WHAT ARE BINARY OPTIONS?
If you know what binary options are then you have no need to read this bit, and you may want to go to one of the relevant reviews of option trading companies we have carried out – navigation to the side. If you have never traded in options before or no nothing about it, then read on!
Binary options are a financial instrument whereby an investor can attempt to predict which way and by how much the value of a commodity, stock, currency or index will move within a given time frame.
Binary Options Trading is effectively a way to bet on movement within the financial markets. For example, you could take an option on whether you feel the value of the US Dow Jones Index is going to increase in the next hour. If you make the right prediction you get a return on your investment if you get it wrong your stake will be lost.
Although the concept of Binary Trading is easy to understand, making accurate predictions on movements within the financial market has proven to be an elusive goal. However, if you are prepared to put in the work and develop a system, you will greatly increase your chances of being able to make a living from this form of trading.
Binary trading attracts investors for a variety of reasons, the potential for very large returns being the major one. Couple this with the fact that these returns can be derived from relatively low levels of investment and it is easy to understand the rapid growth of this financial investment option.
With Binary Options the underlying asset is never owned or purchased by the investor, as an investor, you are simply trying to predict the movement in the value of that asset. Therefore, the size of your investment doesn’t need to be tied to the value of what you are working with. Most brokers will allow a minimum investment of $10 which makes binary trading an easy entry into market trading.
There are many different types of binary options, the most common being the high-low option. Let’s say you have done some research and feel that the value of the US dollar is going to rise against the Euro in the short term. You decide to buy a binary call option on the US dollar. You will need to look at the time frames offered as there is a wide selection available. Some will take an option over a longer period and some like to work in the short term.
Your prediction is that the value of the US dollar will rise against the value of the Euro within the next hour, so you invest $100 in a call option that expires in one hour.
On expiry of the option (in one hours’ time) if the value of the US dollar is above the value of the Euro at the commencement of the option you win. Your return will depend on what percentage of profit the broker you placed the option through will pay. For example, a broker paying 85% will see you gain $85 on your $100 investment in addition to the return of the original stake. So you put $100 in and were able to take $185 out on a successful call.
In the scenario above:
• The underlying assets were the US dollar and the Euro.
• The exchange rate at the time you took out the option was the entry price or target price.
• Because you predicted a gain in value of the US dollar you made a call option. Had you predicted a drop in value you would have made a put option.
• The exchange rate at the time of expiry of your option was the exit price or expiry price.
• In this example, you made a successful call, so you finished in the money. Had your call not been successful you would have finished out of the money.
A second popular form of binary option is the one touch binary option. This enables you to win if you successfully predict the value of the underlying asset will reach a price that you designate within the time frame of the option.
Usually, longer time frames are seen in one touch options with one day, close of trading and one hour being more commonly seen.
One touch options offer higher rates of return the more unlikely the predicted value appears at the commencement of the option.
Boundary binary options work by you being able to predict the value of the underlying asset will either remain within a given value range or be outside that range. It doesn’t matter whether the value is above or below the range limits, you are simply predicting movement or volatility.
SECRETS TO SUCCESSFUL BINARY OPTION TRADING
- The main factor that will help determine how successful you are is the broker that you select to work with. As binary trading has grown in popularity so has the number of brokers grown too. You need to do your research and make the right choice before you even start thinking about trading.
Things to look out for are:
• Stability and reliability. How long have they been in business? What are their trading volumes? Are they growing?
• Regulation & protection. It’s no good having a broker that offers top rates if your investment is not secure. Make sure that your chosen broker complies and is registered with or licensed by financial authorities such as; CySEC, EEA, FCA, Consob, CNMV, BaFin, Regafi, AFM.
• Rates. Brokers rates will vary across a pretty wide range, from 70-85% being the norm. Some brokers will offer premium accounts for serious investors that may increase those rates up to at least 92%. You need to look at the account level you select to match your investment situation. Premium accounts usually come with a minimum balance requirement in the thousands of dollars but do offer many benefits for more active investors.
• Withdrawal frequency. Not all brokers allow immediate withdrawals so to protect your cash flow, picking a broker that does offer this feature could be important to you.
• Support. Customer support that is available and responds swiftly is a critical component in the selection of your chosen broker. Some top brokers such as IQ Option boast a 46 second average response time. You should be looking for something like this, as waiting even minutes to solve a problem can cost you dearly.
• Market coverage. You should also look to work with a broker that has access to a wide selection of markets. Again, using IQ Option binary trading software as an example, they currently work with traders in 178 countries worldwide.
- What type of assets you decide to trade with will also have a substantial effect on your trading success. One common error is to try and trade in too many different types, you will never manage to master any, and this may hinder your progress.
When first starting out, by all means, try some different ideas but as soon as you have enough trading history to analyze your results you will probably see certain asset types that gave you a better return. It would be a good idea to focus on these and develop your trading techniques within these asset types that have shown a successful track record for you.
- Strategy and Research. Rather than relying on intuition, a successful investor will develop methods and strategies to help make decisions. Developing a system will help you with deciding when to place an option, what term to select and how much to invest.
Once you have started to develop your systems and strategies you need to keep faith with them rather than chop and change on every investment.
Always analyzing your results will help you develop your strategies and over time forge a winning system.
- Working to a set of proven trading rules is a sure-fire way to improve your success and confidence. The following is a sample set of trading rules but it is important to adapt and make sure that they work for you.
• Only trade when not distracted and you can concentrate.
• Never take an option because you want it to happen.
• Only trade within a system, never for the sake of it or for fun.
• Only invest amounts that you can afford to lose.
• Always research before trading.
• Place trades at least 15 seconds before the deadline.
- Fund management requires you to work out carefully how much you can afford to invest and what returns you need to make. After all, if you are not doing this to make money why bother at all?
It is also important to plan and manage the amount of each investment as well as your overall funds. Doing this will enable you to survive losing runs without seeing your whole investment pot disappear. If you limit each investment to no more than 10% of your available funds then you can survive ten consecutive losses, reduce that to 5% and you can double that figure to 20 losses.
Restricting the percentage of your winnings that you withdraw will also enable you to grow your fund. It’s all about planning and being prepared.
Trading Binary Options is not for everyone. But the simplicity of the concept, the low entry investment level and control over the investment time scale are major attractions.
The major drawback to be aware of is that options contain a time constraint. Somebody trading in stocks does not have a time limit imposed on them; they can delay ending their investment indefinitely. As a result of the nature of options trading, you need to be in the money at the expiration of your option to make a profit.
Make sure you develop a plan and never wing it. Being as prepared as possible before you start trading will increase your success rate, your confidence and your enjoyment of the whole investment experience.