Many industry insiders have touted binary options as the most rewarding way to trade online. What is all the full about? What do people mean when they talk about trading binary options, and how do you go about it?
Binary options trading is best understood as direction based trading. Instead of focusing on exact price points, as is the case in forex or stock trading, you must simply determine whether the price of an asset will rise above or fall below the entry price of the trade in a given time. If you predict the direction correctly, you will receive a fixed percentage return of the amount you chose to invest.
Why trade binary options?
Binary trading has flourished in the aftermath of the 2008 financial crisis. It has gained in popularity both among investors looking for a simple, risk-controlled, and profitable way to trade, and also among first-time traders hoping to better understand the markets and grow their finances. Binary options are available 24/7 on a wide range of stocks, commodities, currencies and indices.
The ‘up and down’ nature of a binary option makes it very easy to understand the mechanics of trading. There are none of the complications associated with traditional investments from leverage to spreads and exit points. Payouts are always clearly set in advance, typically around 70% to 90% for every winning trade. This means that if you follow the market news and movements, you could easily enjoy high returns in a very short time frame.
How do you trade a binary option?
Once you have opened an account and deposited funds with a reputable brokerage firm, you will have free access to their trading platform. Then follow these 4 steps to placing a trade:
- Select the asset you wish to trade.
- Select the expiry time for the trade.
- Enter the amount you wish to invest in the trade.
- Click ‘call’ if you believe the asset value will go up, or ‘put’ if you believe the asset value will go down.
Follow this example. Say that silver is available for trading, with an 85% return shown on the platform. You are confident that in the next hour, the value of the commodity will drop below its market price of 21.8654. You decide to invest $100 on a downwards ‘put’ trade.
In one hour at the expiry time, if you are correct in your prediction and silver is valued at 21.8653 or less, you will win back the original investment of $100 plus $85 profit. If silver is trading at 21.8655 or more, you will lose the original $100. If the price at the expiry time is exactly 21.8654, you will receive back the $100 investment with no loss or gain.
Deciding what asset to trade
Every day that the international trading markets are open, there are several events that move these markets, from home sales data in the United States to the release of employment figures in Germany to a political election Japan. Professional traders and analysts follow such events using a financial calendar and analyze the chart patterns and asset movements when determining the trades most likely to end in-the-money.
For beginners, it is worthwhile opening your trading account with a brokerage who do the hard analysis work for you. Banc De Binary for example offer daily market updates which highlight the key events each day and advise on which assets you should be trading. If you don’t already, it is advisable to start watching the news or make a news site your internet homepage to gain a broad view of world events and to better understand the daily trading updates you receive. Within no time at all, you will learn how to convert what you see on the news into a successful binary option trade.