Binary investments basics
How does Binary investments work. Options trading is a bet on where the price will be by the time the option expires. You set the bet amount, choose the expiration date and make a prediction - the price will be higher or lower. The forecast is correct - you make a profit.
Binary options trading can be risky. As opposed to other types of options contracts, binary options are all-or-nothing contracts. Here, we talk about how to get started with trading binary options and ways to avoid scams so that you become a successful binary investor.
Start trading binary options now with Pocket Option!What Are Binary Options?
In a binary option, the payout depends totally on whether or not an asset will rise or fall in price above or below a specified amount. Binaries are typically referred to as yes/no options. Since binary options exercise automatically, there is no further decision for the holder to make regarding the exercise of the binary option once it has been acquired.
Binary options do not give the holder the right to buy or sell the specified asset, unlike other types of options. Binary options expire either with a predetermined amount of cash or without any payment.
How Do Binary Options Work?
There is an expiry date and/or time associated with binary options. The underlying asset's price must be on the right side of the strike price at expiry (based on the trade taken) for the trader to profit.
The trader's account is automatically credited or debited when a binary option expires, meaning the trader gains or loses. In other words, a binary option buyer can either win or lose their entire investment; there is no in-between. On the other hand, the seller will either retain the premium or be required to pay the full amount.
A binary option is divided into two major categories: a "Call" option and a "Put" option.
Digital Put Options
An investor who anticipates a decline in the underlying asset (bearish) in the near term buys a binary put option. Binary put options such as this one are commonly referred to as "High-Low" options.
When a binary put option is purchased, the investor is betting that the underlying asset's price will fall when it expires, usually within a short period of time.
In each binary put option purchase, the trader decides how much to invest. In each put option, different brokerages have different minimums and maximums.
Let’s consider an example. On EUR/USD, which is currently trading at $1.30, a binary options broker is offering 85% payout.
A binary option trader tracks EUR/USD's price movement over a 60-minute period and predicts a drop in price within five minutes, so they invest $100 in a binary call option expiring in five minutes on EUR/USD.
Five minutes later, EUR/USD drops to $1.29, and the trader earns 85% of their initial investment, or $85.
The trader will, however, lose their $100 investment if the EUR/USD price rises to $1.31 instead.
The profit and loss will be fixed at $85 and $100 regardless of whether EUR/USD flash crashes below $1.00 or skyrockets up to $1.40.
Digital Call Options
An investor who is confident that the underlying asset will rise (bullish) in the very near future buys a binary call option. A binary call option with a high-low price is called a "High-Low" option.
Traders purchase binary call options by betting that the underlying asset's price will increase beyond the current market price when the option expires, usually within a few minutes or a few hours.
With every purchase of a binary call option, the trader is entirely free to invest whatever amount they wish. Depending on the brokerage, each call option has a minimum and maximum investment limit.
Let’s look at an example of a binary call option.
Observing EUR/USD's price movement over a 60-minute period, a binary option trader decides that it will rise within the next five minutes. They invest $100 in a binary call option on EUR/USD expiring in 5 minutes.
Five minutes later, if EUR/USD rises to $1.31, for example, the trader makes 85% on their initial investment of $85.
But if the EUR/USD price drops to $1.29, the trader loses their $100 investment.
The profit and loss will remain $85 and $100 regardless of whether the EUR/USD price spiked up to $1.40 or flash dropped to $1.00.
Binary Options Scam - Broker's BlacklistWhat Can I Invest in With Binary Options?
There is a wide range of assets that you can trade with different brokers. There are many brokers that offer options on popular assets such as EUR/USD, USD/JPY, GBP/USD, as well as key stock indices such as FTSE, S&P 500 or Dow Jones Industrial Average. Also offered are commodities such as gold, silver, and oil.
Binary brokers also offer individual stocks and equities for trading. You won't have access to every stock, but you'll be able to choose from 25 to 100 popular stocks, such as Google and Apple. These lists will continue to grow due to demand.
All trading platforms clearly display their asset lists, and most brokers make their full asset lists available on their websites.
Traders are also increasing their use of binary trades to trade cryptocurrency. Cryptos are popular binary assets due to their volatile nature. While Bitcoin and Ethereum remain the most traded cryptocurrencies, some brokers list 50 or more altcoins.
Classic Options vs. Binary Options
Investors can make money trading binary and classic options by predicting price movements in Forex, stocks, commodities, indices, Forex pairs, and cryptocurrencies. There are, however, some differences between them. These differences include:
The difference in style of trading: Binary options are completely dependent on yes or no propositions. Trading binary options will either result in a loss or a profit. During the course of a classic option trading session, the propositions are opened and closed several times. There are several factors that affect the investor's profits and losses in this type of trading, including the number of shares, entry and exit prices, contracts purchased, and the number of trades made.
Period of expiration A binary option has a long expiration period, while a classic option can have a short or long expiration period.
Limitations of profits: In comparison with options trading, which gives a wide range of profits, binary options have a limited amount of profitability. If the trader wins a binary option, he or she will get a percentage of the asset's rate.
Percentage of losses: Binary options come with a defined risk of both winnings and losses. When a trade results in a negative outcome, customers are guaranteed a loss of 85% of their initial investment. Classic options also provide the customer with the certainty of maximum losses, but they will lose 100% of their initial investment.
How to Start Investing in Binary Options
Learn how binary trading works. In order to trade binary options, you need to have a good understanding of how the markets work. You also need to be able to identify trends and have a good grasp of technical analysis. However, don't worry if you don't have any previous experience in trading, as there are plenty of resources available online that can help you get started.
Weigh your risks. When trading Bitcoin with binary options, you can lose all of your investment if the price of Bitcoin goes in the opposite direction of your trade. It’s important to only invest what you can afford to lose. By taking the time to understand the risks involved and being clear about your investment goals, you can trade Bitcoin with binary options more effectively.
Research different Binary trading strategies. There are many different ways to trade binaries, and each has its own pros and cons. You need to find a strategy that fits your own trading style and risk tolerance. Once you have a strategy, stick to it and don't let emotions get in the way of your decisions. Also, don't get too caught up in the short-term fluctuations of the market.
Try your hand with a demo. To practice your trading strategy, you can open a demo account where you get virtual money. So, you can trade with no risk at all. Then, when you feel confident enough in your strategy, you can create a live account with a broker.
Choose a broker. When it comes to trading binary options, it is important to choose a broker that is reliable and offers a good platform. There are many brokers out there that offer different platforms and it can be difficult to choose one. Choose a broker that offers a user-friendly platform, competitive fees, and great customer service. You should also look for a broker that’s trustworthy and regulated by a reputable body.
Binary Options Strategies
As binary options trading becomes more popular, more and more people are looking into potential trading strategies for success. There are many different types of strategies out there, many of which are quite useful. However, there is no binary options trading strategy that will guarantee that you will be successful. So much of this type of trading relies on risk and taking chances, so there really isn’t a strategy that can guarantee success. Still, using a strategy can make trading a bit easier. Specifically, the following strategies are used by many successful traders in binary options.
Follow the Trends
No matter what market you’re involved in or what specific asset you’re trying to trade, one of the best ways to make money with binary options is to follow a trend. It’s probably the best strategy a beginner can use when getting into binary options. Asset prices usually move in conjunction with trends. The price of an asset will go up or down along with relevant assets because the market is always speculating in real time.
Beginner traders need to remember that a trend almost never follows a straight line. Traders will usually see an asset’s price navigate in a sort of zig-zag path, which usually follows a general direction. Identifying the pattern will make it possible for traders to estimate if an option’s price will be higher or lower when it expires. When it comes to trading with trends, one can trade with overall trends or trade on swings.
Follow the News
Following the news is a very basic but effective strategy that can result in good profits. It’s a lot easier to do in lieu of technical analysis, all while forcing you to read the news and stay in the loop throughout the day. Start with online news, but also take the time to navigate to the newspaper, listen to news radio, and watch news channels on television. The goal is to get as much information from as many sources as possible, so you can understand your asset right down to its core in order to predict whether it will rise or fall in price.
The Straddle Strategy
This strategy must be used with the above news strategy. Straddle trades have to be made shortly before an important announcement takes place. The value of an asset could jump for a short period of time after a big announcement, but the trader must purchase the option and estimating that the price will drop again. When the price begins to fall, the trader can call another option predicting that the price will go back up. The Straddle Strategy leverages swings, so you will be able to make a profit regardless of if the price rises or falls. This strategy is a very consistent way to make money, even when the market is very volatile.
Is Binary Investing and Trading Legit?
It is legal to trade binary options in many countries. Most binary options brokers are legitimate companies. Working with a legitimate broker ensures that your money won't be stolen or defrauded.
There is a problem with most brokers in that they promise unrealistic expectations. These results are not typical for the average user.
Best Binary Options Brokers
FAQ
What are binary options?
Typically, a binary option refers to whether or not the price of an asset will rise above or fall below a certain amount. It is a type of options contract, whose payout is completely dependent on the outcome of a yes/no proposition.
Are binary options legal?
It is legal and possible to trade binary options in the U.S., but they must be traded on an exchange that is regulated in the country. In some countries, brokers are banned from offering binary options. However, traders can trade with offshore brokers.
Are binary options safe?
It is generally considered safe to invest in binary options. If you want to ensure your money is being handled by a legitimate provider, as with all money instruments, it pays to do some research.
Are binary options risky?
Binary options trading may seem simple at first. However, even professionals struggle to predict short-term movements of an underlying asset. These investments carry a high level of risk and are highly speculative. Trading binary options involves gambling on the price movement of an asset.
Glossary for novice traders
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Broker
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
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Trading
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
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Options trading
Options trading is a financial derivative strategy that involves the buying and selling of options contracts, which give traders the right (but not the obligation) to buy or sell an underlying asset at a specified price, known as the strike price, before or on a predetermined expiration date. There are two main types of options: call options, which allow the holder to buy the underlying asset, and put options, which allow the holder to sell the underlying asset.
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Investor
An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property.
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Bitcoin
Bitcoin is a decentralized digital cryptocurrency that was created in 2009 by an anonymous individual or group using the pseudonym Satoshi Nakamoto. It operates on a technology called blockchain, which is a distributed ledger that records all transactions across a network of computers.
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Team that worked on the article
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).