Binary options trading is one of the most straightforward ways to speculate on price movements in financial markets. The underlying concept is simply to choose whether price will be higher or lower than the current (strike price) after a matter of minutes, hours or days. Taking this as the starting point of how binary options work, the key decision for binary options traders is when their options will expire. The expiry time will determine whether you have made the right call, higher or lower, and therefore if the purchased options can be considered “in the money” or “out of the money”.In order to explain how to trade binary options most effectively, it is important to understand first how it differs from regular trading. Whilst conventional trading is also based on the concept of higher and lower trades, binary options offer both predetermined profits and losses. This is because binary options trades do not rely on price moving dramatically away from the strike price in order to generate large profits.One of the key factors in learning how binary options work are that they only need to expire a single tick higher or lower than the strike price in order to be considered profitable. The returns provided by winning options, which are typically around 85% of the investment, are agreed before the binary options are even purchased. Potential losses are also known in advance and cannot increase during the lifetime of the binary options. This provides for both highly controlled risk and the ability to be profitable with minimal price movement.Most platforms, including Bank of Trade, provide a useful educational area for those looking to learn how to trade binary options. The simplicity of binary options, however, means that many new traders can simply open an account, select their market and choose their investment on higher or lower options. Once a timeframe for expiry has also been chosen a trader can see exactly how much the trade will risk and how much it is set to win if they are correct.
How binary options work
The concept behind how binary options work makes it particularly attractive to both new and experienced traders. Many potential speculators have often avoided trading because of the fact that, although they have a feeling the market will move in this or that direction, they are simply not sure if it will be worth the investment. Using binary options, however, price does not have to swing wildly in the favour of the investor and those who can predict even the smallest short-term movements in a price can end up being very profitable traders.Binary options form a derivative market of the underlying real price of currencies, stocks and commodities amongst others. This is essential in understanding how binary options work because it means that binary options prices are approximately those which are seen by professional traders and which also means that their methods of technical and fundamental analysis can also be successfully applied to binary options.
An example of how to trade binary options
A typical scenario, to explain in greater detail how binary options work, begins from the analysis of a market. In this case a trader may be looking at gold, anticipating a rise in price as political tension escalates in the Middle East. Knowing how to trade binary options online, the trader enters their platform such as Bank of Trade and is instantly quoted a price. Since she thinks price is heading up, she purchases 100 USD of call options with a 3 hour expiry and 75% return. Watching the news as stock markets begin to fall, the real price of gold begins to climb and three hours later is several points higher than the original strike price. In the ten minutes it took to learn how to trade binary options and the three hour expiry, the binary options have expired in the money with a 75 USD profit.
Benefits of understanding how binary options work
For the increasing number of new traders wanting to know how to trade binary options, the benefits that they offer over other forms of trading are highly attractive. Perhaps the most important of these is the ability to strictly limit the financial risk associated with any form of speculation. Whilst warnings relating to the potential for losses to exceed your initial capital are common in forex trading, binary options are unique in allowing traders to agree on the risk before the trade is placed.The fact that both potential profit and loss are pre-determined is a unique benefit which not only allows traders to only risk what they can afford with each investment, but also to remove the problem that stop-losses can create trading. Since binary options don’t require the placing of stop-losses to reduce the fixed risk level it also allows for each binary option investment to run until expiry with the potential to expire profitably throughout.
Other reasons why many traders prefer to trade binary options
An additional benefit, for those either new to trading or specifically learning how binary options work, is that it takes very little capital to begin trading. Almost all binary options platforms offer 100% web-based trading platforms which allow registration and new traders to purchase their first options in a matter of minutes.Platforms such as BankOofTrade.com not only allow direct access to all binary options markets from one screen but have definitive guide to show new traders how to trade binary options. Accounts can be opened from a little as 50 USD which demonstrates just how far trading has come from its traditional image of allowing only those with large amounts of capital to make money trading stocks, currencies and commodities.A concern of many market speculators and traders has always traditionally focused on the fear that if markets aren’t swinging wildly up or down then large profits can’t be made. One simple reason why all traders should learn how to trade binary options is that they can be traded equally successfully in both volatile and flat markets. Since binary options only need to expire a tick higher or lower than the strike price, even the slowest and seemingly most inactive markets can potentially be very profitable. Again this benefit removes an additional concern for traders but also makes binary options tradable day or night and on both eventful and uneventful trading days.
How to trade binary options in Three Easy Steps
As we have already seen, the benefits of trading binary options have made them one of the most popular forms of speculation available to online traders. The returns on in-the-money trades are very generous, typically starting from 85% of the initial investment, and anyone can trade from home within a matter of minutes. Binary options offer some of the highest rewards for short-term traders and these profits are attainable to anyone with an internet connection who wants to know how to trade binary options in three simple steps:
- The first step after registering with a reliable broker such as Bank of Trade is to know what you want to trade. There are literally hundreds of available markets but many traders will have a particular stock, currency or commodity that they are particularly interested in. Click on this market within the trading platform and move to step two.
- Step two is to decide whether you think that the market will be moving higher or lower in a given time period. The answer to this will depend on both your own analysis and also how long you want to allow before the options expire. This can be a matter of minutes to several hours or days but it all relies on a simple, higher-or-lower call for the options.
- Finally, the third step is to decide on how much you want to invest in your trade. This is where binary options very helpfully tell you exactly how much you are set to win or lose at expiry. Winning can typically offer a return of 85% whilst, even if you lose, many brokers will offer up to 15% of your initial stake as an insurance. With these values pre-determined, it means that traders can manage their risk highly effectively without worrying about placing stop-losses or losing more than they expected in highly volatile markets.
Binary options trading for beginners: learning how to trade binary options
As binary options grow in popularity, so the available trading platforms grow in quality. As a fairly recent innovation, spanning only a few years rather than decades as a widespread form of trading, binary options has really taken off amongst both new traders and those who already have experience trading financial markets.The straightforward learning curve of how binary options work is both easy and painless and there is a wealth of information to newcomers to assist with their trading strategies and also how to exercise good money management as the key to becoming a profitable and successful binary options trader.
Choosing a platform to trade binary options
Learning how to trade binary options on a platform can be as easy as three steps but choosing the platform can require a little more time. Given the multitude of available brokers, new traders will often be tempted to open accounts by the bonuses offered in the form of cash incentives once a deposit has been made. Whilst these are not a bad thing and can offer a nice introduction to trading binary options with ‘free’ money, there are other factors which should play a major role in the decision to trade with a particular broker.Most of the decision process for traders signing up to a binary options trading platform in order to learn how to trade binary options should be based on the information that they contain. This may initially be the quality of educational and support services, followed by the number of markets that they offer as well as the average pay-out that they provide for successful trading. Additional factors will depend on whether the preferred expiry times are supported; with some brokers offering super-rapid 60 second binary options and others allowing for longer expiries as well as additional forms of binary options trading such as ‘touch’ or ‘range’ trading.
3 Binary options trading strategies
Binary options trading strategies vary depending on a number of factors including person trading preferences and the expiry timeframe that is targeted by the trader. A number of strategies exist which can be used successfully and are good examples in order to learn how to trade binary options using different levels of risk and aggression.
1. How to trade binary options with a Long term strategies for conservative trading
The idea behind conservative, longer-term strategies is to allow new traders to generate consistency in order to grow a trading account which can then graduate to trading shorter-term opportunities. Far from being the boring way to learn how to trade binary options, this is how most successful traders build their accounts, taking slow and methodical trades where there is a high probability of success than multiple fast and risky trades.
One example of this is to trade breakouts of long-term consolidation areas on large timeframes, following a good understanding of how binary options work. Consolidation ranges appear on all timeframes but are particularly powerful on the longer timeframes where price movements are more predictable. Consolidations occur when price becomes trapped between a nearby high and low and they are defined by the price bouncing between these two levels over a period of time and as shown by the red lines on the chart below.Typically, when price ‘breaks out’ of this range, it offers binary options traders the opportunity to take advantage of the momentum that occurs when the market finally decides which way price should go. However, rather than buying or selling binary options as soon as price springs out of the consolidation range, conservative strategies show us how to trade binary options by waiting for confirmation that this is a definitive trading opportunity. This involves waiting for price to break out of the consolidation area, either up or down, before returning to this level to ‘confirm’ that this is now a new supportesistance zone.This scenario can be seen hundreds of times on many different timeframes as price springs out of its consolidation box before pulling back to check that this is a genuine market move. Purchasing options in the direction of the original move when it returns to test this new supportesistance level provide a high probability setup.
2. How to trade binary options with a semi-conservative strategy
One of the great things about binary options is the ability to place two opposing trades within the same market. This is almost unique to binary options as most traders will know that placing an opposing short (sell) trade, for example, in to a market where you already have a long (buy) open trade will simply close the position. In binary options, however, this is not the case and an important feature of learning how to trade binary options is the ability to ‘hedge’ a position to reduce your losses. Hedging in this scenario simply means placing an opposing order to lower the risk of potential losses when price moves against a trade and threatens to expire the options ‘out of the money’.
Using hedging with this strategy
Hedging may seem like a strange way to trade at first, until it is incorporated in to a break-out strategy from an area of consolidation. This strategy requires a trader to understand how binary options work in terms of their expiry and attempts to trade for a shorter period of time than the conservative strategy above. When a breakout occurs, binary options are purchased in the direction of the breakout after the first bar closes out side of the consolidation area shown by the red lines on the chart. The strategy relies on momentum and, ideally, the options will be set to expire after 3 or 4 bars following entry in to the trade.A good deal of breakouts will continue higher for a period after the first bar breaks out and allow expiry in the money. For those that don’t, this is when learning how to trade binary options alongside hedging becomes incredibly helpful. If the options are purchased in the direction of the breakout and price begins to falter and show signs of a false breakout, pulling back towards the consolidation box, the trader needs to only open an counter-trade in the opposite direction as close to the original strike price as possible. This means that two positions, both long and short, will then be open at the same time.
Why would hedging a position help a trader become more successful?
The rationale behind this, where one position is likely to close in the money and the other position closes out of the money, is to only trade the genuine breakouts and neutralise the risk of being caught in a false-breakout scenario. Learning how to trade binary options in this way will often result in profitable trades of 75-85% of a trader’s investment. Should the breakout turn against the trader, a losing position will result in losses of 85% (assuming a 15% insurance payment is made by the broker on losing trades). If this position is hedged using this strategy not only does this minimise losses but it allows the trader to only trade positive, profitable breakout trades and substantially reduce exposure to risk over time.
3. How to trade binary options with an aggressive breakout trading
In order to learn how binary options work, many traders will find it easier and more attractive to focus on the low timeframes, in order to monitor how prices move on a chart. Alongside the strategies above, binary options trading also allows rapid expiry times of as little as 60 seconds. Although this is the most risky, it can be used to take advantage of momentum trades such as breakouts both with and against the direction of the price movement.
An example of this strategy
On the 5 minute chart below, the top of the consolidation zone is highlighted by the red line which is broken. There are two binary options trades here, the first arrow in the direction of the breakout after the close of the first 5 minute bar, and the second with the formation of the shooting star candle signifying the first retracement. Both of these could have been traded using just 5 minute options and would have been profitable and learning how to trade binary options using price-action analysis such as this can be highly rewarding.
Why do people think that binary options is a scam?
Those new to trading and especially those learning how to trade binary options are entering an exciting but not risk-free world of profit and loss. Since all financial speculation comes with an element of risk, binary options is about as safe at it gets to ensuring that the risks are fully known before placing the first trade. Some traders may assume that binary options trading is a scam, seeing the rise in the number of online trading platforms must mean that there is a lot of money to be made exploiting those who part with their money purchasing binary options. This is wrong for a number of reasons, with the primary problem that those who consider binary options trading a scam is that they have failed to learn how to trade binary options before starting to trade.
How to trade binary options with money management and by avoiding scams
Binary options’ trading is a very straightforward way to speculate on financial markets, although it also requires that traders exert a degree of money management and control of their risk. Those traders who think that binary options and financial markets in general are scamming them have often overexposed themselves to large and risky trades, rather than first learning how binary options work before only risking a small amount of trading capital on each trade. The golden rule of money management and how to trade binary options without over-exposure is to risk no more than 2% of any trading account on each investment. This is used by professional traders to prevent them getting overexcited and blowing their account on a high-probability, but never absolutely-certain trade.
Do scams in binary option trading exist?
Scams, of course, do exist. As binary options continue to rise in popularity and more brokers become available online it is increasingly important that traders choose carefully with whom to trust their deposits. The most important advice here is to check where a potential broker is registered, where it holds your funds and if people are taking positively about them in the many forums and information websites available free online. Contact their customer support if necessary and get a feel for their response and professionalism as well as finding out if they provide any help to show you how to trade binary options and provide good explanations on how binary options work.All decent platforms will provide educational material on how to trade binary options and those that don’t should be avoided. Most importantly, find out from other traders who they trade with them if they have had any negative experiences. Finally, don’t deposit your full trading allocation initially, start small and get a feel for the platform and company before transferring any larger deposits.
Binary options’ trading is changing the world of trading for the better. Not only does is out-compete all other forms of trading currently available with the potential for lower-risk trading, zero commissions and the most straightforward trading platforms, but it is accessible to all regardless of previous trading experience. Whilst it is important to stress that learning how to trade binary options is essential before trading, for those that do binary options offers a world of genuine 24 hour trading and the potential to make substantial profits.