating the price of a certain trade they will normally choose to use the Rebate options. This is also known as ‘’cash back’’ and is used to lower the purchasing price.
Rebate options are mostly used as incentives for new purchases that deal with specific trades. This functions as a motivator for traders to help them balance out their investment amounts.
Seeing that there are multiple brokers that offer this type of binary options you can get them in a fairly simple way. After you have made sure that the broker you want to register with is the right fit for you, all you need to do is to contact them and ask about Rebate options. Make sure you are aware that there are different deals available pertaining to Rebate options and you need to review them carefully to ensure it suits your needs.
In essence, Rebate options refer to a financial derivative that expires if the asset price reaches a designated price mark. When that happens, the trader is being refunded a portion of a paid premium. This option variety is considered to be exotic that can be realized only if the asset price actually reaches the designated limit.
Another feature of Rebate option is that it can be either a ‘knock-in’’ or a ‘’knock-out’’. The first type refers to a situation where the contract is activated once the price goes over or under the barrier price, depending on the set conditions. ‘’Knock-out’’ refers to a situation where the binding contract expires if the price goes over or under the boundary.
To round up this guide it is important to reiterate that trading binary options or any other type of financial trading require patience, knowledge and a great, expert broker. In addition, properly developed investment strategies and continuing education can indeed get you very far in this industry.
Besides the positives, traders need to be aware of the risks involved with trading and be adequately prepared to minimize those risks. Do not dive into binary trading without reading the broker and robot reviews and especially without a solid understanding of strategic investment planning.
The fixed price options are a relatively new occurrence in binary options trading and the same precautions stand for them as well as the other varieties. There are always ways you can boost your profit potential but you must not forget to review your possible loss occurrences and adjust your investment strategies accordingly.
The Best Binary Options Broker 2020!
Perfect For Beginners!
Free Demo Account!
Free Trading Education!