How to Start Your Way of Binary Options Trader

Hello, dear friends!

Binary option is a type of options where the trader opens or does not open a position at the price of a financial asset and the profit is everything or nothing. Thanks to this feature binary options are quite clear for trading in comparison with traditional options.

Binary options are estimated contracts, like the options in the European style in the sense that they can be exercised on the expiry date only. If upon the expiration they become the options ”in-the-money”, the buyer or seller of the options gets a specified sum in dollars. If they become the options “out-of-the-money”, the buyer or seller gets nothing. This is their simplicity in the evaluation of risk and return. Unlike the traditional options, full payment of the profit on binary options is ensured no matter how high (or low) is the price in comparison with the option exercise price.

Despite the term “everything or nothing” depending on the actual trading platform, “nothing” can actually mean “something”. This means that upon the expiration the owner of the option can actually get a certain sum of payment even if the option expired “of-the-money”.

Very often, you may encounter a different name for binary options. On the foreign exchange market, binary options are known under the name of digital options.

Steps

 

1. Examine two types of options - Call option and Put option

How to make money with binary options trading? Simple -a trader working with binary options has to predict the expected direction of the price movement of the underlying asset. On most platforms, these two options are referred to as Put and Call. Put option is a prediction of the fall of the asset price, while call option is a prediction of growth of its price. Unlike traditional options, you do not need to know the quantity of motion. Instead, you must only correctly predict whether the price of the selected asset is above or below the execution price. If the investor has his own opinion about the quality of the underlying asset and wants to trade, he may trade binary options.

2. Make a decision regarding your trade

Evaluate the current market conditions surrounding your chosen asset and determine whether the price is likely to rise or fall. If, at expiration, your intuition is correct, you will receive a valid price of your contract. Return on each winning trade is carried out by a decision of the broker and this amount is always pre-known.

3. Learn how to determine the price of a contract

The price of the binary options contract is roughly equal to how the market perceives the probability of the occurrence of an event. For example, if the valid price of the contract is $100 and the last trade position of contract was $96 , then it is an indicator that approximately 96% of the market believes that the event will occur, and the contract will be, in the end, “in-the-money”.

4. Learn about the benefits of binary options trading compared to traditional options trading

• Binary options are generally simpler for trading because it is sufficient only to predict the direction of price movement of the underlying asset, while for trading on traditional options you must predict the magnitude of movement, in addition, to forecast the direction of price movement. The assets are never actually bought or sold, therefore, the sale of an asset and placing of stop losses are not part of the process.

• Binary options always have risk/profit ratio, which can be controlled, meaning the risk and profit is always known in advance at the time of purchase of the contract. Traditional options have no defined boundaries of risk and profit and, therefore, the profits and losses can be unlimited.

• What kind of binary trading strategy you can use? Almost all trading strategies and hedging strategies that can be applied for binary options. To improve the accuracy of forecasting price movement, it is possible to use both fundamental and technical analysis.

• Unlike the traditional option, the amount of payout is not proportional to the amount by which the binary option expires “in the money”. If the binary option expires “in the money” even by one tick, the winner receives the whole fixed amount of profit.

• Binary options offer short term contracts. Contracts for binary options can be completed a few times throughout the trading day on some markets while they can last up to a year on other markets. Some brokers offer contracts lasting thirty seconds only. This provides the trader with several investment opportunities and flexibility as the markets change over time.

5. Check out all of the transaction costs for binary options

Brokers working in binary options, do not charge any commission for opening positions, and also do not charge any additional fees. What percentage of time do you consider as the most appropriate to profit from binary options? How different are the terms (for example, “strike price”) for one of the parties of the trade you are considering, and for the other party (reversal deal)? If they are very different from each other, you could successfully predict that the underlying asset’s movement will be very different from the prediction of seller of the option – it is usually a bit between the conditions offered by various parties of the trade – which is unlikely to happen. In very rare cases, the market will be able to exceed this prediction consistently; therefore, high transaction costs can neutralize profits easily.

 

Tips

• You should always analyze the market before the opening of each trade. In the process of deciding whether the price of an asset will rise or fall within a certain period of time, you need to consider many factors. The risk of losing money increases substantially without analysis.

• You must know how to interpret the price of binary options. The price of binary options trading is an indicator of the chances if the contract is “in the money” or “out of the money”.

• Before you make your choice, make a thorough selection of several brokers. Every broker is going to provide his own trading platform, the terms of the contract, the assets, the rate of return, and training materials. Each of these elements may generally affect the potential profit.

• Clearly introduce the relationship between risk and profit in binary options because risk and profit go hand in hand here. The rarer the probability is that the binary option expires “in the money”, the greater the profit associated with it is. Smart investor, before he opens a position on a contract, understands and evaluates each contract according to these two components.

Let us consider an example. An investor who works in the foreign exchange market is anticipating that the USD becomes stronger against the JPY and he wants to hedge his risk by trying to protect his investments in Japanese yen from falling in price. He can do this by buying 10 000 contracts on binary options on Nadex who say that tomorrow at 4:00 PM European time USDJPY currency pair will be trading above 119,50. If his analysis is correct, and USD really will become stronger against the yen and rise above 119,50, 10 000 contracts in binary options will be closed “in the money” and he will get the full payout of $1 million. If the investor paid $ 75 for the contract, he will earn 25 $ on each contract, i.e. his total profit will be $250 000, and the rate of return on its investment will amount to 33%. However, if the yen by this time will cost below 119,50, 10 000 contracts in binary options will be closed “out of the money”. In this case, the trader will lose the initial investment for binary options, but this loss will be compensated by a profit from the value of his Japanese investment.

• You must know when you should exit the position. Intuitive trader acts quickly when he feels that his binary options contract will be closed «out of the money” upon expiry. Example: you have a contract on silver for the price of 75,00 $, and you feel that it expires “out -of-the- money”. Instead hold it until expiration, you should sell it at the price of 30,00$ – neutralizing of your open positions will help you to manage your losses (i.e. your loss will be $45 instead $75 as soon as you are convinced that your option expires “out of the money”).

• You should possess information about your underlying asset. The financial value of binary options is derived from the underlying asset. Before investing in binary options, make sure you have complete information about your underlying asset and related financial markets, in particular the market where this asset is traded.

 

Warnings

1. When trading binary options try to avoid “bonuses” since in this case the broker can lock your money till you get a profit of certain lot on the amount of the deposit + bonus.

2. Remember that there is financial risk in this type of trading. There are no guarantees that even in this type of trading you will earn any specific amount of money.

Take care.