Binary Options Trading Explained
Binary options are becoming an increasingly popular method of trading for many who are already involved in the forex trading market and wish to expand their trading opportunities. Although binary options online trading can seem daunting if you’re new to the markets, getting involved is easy with the right help.
That’s why we are here to provide you with a comprehensive guide that we’ve written using all our experience and knowledge about the industry to help enhance your trading potential. Here we will cover all aspects of binary options trading in the most accessible manner. This will ensure you are fully aware of the right steps you’ll need to take to kickstart your career in binary trading, should you decide it’s the right option for you.
What is Binary Trading?
It’s easy to define binary trading. Binary options trading, in its most common form, is an investment in whether the price of an asset will go up or down, above or below certain prices over a pre-defined period of time.
The result is either yes or no, and the payoff for the correct decision will already have been decided. Trading binary options are effectively taking long-term market volatility out of the equation for investors.
A Guide to Trading Binary Options
In this section we will establish the foundations of knowledge for developing your career as a successful binary options trader. This will include key terms in trading basics to help you understand binary trading strategies, and ultimately allow you to implement your binary trading systems to capitalize on the market.
Key Binary Trading Terms
- Call Option – A call option is used when you are predicting that the price of the underlying asset will increase by the expiration time which you have set.
- Put Option –A put option is used when you are predicting that the price of the underlying asset will decrease by the expiration time which you have set.
- Strike Price –This is the purchase price, or the price of the underlying asset at the time of your investment. This will act as the marker which you need to be above or below at the expiration time.
- Option Expiry –This is the expiration date of your binary option trade. It is at this time when you will know if your investment has been successful or not, based on the strike price of the underlying asset.
- Underlying Asset-The product which you have invested in through your binary option trade is known as the underlying asset. This could be a stock, major currency pair, or other type of instrument.
How Binary Options Trading Works
Binary options trading is investing in an underlying asset, and the volatility of that asset. From a trader’s perspective, trading binary options can be relatively simple and devoid of worries about the long-term price movements of a particular asset.
Traders engaged in binary options trading online will select the asset they wish to invest in, such as Google stock, for example. At the time of investment, they will predetermine an expiration time and an investment amount. Also determined at this time is the profit that the trader will gain if they are correct in their prediction.
With these factors decided, you, the trader, simply have to decide between a call or a put option. This means whether you think the price of our Google stock will go up (call) or down (put), during the set time period. This can be as short as 60 seconds depending upon the binary trading brokers you are using, but it is ultimately at your discretion to decide.
At the expiration time, if you have correctly predicted the result of the underlying asset price, your initial investment is returned, along with the predetermined bonus as profit. If your prediction is wrong, then your entire investment is lost.
As opposed to the all-or-nothing nature of binary options online trading outside the United States, trading is done through the Chicago Board Options Exchange and Nadex. These major exchanges are in turn regulated by the SEC and CFTC. Ultimately, this provides more transparency and the safety-net of being able to enter or exit most binary options trades at different times when trading on the US market.
How to Make Money with Binary Options Trading
As with all forms of trading, there is an inherent risk involved with binary options trading. This is perhaps even starker than other markets due to the nature of the investment. Complete loss of your investment is possible in a short period.
There are certainly ways to make money in binary options trading, and you will see many binary trading strategies promoted by traders and brokers alike. These strategies have one thing in common: they cannot guarantee you a profit. Additionally, there are many binary options online trading scams to beware of, and so brokers or traders propagating instant or easy profits should fall under suspicion.
The best way to make money in binary options is to increase your knowledge of the market, and stay well within your account and budget limits, both in terms of risk and volume. This should help ensure the best possible environment for you to trade binary options.
Types of Binary Options Trading
What we have described so far is the most common and fundamental type of binary options trading. However, many variations exist when it comes to this form of option trading. The basic end result is the same, in that the options trader will either profit by a set percentage or lose their investment, though the events which define success of failure from the underlying asset are altered.
Call/Put (High/Low) – This is the most common form of binary options trading which has been referred to throughout. Here, traders are aiming to predict whether the expiration price will be higher or lower than the strike price.
Boundary Trading – This is a more forgiving form of binary options trading where two ranges are set, and your goal should be to determine if the option will finish inside or outside the specified ranges.
One Touch – The trader, or in some cases the broker, determines one point which the underlying asset will hit during the course of the option. Whether or not the asset hits this selected point will determine the outcome of the investment.
Double Touch – This investment is exactly like the one touch option, with the exception that there are two selected points for the asset to hit or not.
As time progresses, binary trading brokers are adding more and more binary options trading types in an attempt to attract more traders. Many of these more complex methods are often more difficult for binary options traders to succeed with.
The Pros and Cons of Binary Options
Binary options trading, as with trading of other forms, is a style of investment which has both advantages and drawbacks. These may be more important to you depending on your attitude to risk and general trading style, though they are factors which you should still consider.
Easy to Understand
As outlined, for the most part, binary options online trading investments are relatively simple win-or-lose propositions. This removes a lot of the detail which surrounds other trading methods and may be suited to traders who have less time to devote to study or gaining market experience.
High & Quick Gains
Binary options trading strategies facilitate the possibility of very fast gains. As a trader, you can specify the expiry time as low as one-minute in some cases. This has the potential to generate up to a 90% profit if successful. This is generally a much higher, faster rate of return than most other trading styles.
The issue of regulation is a big one for many binary options brokers. Many of these brokers are operating unregulated or within legal gray areas. This is in contrast to the forex trading market which provides top-class regulation. Ultimately, traders within the binary options market are left more exposed and vulnerable to unethical broker practices.
With the potential for high returns comes an equally high risk. The all or nothing nature of binary options trading is extremely risky, bordering on gambling for many. While values may fluctuate in other forms of trading, entry and exit from positions is always available, and at no one particular point will you suddenly lose 100% of your investment in such a short period.
The linear nature of binary options trading ultimately means that traders are devoid of choices once a position has been entered. This is slightly improved in the US, but still completely at odds with almost every other form of investing where multiple paths can be chosen in any given event.
Ready to shift to forex trading?
Forex brokers operate in a safe, secure, and regulated environment and offer you many options for how you can profit on trades. This gives you more control over your trading and has the advantage of letting you profit from your knowledge of the forex world. Check out our list of recommended forex brokers below.
The Main Differences Between Forex and Binary Options Trading
Although both are forms of trading, and based around the same underlying assets, there are many important differences between binary options trading and Forex. A better understanding of these differences will help you make a more informed decision on the next steps of your trading career.
Simply put, the regulatory environment which surrounds the forex markets is much stronger and more trusted than the regulation, or lack thereof, which currently exists in binary options trading. There are often reports of binary options trading scams from unscrupulous brokers who take advantage of the lenient or non-existent regulation of the sector outside the United States.
Where binary options trading is extremely limited in terms of how you can trade, forex features a multitude of options. There are a variety of ways to become profitable in forex. Every top forex broker has hundreds of available markets and many more ways in which you can invest. You are also not limited to holding any one position for a set period of time. Ultimately, this flexibility and freedom is advantageous to traders, opening up an increased number of opportunities while also facilitating better risk management.
Better Educational Infrastructure
While binary options trading is rudimentary in terms of its simplicity, the increased options available to forex traders create a two-fold benefit for forex trading as a whole. Firstly, traders can be more satisfied and empowered through the knowledge they are obtaining. Secondly, almost every top forex broker that we recommend provides top quality educational resources to assist traders in expanding their trading knowledge.
The potential for increasing knowledge is unlimited in forex trading, as is the opportunity to profit from trading. Unlike binary trading options, where the upside of a trade is entirely limited to the preset payout, forex traders can remain in an upward trending market for as long as they wish, and exponentially increase profits along the way.
Forex Trading: A Safer Alternative to Binary Options
Overall, having answered the question: ‘what is binary options trading?’ by comprehensively reviewing everything which binary options trading has to offer, it is clear to us that forex trading represents a much safer, secure, and all-round, more prosperous opportunity for potential traders.
A major factor in this is the work of well-respected regulatory authorities such as CySEC who hold Forex brokers accountable for maintaining the highest of standards. Throughout our Forex broker reviews, you will also only find recommendations to the most trusted, top quality Forex brokers.
If you are interested to learn more about Forex trading as a safer, more transparent alternative to binary options, check out our wide range of trading strategy guides and educational support material to help make you the best Forex trader possible.
Is binary options trading legal?
Yes, binary options trading is legal. That said, traders should exercise caution when choosing a broker, as there are a large number of scam brokers operating within the binary options trading sector.
How much money can I make on binary options platforms?
Some traders will make money through binary trading platforms, but considering the risk/reward ratio, it is highly unlikely and very difficult to predict with any certainty that profit would exceed loss when trading binary options. Any binary trading broker who promises profits should viewed with extreme caution.
Is binary options trading safe?
Through a limited number of top brokers, binary options trading is safe. The lack of regulation among brokers however, gives rise to a large number of binary options trading scams which traders should be mindful of.
Are there any trusted binary options brokers you recommend?
We do not recommend any specific binary options brokers. This is due to the lack of regulation and other concerns raised through this guide. We do, however, recommend a number of top forex brokers who comply with the most stringent regulatory bodies.
What are the best alternative financial trading options?
For those who fear the increased trading and regulatory risks posed by binary options trading, forex trading offers the perfect alternative. Top brokers are well regulated, and traders are presented with wide-ranging and flexible options in terms of what and how they trade.