10 Things You Must Know About Binary Options

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10 Things You Must Know About Binary Options

It can be quite exciting to make your first deposit and start trading options online, especially with a tempting bonus received from your trading provider.

However, without proper understanding of binary options and the trading platforms, one can quickly lose the initial deposit with the bonus money and turn away from options trading forever.

I’ve seen this happen in the past and I’m sure I will see it again and again. So here is a simple to follow crash course of the most important points that will assist any beginner trader wanting to trade binary options and make money from forex or the stock market.

Binary options trading involves PUBLICLY traded stocks and commodities.

Most currencies in Forex, indicies such as the S&P 500, commodities like oil, gold, or silver, company stocks such as Facebook or Google can all be traded on binary options. Penny stocks cannot be traded using binary platforms.

Binary options are a fixed return options

In binary options the trader always knows EXACTLY how much he/she can win or lose on a given trade. The trader is always paid a fixed return regardless whether the market has shifted 10 or 200 pips. To learn more visit How to start binary options trading.

All binary options have an expiry time and a strike price.

The trader chooses an instrument, for example oil, EUR/USD, or a Facebook stock and picks its market direction (UP or DOWN) and its expiry time (ie. 15 min, 1 hour, 5 hours). When the price of the instrument at the time of expiry is on the chosen direction at the time of entry, the trader is paid a fixed return.

You can never lose more money than your initial investment.

Binary options are quite unique in that you cannot lose more than what you have traded. There are no margins or losses that can surpass your initial investment as in the case of margin trading. In most cases you lose 100% and win about 75% of your trade value.

Risk management is one of the key aspects of trading.

This statement is true for all traders and all types of trading, not only binary options. Risk management is money management and all traders must understand it well if they want to succeed and make money trading. One of the main rules of thumb of risk management is that if you are a beginner trader you should never invest in a single trade more than 2% of your account. If you have $1000 in your account your single trade should not exceed $20.

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    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
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    2nd place in the ranking!

Binary options will not make you rich quickly.

Despite of what broker ads and videos on YouTube may promise you, trading binary options is a challenging and demanding task. If you’re not an experienced and knowledgeable trader you will most likely lose your deposit. Unless you use a high quality binary options signals from professional traders.

Winning payout is less than the loss on losing trades.

In most cases when you win a trade you receive about 70%-80% of your trade amount but when you lose, you usually lose 100%. So if you traded $100 for example, you would receive $180 in a win and $0 in a loss. It should be noted, however, that it is still possible to earn money trading binary options.

ALWAYS read the terms and conditions of your broker.

Before you sign up and deposit any of your hard earned money make sure that you understand your broker’s terms and conditions. This is especially important when you are accepting a bonus offer.

All bonus offers from brokers will have some sort of limitations imposed on your account.

For example if you are offered 100% bonus for your initial deposit it is very likely that you will need to have about 40 times the amount of your deposit in your account before you will be allowed to make any withdrawals.

Please, always read the terms and conditions of each bonus offer separately.

Always use professional charts to trade binary options.

I’ve met some enthusiastic people starting out to trade on binary platforms using the provided tick charts. If you want to trade by using charts and following price action you should use dedicated software, such as MetaTrader. If you are new to trading and meta trader than you will need to use indicators that will help you find good trades. Here is a link to free binary options indicators for Meta Trader 4.

Use professional signal service to optimize your trades.

If you aren’t a professional trader or simply don’t have enough time to learn about the markets there is a simple solution. You can use a signal service where you will be informed of new trades which have a very high winning probability. One of the best signals services we’ve tested were Franco’s binary signals – read full review.

What You Need To Know About Binary Options Outside the U.S

Binary options let traders profit from price fluctuations in multiple global markets but it’s important to understand the risks and rewards of these controversial and often-misunderstood financial instruments. Binary options bear little resemblance to traditional options, featuring different payouts, fees, and risks, as well as a unique liquidity structure and investment process.

Binary options traded outside the U.S. are also structured differently than those available on U.S. exchanges. They offer a viable alternative when speculating or hedging but only if the trader fully understands the two potential and opposing outcomes. The Financial Industry Regulatory Authority (FINRA) summed up regulator skepticism about these exotic instruments, advising investors “to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches.” 

What Are Binary Options?

Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities and foreign exchange. These options have a clearly stated expiration date, time and strike price. If a trader wagers correctly on the market’s direction and price at the time of expiration, he or she is paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.

The binary options trader buys a call when bullish on a stock, index, commodity or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time. The strike price, expiration date, payout, and risk are disclosed by the broker when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.

Binary Options Outside the US

Foreign Versus U.S. Binary Options

Non-U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange. These brokers profit on the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an “all or nothing” payout structure. Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC).

The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008.   The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC. These options can be traded at any time, with the rate fluctuating between one and 100, based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration. They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.

High-Low Binary Option Example

Your analysis indicates the Standard & Poor’s 500 index will rally for the rest of the trading day and you to buy an index call option. It’s currently trading at 1,800 so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date that supports your analysis. You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker.

Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid + ask)/2. Each binary options broker outlines their own expiration price rules. In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment. If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader’s account when the position is closed.

Other Types of Binary Options

The example above is for a typical high-low binary option—the most common type of binary option—outside the U.S. International brokers will typically offer several other types of binaries as well. These include “one-touch” options, where the traded instrument needs to touch the strike price just once before expiration to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date/time. Meanwhile, a “range” binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if price stays within the range, while the investment is lost if it exits the range.

As competition in the binary options space heats up, brokers are offering additional products that boast 50% to 500% payouts. While product structures and requirements may change, risk and reward is always known at the trade’s outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured in such a way that the probability of winning the payout is very low.

Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most do not. Exiting a trade before expiration typically results in a lower payout (specified by broker) or small loss, but the trader won’t lose his or her entire investment.

The Upside and Downside

Risk and reward are known in advance, offering a major advantage. There are only two outcomes: Win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They’re simple to use and there’s only one decision to make: Is the underlying asset going up or down? In addition, there are also no liquidity concerns because the trader doesn’t own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world.

On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses. While payout and risk will fluctuate from broker to broker and instrument to instrument, one thing remains constant: Losing trades will cost the trader more than she/he can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower.

10 Things You Need to Trade Binary Options

Thinking about getting started in the exciting world of binary options? Online trading is making investment possible for low- and moderate-income customers who might never have had a chance to try before. Trading stocks is quite challenging and has high entry barriers. You have to pay a fee for each of your trades, and it can be quite substantial. With binary options trading, there are no fees for your trades. You can get started with just a couple hundred dollars. Do you have everything you need to become a binary options trader? Let’s find out.

1. Investment capital.

The majority of binary options companies will allow you to sign up on their site and start trading with as little as $250 to invest. Some companies may even let you start with $100. The matter of investment capital is a little more complicated than this (not much though!). You also need to look at the minimum investment amount to see how much money you need to put down for an actual trade with a company.

Managing your money is really important if you want to win. You cannot deposit $100 and then invest $25 on each of your trades. In just four trades, a short losing streak, you could blow your bankroll and find yourself out of the game. You will need to choose a broker that allows you to invest an affordable percentage of your account. That in mind, you will want to either choose a broker that offers a low minimum investment amount ($5-10), or you will want to deposit more money than the bare minimum. $500 is a nice starting amount for a small account holder.

2. A computer or mobile device and an Internet connection.

To trade binary options, you will need to be able to get online on a regular basis. You can trade on your personal computer, and with many binary options companies, you can also trade on your mobile device. Many companies nowadays have apps for Android and iPhone. With those apps, you can trade on the go. You will need a stable internet connection wherever you trade, though.

3. A trading method.

If you do not care whether you win or lose, by all means, start trading armed with nothing but your Internet connection, mobile device or PC, and your initial investment amount. But if you do want to win, and win consistently, you absolutely must get a trading method, sometimes called a trading system. A trading method is a simple set of rules which you use to identify trade entries. When your trading method tells you to trade, you have a good shot at winning money. If it does not signal an entry, it helps you to avoid trades you would probably lose.

If you do not have a trading method, you can search online through thousands of free trading methods which have been developed and use effectively by others. You also have the option of building one from scratch, or you can start with a system developed by someone else and make it your own with modifications. A trading method is like a good horse. With it, you can ride out your profits for a long time and continue to grow your bankroll.

4. A trading plan.

Your trading method fits within the larger scheme of your trading plan. A trading plan includes not only a method, but a trading schedule, and notes about your goals and other aspects of business. Without a trading plan, there is no context for what you are doing, and you will have a hard time managing your business. And yes, binary options trading is a business, or can be, if you treat it like one. If you want to go pro, that is a must!

5. An accountability partner.

This is optional, but a very helpful thing to have, especially if you are a person who really struggles with self-discipline. An accountability partner is someone you can talk to about your trading. As the name implies, it is a person you are accountable to. You have to be honest with your accountability partner at all times, and you may even empower that person to stop your trading if you violate your own trading rules or money management rules. A trading partner can be anybody you trust. It might be a coach, a business partner, a friend, even a spouse.

6. A trading journal and spreadsheets.

These are tools you use to keep track of your trades and how they progress. In your spreadsheets, you record wins, losses, and basic information about your trade. This is as simple as opening Excel and setting up some columns and rows for your information. You can use Excel to calculate helpful statistics which you can then use in your analysis.

Your trading journal is simply a document where you write down more detailed information about your trades, and about trading in general. Here you can reflect and develop self-awareness. You can look for patterns in your wins and losses, which will help you become a better trader as time goes by.

7. A broker.

You certainly are not going to get too far without a binary options broker! Here you can view our list of recommended binary brokers. These companies have passed our tests for features, customer service, and reputation. Finding a good broker is not optional! Even if you are an amazing trader and even if you have the best trading system ever devised, you will fail if you do not have a trustworthy broker that gives you the features you need and allows you to make easy withdrawals that are hassle-free.

8. A demo account.

You need to find somewhere you can demo test before you trade live with real money. You may want to think about making this one of your requirements for evaluating binary options brokers, since some brokers like Marketsworld do offer demo accounts to traders. If not, you will need to find a broker where you can test and another where you plan to trade. Demo testing is a critical step, so do not neglect this aspect of binary options trading.

9. A goal.

You need to know why you are trading binary options before you jump in. Are you trading with the goal of having fun? Having fun and making a little money on the side? Or is making money your primary objective? Do you want to be able to unchain yourself from your desk at your 9 to 5 job, or would you just like to supplement your main stream of income with a little extra on the side? What do you want to do with the extra money? Retire? Build a house? Donate to charity? Support loved ones? Create something amazing? Whatever your goal is, having one will keep you focused and motivated when you need it the most.

10. The right attitude.

Perhaps the most important thing you need going into binary options trading is the right attitude! At a minimum, you need to be willing to trade responsibly and not exceed your finances. This is true whether you are trading to win or trading for entertainment. If you want to win, and win often, you also need to add self-discipline, self-awareness, and willpower into the mix.

While this list may be longer than you might have expected if you are a binary options novice, you will notice that most of the items on the list are cost-free. For this reason, trading is a great choice for a business to start on a shoestring. You need capital to finance your account, but a trading method is free, and so is the right attitude.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
    BINOMO

    2nd place in the ranking!

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