What are binary options?
Before starting to trade, let's clarify what binary options are. A binary option is a bet for the movement of the price for a certain asset based on the suggestion of whether the price for a certain asset will fall or rise for a specified amount with the expiration of this bet. The answer in this situation has only two variants: yes or no. The main goal of the trader is to make an accurate forecast for this movement. Then, there can be two variants for the development of events: the loss of money (if the forecast turned out to be incorrect) or payment (if the forecast was successful). That’s why these options are called binary.
Types of binary options
With the development of binary options, new trading formats or variations of existing ones appear. Here are the main types of binary options. You can find them on most trading platforms.
Cash-or-nothing. The trader makes a bet on a decrease or increase in the price for a certain asset. The sum of the price and its change doesn’t matter. Investor needs to make an assumption whether the price will be above or below a certain level. If the trader guesses right, he wins from 70% to 90%. If he fails, he loses everything.
Assets-or-nothing. Unlike the previous case, the payout for the winning is defined by the price of the asset.
One-touch. The option expires when the asset’s amount reaches a certain value.
No touch. This is the opposite situation. The main goal of traders is to avoid the price touching a certain level.
60 Seconds. This quick transaction allows the trader to make money in a short timespans before the trend reversal.
Types of assets
Forex. Forex is the abbreviation of the foreign exchange. Currencies are traded in pairs, their relationship to each other is taken into account. The currency pair looks like two abbreviations. Trading in currency pairs occurs through the interaction of the international Forex market and binary options.
Index. An index is a trading indicator that consists of a set of specific stocks. The price of the index is defined by the average value of all stocks of the companies included in the index. Indices are very convenient, as they are constantly and extensively described in financial news.
Stocks. Stock trading means that you buy an electronic contract for the shares of a certain company, and, moreover, the purchase will be less expensive than the purchase of the share itself. Trading stocks through binary options suits those speculators who don’t want to invest their money in securities for the sake of 5-20% per year. In addition, if the value of shares falls on the market, then their holders will begin to suffer losses. If you use binary options on stocks, then you can make money on the fall of the market rate.
CFD. CFD (Contract for Difference) is a contract concluded for the difference between the prices of the equity at the time of the opening and closure of the agreement. Upon completion of the contract, one party undertakes to transfer the difference between the prices to the other party.
Commodities. The commodity is the natural resource that is supplied and available for trading. The most popular commodities are precious metals.
Futures. Futures is a contract for a future transaction at the price fixed today. The advantage of futures is great sensitivity. The starting capital for this asset doesn’t require too many funds compared with stocks.
Cryptocurrency. Crypto trading is the new direction of online trade. In recent years, due to the popularity of cryptocurrencies, traders paid attention to digital money and started to trade it as the standard currency. The rate of cryptocurrency is related exclusively to demand and is not influenced by large economic players.
Is it possible to make money on binary options?
Yes, you can earn on binary options if you have enough knowledge and practice. Trading is competence and like every competence, it requires training and thought-out actions. Firstly it is better to open a demo account and practice without financial risks. Also, on the demo account trader can understand the principles of work and develop the trading strategy.
Then, the trader builds the trading strategy through trial and error, and through constant education. And only when the trader has enough experience, he may open a professional account. Start with small sums and improve your technique constantly.
What is binary trading?
Binary trading is the act of selling and buying the options for different equities.
For example, the trader guesses that the prices for the American Dollar will be above $10 per share at 20:00 on a certain day or the price for Bitcoin will fall below $38817 at 12:30 on Thursday. He indicates the certain sum of money that he would like to acquire in case of the right guess, for example, $6. Then, the trader waits as the option expires and watches whether it happens at the indicated time. If the forecast was correct the trader receives $6 as an option premium. If he made a mistake, he loses this sum.
Sometimes traders use the trading robots that sell and buy assets. This type of work is called auto-trading, the process where the machine trades on the market based on the calculated algorithm. In the past, many traders used trading robots but currently, there are few. The drawback of auto-trading is the predetermination of the actions. In contrast, the trader can think outside the box and make quick and non-typical decisions.
When to trade?
The time of trading depends on the asset. The trade begins as the stocks open, that’s why the trader should start when a certain session begins. For example, if he trades the GBP or EUR, he should start trading when the European trading session opens. The trading with forex is available only on business days.
If you want to trade 24/7, pay attention to the cryptocurrency. Crypto trading is available on weekends and holidays.
How to trade forex with binary options?
If you want to trade forex but don’t have enough funds to enter the market, you can use the forex assets for binary options trading. Forex assets include numerous currency pairs. Select stable assets such as the American Dollar. Use the economic calendar and pay attention to the financial news. Also, follow the economic situation in the country whose currency you trade.
Platforms for binary options trading
The platform for trading is the software provided by brokers that gives the opportunity to trade the different assets and to manage the trading account. Every platform is provided by a broker. A broker is an intermediary between buyers and sellers. The broker takes a small part of the client's turnover as a commission.
A trustworthy platform provides the customers with good service, numerous assets to trade, and different ways to withdraw the earnings. Often, the brokers give you the opportunity to test yourself on the demo account to build the strategy.
How to choose a trading platform?
The quality of the broker platform is the essential factor for profitable trading. Sometimes brokers use fraud schemes. They suddenly block the profitable accounts in order not to pay out profits. To avoid fraud the trader should attentively check the broker’s platform before he starts to work.
Pay attention to the reviews from other traders. You may check it on the special trading forums and on the social media of the trading community.
Ensure that you understand why the broker’s platform works. The reliable broker clearly explains the work of the platform in different aspects: how to withdraw the funds, how to configure the personal account, how to set up the trading indicators. If something bothers you, contact the broker’s support service.
Check the condition of withdrawal of the money. Ensure that the broker works with the services that are available in your country.
Check the work of the support team. If the support service doesn’t keep in touch with you and doesn't answer your questions, you better avoid this platform.
Remember that the good broker never promises easy money because trading sometimes may be really hard work. It requires skills and patience. If a certain broker promises you a fortune without effort, be sure that it is probably a publicity stunt.
Are binary options trading safe?
Yes, binary options trading is absolutely safe if you know how to do it right. If you trade with a cold head, professional instruments, and a good strategy, the winning is not long in coming. Apply the “Rule of three P”: practice, patience, and persistence.
The process of trading is rather simple. The trader should open the broker’s platform, select the necessary asset, and set the trading indicators according to the trading strategy. Then, he follows the movement of the trading signals and chooses only the strongest ones.
Recommendations for the safe trading
- Select the most stable and profitable assets. If you’re not sure that a certain currency is profitable, don’t work with it.
- Choose a trustworthy broker with positive reviews and customer-friendly support service.
- Compare the information from the signals with data of the trading indicators. If you suppose the upcoming trend reversal or appearance of the certainty signal, you should verify your hypothesis by three indicators. If they confirm it, you can take a certain action.
- Every new strategy should be tested on different assets and in different conditions.
- Apply the strategy that brought the profit with different assets.
- Stay calm and control your emotions. Don’t let the negative feeling distract your attention.
Binary trading can be very safe and profitable if you know how to do it right. But if you trust the chance and consider the binary options trading as the lottery, results may be really negative. Remember that binary trading is a skill like painting or driving a car. Every skill needs learning and a reasonable approach.
How do I manage risk?
If you want to avoid risks, apply risk management and risk diversification. Risk management is a set of rules, the purpose of which is to describe the number of acceptable losses, as well as the actions if they have occurred. Risk diversification is the investing of trading capital in various assets and brokers in order to reduce the total trading risks. Apply them to avoid losses.
Rules of risk management
- Don’t pull all eggs in one basket. Even the most stable asset can suddenly lose profitability. It is much smarter to invest in several assets depending on their value. For example, you may open one option for the currency pair USD/JPY, another for the EUR/GBP, and the third for the USD/CAD. The money should be distributed according to the profitability and the time of the signal expiration. For example, $5 for the first pair, $8 for the second, and $6 for the third.
- Don’t risk all your deposit. Save a rainy day fund. Sometimes the market may be very volatile and unstable, and if you have some amount on your deposit, at least, you’ll have a chance to stay on the market and then compensate the losses.
- You can risk an amount of no more than 5% of the actual deposit for one transaction. If the risks are kept within 5%, then the total loss will be approximately the same.
- It is necessary to open positions on several instruments but within the amount of the guaranteed provision. Losses from one group of assets should be offset by profits from others. Try to divide funds between assets wisely.
- Make the stop-losses. Sometimes traders forget that there is time to stop, and the stop-loss acts like an emergency brake in such situations.
Here are two formulas that will help you to calculate the level of risk during the trading.
Formula for calculating risk in one trade
Risk in one trade = Purchase cost - Stop
Formula for calculating risk for all trading capital
Risk = Expected losses in the trade/Capital * 100
Tools for trading binary options
Trading instruments are equipment that helps to make the right decisions. Remember that there is not a standard solution for using trading instruments. However, if a trader owns different instruments, then he will be able to determine the price behavior of the corresponding assets with higher accuracy. The main trading tools are the economic calendar, charts, and indicators.
Types of market analysis
There are two main types of market analysis: technical and fundamental. The fundamental analysis describes the influence of economic factors on the behavior of trading instruments. This type of work is based on the analysis of fluctuations as a reaction to the financial news. Technical analysis is based on the visual evaluation of the graphic figures of the charts.
Instruments for fundamental analysis
Economic calendar. The economic calendar shows the main economical events (information from the state banks, decisions of the economical departments) that may influence the market situation. Such an instrument allows traders to monitor the market in real-time.
Market trends. Market trends display the upcoming change of certain trends in different timeframes. The trader compares the data of the trends with information from the calendar and creates the forecast.
Instruments for technical analysis
Online-chart. This is a graphical representation of price movement. The main task of the trader is to analyze the graph and to define the trend, reversal, and the point of breakdown. Identifying pivot points, trends requires knowledge to work with live binary options charts.
Technical indicators. A technical indicator is an instrument that makes certain calculations according to specified formulas. Most often, indicators look like graphical constructions (lines, histograms) that are automatically plotted on the chart.
Types of indicators
Trend indicators. These indicators are applied to identify the trend or reversal and to define its power and direction.
Examples of indicators
Bollinger Bands (BB). This indicator reflects the current fluctuations in the price of a stock, commodity, or currency.
Parabolic SAR. This indicator is used to identify trend reversal points and place stop loss.
Oscillators. These indicators help to identify the channel’s borders and the zones of the overbought/oversold.
Examples of indicators
RSI (Relative Strength Index). This indicator determines the power of the trend and the probability of reversal.
Stochastic. This indicator shows the probability of a reversal at certain levels. Apply Stochastic together with the trending indicator.
The main role of the trading indicators is to serve the trader as a tool for technical analysis.
The right usage of analytical instruments is a key thing in the strategy. A strategy is the sequence of actions that lead to profitable trading. A working strategy is a key to profitable trading.
The signal is the informational alert that appears when the price for a certain asset changes. It emerges when certain conditions are met. The signal includes the main details of the asset: currency pair, type of signal, power, expiration. The ability to analyze and select precise signals is important for traders. However, please remember, that signal is the suggestion and not the call to action.
Bot for binary options
Nowadays the developers offer automated bots for binary trading. The pros for using the bot are quite reasonable. The bot acts according to the predetermined algorithm and never gets tired. A bot is faster than humans and it can’t be affected by negative emotions. Sometimes this type of trading can be quite beneficial, especially in small periods.
However, the usage of the bot has a list of cons. The drawback is that you don’t clearly understand who developed this algorithm. The developers often offer several typical options to act and won’t provide the variants for the unusual situations. You can’t check the quality of the trading algorithm and you can’t change it. And remember that robots can’t replace humans. Even when you use the bot, you can’t rely on it completely.
Signals show the indication according to the precalculated algorithm and this calculation does not always comply with the currency market situation. There is always a certain percentage of instability, especially when the market volatility is high. A trading robot just automatically reads the indications on the signal and does certain actions according to the algorithm, but the real situation does not always follow the algorithm. A binary signal is the alert with information and is the trader who decides what to do with this information.
Tips for the beginners
Some people think that binary options are just a way to make money. Trading tools are really simple, but only visually and in terms of the number of actions. However, trading is a complex process that requires certain knowledge. It is necessary to correctly analyze economic news, and learn technical analysis. The novice trader may apply these tips to make trading more convenient.
- Test all your trading ideas on the demo account.
- Stay calm and follow your strategy.
- Trade regularly at the same time.
- Compare the information from the signals with data of the trading indicators.
- Learn more about the trading strategies and different assets.
- Stay positive and analyze your mistakes.
Are binary options illegal?
Many novice traders bother, are binary options illegal? It all depends on the country. In some states, the government considers binary trading as gambling and makes severe restrictions on the work of binary services. Options trading is prohibited in Germany, Sweden, France, Finland, Czech Republic.
Options are legal in Thailand, Chile, Argentina, South Korea, Colombia, Brazil.
There are also the countries where options are not prohibited but are controlled by a certain government body or department like in Indonesia. That’s why you should research the legislation concerning binary trading. Choose only the legal brokers to avoid risking your money.
How to trade if binary options are prohibited in my country?
If binary options are restricted in your country, choose another method, such as cryptocurrency. In general, you should proceed from what is allowed in your country and which broker is certified. The broker's platform itself can offer various methods of legal trading. Pay attention to the international trading platforms that work in different countries. If you don’t, whether a certain platform works in your country, contact the broker’s technical support.