While predicting the short-term market is super tricky, there’s slightly less risk with binary options. Then practice what you've learned with our free stock market simulation.
WHAT ARE BINARY OPTIONS?
Compared to traditional options, binary options have different payouts, fees and risks. Binary options are a form of options trading based on a single question: did a stock index, commodity or Forex pair reach a certain price by a certain time period, or not? They’re called “binary” because there are always just two possible outcomes. If a trader’s prediction of the market's direction and the price at the time of expiry is on the correct side of the strike price, the trader is paid a fixed return – regardless of how much the instrument moved. A trader who wagers incorrectly on the market's direction loses his/her investment.
You can trade binary options on a whole range of different events. On the Nadex exchange, for example, you can trade on foreign exchange rates, commodity futures prices, and major economic stats like unemployment figures or the Fed funds rate. You can also trade stock index futures based on the Dow, S&P 500, Nasdaq, Russell 2000, and major international indices.
You can take either side of a trade – buying if you think the underlying market price will be above the strike at expiration, and selling if you think it will not be. There are also plenty of different contracts to choose from – you could trade based on gold being above 1790 at 1:30 PM this afternoon, for example, or above 1795 at 2:30 PM. There are hourly, daily or weekly options at a range of different prices, so you have a lot of flexibility in how you trade.
Because short-term market events are hard to predict, there is certainly risk involved, as with other types of options. But with binary options, the amount of money at risk is fixed; it’s always the initial cost of the trade. When you make a binary trade, you know exactly how much money you could lose, and how much you could make. And you can also sell out early to limit your losses or lock in a gain – you don’t have to wait for the option to expire.
BINARY OPTIONS TRADING STRATEGIES
Use the following trading strategies for maximum gains:
High Volatility Strategy
Assume you are bullish and expecting a big move in the underlying market, but the volatility is going to be too much for you to stomach. You could use binary options as a way to trade direction with the expected volatility while keeping your exposure limited.
In this case you could buy out-of-the-money binaries; this is where the binary strike price levels would be higher than the current price of the underlying. The higher the strike, the cheaper the initial cost reflecting a bigger trade disadvantage but offering a much higher net payout if the binary finishes in the money.
For example, you might find an OTM binary strike that’s trading at $25. If the underlying market surges upward as you expect and finishes above the strike at expiration then the binary settlement value will be 100 and you gain $75. If you’re wrong and the binary expires at 0, the settlement payout is zero and you lose your initial cost of $25.
Low Volatility Strategy
If you’re expecting the underlying markets to be flat, a strategy that could be effective would be using in the money binary options. Buying binaries would mean the underlying is already over the strike or selling binaries means the underlying is already below the strike. If the underlying market stays flat, as you expect, then your binary finishes in the money.
If gold is currently trading at 1800, for example, you could buy a binary option with a strike price of 1795 that might be trading at $75; it is more expensive, since it’s already in the money and has a higher probability of paying out at expiration. If the gold market price stays flat, or even slips a small amount, the binary will finish in the money as long as the gold price finishes above the 1795 strike at expiration. Your profit would be limited to $25 with a possible loss of $75. You’re following a more conservative strategy, so the payout is smaller.
BINARY OPTIONS TIPS
Success can be achieved and risks can be minimized by keeping the following tips in mind when investing in binary options:
Find a good binary options broker
A solid broker who knows his stuff can make all the difference.
Trade long term
Develop a long term plan and resist the temptation to get drawn into fads that don’t fit into your overall strategies.
Resist the urge to over-invest
New traders often lose money by getting carried away and over-investing. Invest with both rational thinking and self-control.
Keep a clear head
Emotions can create havoc with one’s trading. Everyone, but beginners especially should avoid trading when they are emotionally disturbed.
Prep yourself before trading
Studying the market, look at graphs. Keep apprised of trading news.
BINARY OPTIONS TRADING SYSTEMS
Here are some of the more popular systems:
Binary Options Trading Software
Some super experienced traders have developed their own complex trading strategies that render awesome results using advanced systems. Some of the best such systems are:
Comparing Forex Brokers
If you want to trade Forex, it is important to first compare Forex brokers to find the right match for you. Australian traders can check out compareforexbrokers.com.au.
OTHER TYPES OF BINARY OPTIONS
The high-low binary option (AKA: call/put binary options) is definitely the most common one, but other types of binary options do exist. As competition in the binary options space gets tighter, brokers are simply offering more binary option products.
“One Touch” Binary Options
With a one touch binary option, the price only needs to touch a specified target once before expiry for the trader to make money. There is a target above and below the current price, so it’s up to traders to pick which target they think will be hit before expiry.
“Range” Binary Options
A range binary option allows traders to select a price range within which the asset will trade until expiry. Payout is received only if the price stays within the range selected. If it veers out of the specified range, the investment is lost.
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