A Beginner’s Guide To Binary Options Trading
Trading in binary options is an increasingly popular form of investment. At its heart, it involves trying to predict how the prices of certain assets (including stocks, indices, Forex currencies, and commodities) will change in the future. The name for binary trading comes from the simple yes/no outcome of the predictions involved.
Within a fixed amount of time, an asset’s value is only going to go up or down. The job of the binary trader is to predict which way the value is going to move. Every binary trade is a prediction on whether an individual asset will be worth more or less when the time frame in question comes to an end.
Since binary trading is a form of investment, traders need to back up their predictions with a financial commitment. Successful predictions earn a trader his or her money back along with a slice of profit in the form of a commission.
This page will teach you the basics of binary options trading.
As noted above, every trade on a binary option boils down to forecasting the way a given asset’s value will move in the future — up or down. Besides lending a name to this form of trading, this “yes or no” system also means that the long-term success ratio for a trader operating without any sort of strategy in place will come out close to the break even point of 50 percent. (Functionally, the random trader’s success rate will be somewhat lower due to payout rates.
Trading in binary options occurs through the services of binary options brokers. Every trader who wants to enter the market will need to register an account with a broker. The start of the process is depositing money into the brokerage account. It’s important to note that this is not a payment being made to the broker. Account funds remain the property of the trader until such time as he or she elects to invest them in specific trades.
Once a trader has funds available to work with, the next step is to pick out the assets to trade. As noted above, the most common trading assets on the binary options market include stocks, commodities, Forex currency pairs, and financial indices. Examples include Apple, Google, and Microsoft (stocks); gold, oil, and silver (commodities); USD/GBP or USD/EUR (Forex pairs); and DOW Jones or NASDAQ (indices).
Once a particular asset is chosen, the trader’s next job is to predict what is going to happen to the asset’s value over a given length of time. How the trading contract plays out depends on the real value of the asset once the length of time in question has passed.
In cases where the trader’s prediction proves to be accurate, he or she gets the full value of money invested in the trade back as well as a commission fee which includes a profit. When the trader’s prediction turns out to be incorrect, his or her investment is forfeit. While many traders invest large sums of money in binary options trading, this is absolutely not required. With the majority of brokers, trades can be executed for investments as low as $5. This makes binary options trading a decent opportunity for the first-time or casual investor.
Profits on a binary options trade are calculated based on a promised payout percentage which is dictated by the nature of the trade. This percentage is applied to the trader’s initial investment to determine the total sum of the commission fee earned on a successful trade. This means that traders who deal in binary options know in advance the potential profit involved in any given trade.
Here is a basic step-by-step example of a simple binary options trade:
For this example, assume the current date is September 12th.
- Stock in Apple is currently trading at $500.
- September 14th (two days from now) is the planned release date for the latest iPhone.
- Based on your understanding of the market and how you think it will react to this event, you decide whether Apple stock is going to be trading for more or less than $500 following the release of the new phone.
- You set the date and time of your binary options trade for the morning of September 15th at 8 AM — exactly one day after the new iPhone comes on the market.
- You decide whether Apple stock will be trading at more or less than $500 at that time.
- Your binary broker offers you a payout percentage of 90 percent on the terms of this trade.
- You make an investment of $100 based on your decision regarding the future price of Apple stock.
- When September 15th comes around, you broker checks the price of stock in Apple.
- If it matches your prediction — whether you predicted the stock would rise or fall — your broker will pay you $190. This represents your original $100 investment plus $90 in profit. If your prediction was incorrect, your $100 is gone.
This is the fundamental nature of the binary trading process.
In this example, your instinct was probably to predict that the price of Apple would rise, wasn’t it? This would be a smart trade to make, as product launches virtually always lead to higher stock prices, especially in the very short time frame described above. (Obviously, this strategy applies to companies in all sorts of different industries.)
Who Can Trade Binary Options?
Binary trading is different from most other forms of investment (e.g. Forex trading or stock investment) because it doesn’t actually require specialized financial knowledge. With that being said, you should bear in mind that well-informed and financially knowledgeable binary traders tend to experience greater success.
With most assets, it becomes easy to predict future movements in value by conducting sufficient research. Constant vigilance is required, though, so that you are not taken unawares by sudden financial developments. A degree in economics isn’t required to earn money in binary trading; diligence and attention to detail are.