Before you learn how to trade binary options, first you need to know a little bit of history.
In the financial world, an option refers to the purchase of an underlying asset or financial instrument at a certain point in the future at a pre-determined price.
This type of trading has been around for centuries, but it was not until 1973 (and the formation of the Chicago Board Option Exchange) that options contracts were standardized and sold as “over the counter” investment vehicles.
Learn how to trade
Binary options simplify the once-complicated act of trading currency pairs, commodities, company stocks and share indices to a simple choice between two possible outcomes: Will the price of a tradable asset goup or down over a given period of time?
And because of the limited parameters for success and failure, binary options either expire “in the money” or “out of the money”.
If the prediction is correct, the investor receives a predetermined return on investment (typically between 60 and 90%). However, if the prediction is incorrect, the investor loses all or most of his/her investment.
Options trading for dummies
Binary options investors tend to use fundamental analysis to inform their trades. Fundamental analysis involves the study of the underlying factors that can affect the price direction of an underlying asset. So, learning how to trade binary options starts with a critical appraisal of the context in which your chosen asset is bought or sold.
For example, if a company’s earnings report shows better-than-expected quarterly profits, this fundamentalfact should, all things being equal, drive up demand for that company’s shares. And as you know from Economics class, price rises with demand.
- Example trade
You discover that a publicly-traded company is about to launch an amazing new product. A product so incredible, you are sure investors around the world will fight to buy the company’s stock and drive the share price up.
To place a trade, a binary options investor selects the company from the drop-down menu on their trading platform; picks an expiry time; clicks “up”; and enters the amount he/she would like to invest and “applies” the trade.