Heard about binary options trading but don't know what it is about? This article will give you a good understanding of what are binary options and the potential profits it can bring you.
This type of trading is great for any new, inexperienced trader. The concept is simple – just correctly predict whether an asset will increase or decrease in value and receive a payout. Although understanding what is binary options trading is quite simple, there are many variations of this type of trading for more experienced traders to explore.
So what are binary options? The term binary refers to something that has two parts. In this type of trading, also called up/down trading, you determine whether an asset will increase or decrease in value. There are only two options and there are only two possible results to the trade – win or lose. If you correctly predict which way the asset will move during a set timeframe, you will receive the payout.
The asset could be any commodity, index, currency or stock. In binary options trading, you do not actually purchase the underlying asset, you simply trade based upon its movement in the market. Then, you decide which asset to invest in based on an understanding of its recent activity and the current market conditions. Examples of assets could include a commodity like gold or an index like the NASDAQ.
Binary Options Explained
Examples of binary options trading
So how do binary options trading work? If you correctly predict how an asset will move during a set timeframe, this is considered being “in the money.” If the price of the asset does not move as predicted, you will be “out of the money.” This type of trading is based on a yes or no proposition and will only result in being in or out of the money.
When you decide to place a binary options trade, you will first determine which asset you would like to invest in, and then determine the timeframe. This form of trading is fast-paced with trades expiring in as little as 60 seconds. You determine the timeframe, which could be within a few minutes or a few hours. Although there are some longer term options, this type of trading is generally quick and short term.
If you determine that the price of gold will hit at least $1,000 at 4:00 pm, you will place this trade with a broker. The price that you believe the asset will hit is called the strike price. The amount of the trade could be anywhere between $10 and $10,000. The minimum and maximum trade parameters are typically set by the broker. If the price of gold meets or exceeds the strike price of $1,000 at 4:00 pm you will be in the money and receive a predetermined payout. Otherwise, if gold is below the strike price at the expiration time, you lose your investment.
Consider the brokers payout rate
The payout is predetermined by the broker, and you will be aware of the amount of the payout before placing the trade. One consideration when selecting the broker is the payout rate. You should seek brokers with high payout rates so you can earn more. From the example above, let’s assume that you invest $200 and the broker’s payout rate is 90%. If you are in the money, your payout will be $380.
For the newest of traders, many brokers and binary trading platforms will offer the opportunity to practice trading in the binary options market. As a new client, you will be able to practice with play money to get a better understanding of what is binary trading and the way that it actually works. If you are new to the game of binary trading, you should take full advantage of the opportunity to learn in the demo before you start live trading.
Therefore, when searching for a reputable broker, you need to decide based on reviews and as well a clients' complaints. Not all brokers offer the same types of trades and the rules of trading will be different for each broker. Many offer a new client bonus which will help you to increase your trading budget.
Types of Binary Trading Options
The most basic and easiest binary option to understand is the up/down option. This option is also referred to as the call/put option. If you believe an asset will increase in price, this is a “call” option. A “put” option in one where the asset is predicted to decrease in price over a set period of time.
The binary options market is expanding as these options grow in popularity. Several other types of binary options have emerged in the market and there will likely be more to come. The most common include the 60-second and one touch option.
60 second option
The 60-second option is quick and fast-paced trading that expires in 60 seconds. You have the opportunity to make high profits quickly, but also risk losing a lot of money in a short period of time. This option is best for more experienced traders with good money management skills.
One touch option
The one touch option allows you to select a strike price that you believe the asset will hit at any time during a specific time period. In the gold example, you may predict that between the 3:00 pm and 4:00 pm, gold will hit $1,000. If it does, you will receive the payout.
With range options, you predict if the strike price will be within a certain range. The broker sets the range and you predict whether or not the asset will be within or outside the range at the expiry. This type of option is also called a boundary or tunnel option.
Ladder options offer the opportunity to set milestones throughout the option and receive partial payment if those milestones are hit throughout the timeframe. This type of option allows for some wins and some losses throughout the trade.
The pair option is more a complex binary option. The pair option bases the trade prediction on the relative performance of two assets. The trade is based on which asset performs better. Even if they both decrease in value, the payout would still be made based on which performed better before the expiry.
Binary Options Platforms
An important part of selecting a broker is a review of the platform used for trading. The platform can be considered the backbone of the broker since most trade selections and decisions are made from the information contained in the platform. If the platform is poorly designed , it will increase the risks of you making a poor decision.
Deciding on the best binary options platform for you will require research on the broker along with the platform. Most platforms offer an option to open an online demo account. With this account, you will be able to see the layout of the platform, determine if it is user-friendly, and make sure that it has all of the tools and options you need.
Things to consider when choosing a platform
There are a few key things to consider when selecting a platform. The look and feel of the site are important to gauge your comfort level with the platform. Is it easy to navigate? Can you easily find important information? Are there charts and graphs? You should be able to determine if the site is user-friendly and easy to use within a few minutes of exploring the platform.
In choosing the binary options trading system, you should look for tools that will help you to make trading decisions. The tools should be easily accessible and easy to understand. For example, a list of recent prices of an asset in a table format is much more difficult to interpret than a graphical representation of the movement of the asset over a period of time. Look for charts and graphs that you can quickly and easily access to make your trade decisions.
Other items to consider include online technical support and mobile capabilities. Some platforms allow for mobile trading as a convenient way to access the site from your smartphone or tablet. Trades can be made directly for your smartphone. The site’s technical and customer service support will be important if you experience any issues on the site. Be sure to find the contact information for technical or customer support.
You should also determine whether the platform is web based or non-web based. A non-web-based site will require you to download software in order to use the platform. If you are interested in using mobile technology, make sure that the platform is web based and have those services available.
Binary Options Trade Signals
Although trading binary options is simple in concept, the level of market and trend analysis is left up to the trader. As with any financial decision, you determine how much analysis, research, time and energy you want to put into making the decision. It’s no different with trading binary options even though the up/down option is a simple yes or no proposition.
There are many services that offer extensive market analysis and trend tracking to assist you with making your trade decisions. These services provide binary options trade signals delivered directly to you in the form of alerts. You can receive these alerts through text message for immediate turnaround on fast trending options.
Using these types of services allow you to leverage extensive research and analysis from experts constantly monitoring market trends. If you are a casual trader, you may not necessarily be constantly monitoring the market and completing the in-depth analysis on a regular basis.
If you choose to use these signal services, be sure to select a reputable service. There are many trade signal services that cannot meet their advertised success rate and turn out to be scams. Therefore, before you choose a service, make sure you check for their success rate, as well as customer opinions and complaints. You can check out our list of best binary options signals to get an idea of which provider to choose.
Are Binary Options Legal?
Yes, binary options trading is legal in the U.S. This type of trading became legal in the United States in 2008, so the laws are not yet well established. However, brokers and licensure are heavily regulated and somewhat restrictive when it comes to binary options.
Traders in the United States can seek and make trades with any brokers, including offshore brokers. By contrast, only licensed brokers within the United States are permitted to solicit U.S. traders. Unlicensed and foreign brokers cannot legally solicit U.S. traders. Although U.S. traders can make trades with offshore brokers, many do not accept U.S. traders. If you are searching for an offshore broker, you will have to first determine if they accept traders from the United States.
Brokers in the United States are licensed through the U.S. Commodities Futures Trading Commission (CFTC) and are regulated by the U.S. Securities and Exchange Commission. With this license, brokers can legally solicit trades within the United States. Currently, there is only one binary options broker licensed in the United States. NADEX is the only broker licensed and regulated by the CFTC.
Most important of all, you should be wary of any broker that claims to be licensed in the U.S. since NADEX is the only one. Many brokers still offer to trade with binary options, but they cannot solicit in the United States and are unregulated. This means that the trading may or may not be monitored by a 3rd party. There are reputable, trustworthy, unlicensed brokers out there and, as with any financial decision, you should do your homework when selecting a broker.
The Bottom Line
Binary options trading is an easy to understand trading option that offers quick returns in a fast-paced environment. The concept of the up/down trading is simple for even the most inexperienced traders. As the industry expands, so does the number and types of binary options trades available, each with an advancing level of complexity.
Getting started in binary trading is as easy as selecting a broker and a platform on which to trade. This will require research and analysis on the platform options, as well as a thorough understanding of the broker’s options and rules. While most brokers in the United States are not licensed, you can find reputable, trustworthy binary trade brokers through referrals and reviews.
There's considerable risk in binary trading, and if you're not comfortable with this, there's always the option to trade in stocks — your exposure to risk is lower, and the aids and materials are numerous. For example, you can subscribe to trade alerts from experts like hedge fund founding father John Thomas, which tell you what stocks to buy and when, giving you a greater chance to make a healthy profit. Learn more here.