How to trade binary OPTIONS
Binary options are types of trading contracts which allow traders to profit on the price difference of an underlying asset without the need to actually purchase that asset. They are also called digital options, as trading takes place online on binary brokers trading platforms, or fixed return options. Payout and profit percentage of a binary option contract is known in advance, which makes binary options the most straightforward and easy to master financial instruments.
In order to make profit, or close a trade “in the money”, a trader has to make a right prognosis and determine whether or not the underlying asset price will be higher or lower comparing to the option strike price within a specific period of time, called expiry time or expiration. The strike price is the price of the underlying asset at the moment when a trader is opening a position. It a trader is correct in his prediction he is generating a profit.
In order to understand how to trade binary options, you need to make yourself familiar with the main notions of these financial instruments.
1. Underlying Assets
Leading binary options platforms offer 100 plus underlying assets to their clients to trade with. The assets index includes currency pairs, stocks, indices and commodities. Many novice traders who are just starting to learn how to trade binary options choose currency pairs due to their volatility and easily predictable patterns.
2. Expiry time
Expiry time is a term of binary options contract. Options are offered with expiry rates ranging from 30 seconds to several hours, days, weeks or even months. Most binary options platforms offer fixed time expiries, meaning that options expire at the exact time specified in the chart and chosen by the trader. In addition to the fixed time expiries some brokers offer so called turbo options which last from 15 seconds to several minutes.
3. Prediction of price movement
After choosing an asset and expiry time a trader needs to make a prediction of price movement. If a trader thinks that an underlying asset will rise above the strike price, he is choosing a call option. If a trader thinks that an underlying asset will fall below the strike price, he is choosing a put option. A trader can almost double his investment if his prediction is correct, as depending on the platform, binary option type and asset, profit can range from 70 to 90% of the invested amount.
Learn how to trade binary options in 5 steps
Binary options trading has become very popular in the last several years because with a little research and self-discipline anyone can learn how to trade binary options within a short period of time. There are several types of binary options to choose
from, such as classic options (Call/Put), Pairs, Turbo options (short-term), Ladder, Forex and others. If you are trading Call and Put binary options, in order to place a trade the following steps need to be taken:
- You need to choose an asset you wish to invest in. It can be a currency pair (JPY/USD, EUR/USD etc.), stock (Amazon, Sony, etc.), commodity (gold, corn, etc.) or indice (DOW, NASDAQ, etc.)
- You need to choose an expiry time (end of the hour, certain time on the following day, 60-second, etc)
- You need to make an investment. Investment amount can be as small as $1, but most brokers set minimum investment amount between $5 and $25
- You need to decide if this asset price is going to go UP or DOWN.
- Collect the profit if your prediction is correct. Trading profit gets credited to your trading account balance immediately after expiration of the option and can be withdrawn any time by placing a withdrawal request with your broker.
Here’s an example of how to trade binary options.
From the morning news you found out about German Unemployment rate release from which you made a conclusion that because the figures look positive, as a consequence, the prospect of Euro strengthening against other currencies is rather plausible.
At this point you may open your trading platform or log into your mobile trading application and choose one or several currency pairs which include Euro, for example EUR/USD. Once you select a desired expiry time you will be able to see the profit you will generate if your prognosis turns out to be correct, for example 84%, and potential payout. If you choose to invest let’s say 100 Euro your potential payout will be 184 Euro in the event your option closes “In the money”. If you expect Euro to rise against USD you choose a CALL option and wait till your option expires.
If your prediction is correct and Euro strengthens in value by the expiry time, your trade will bring you a profit, which will be instantaneously reflected on your trading account balance.
That was an example of making a trading prognosis on a news release, a method widely applied by those traders who prefer to rely on the results of fundamental analysis. Novice traders who want to learn how to trade binary options successfully and generate steady flow of profit should pay special attention to the economic news which can cause various market reactions. At the same time, it is very important to make yourself familiar with the technical analysis (chart reading) which can be very helpful when it comes to identifying best market entry points and taking advantage of multiple trading opportunities.