When you first begin looking into online trading options, it is likely that your initial ports of call will be things like spread betting platforms or foreign exchange platforms. Those who are looking to make fast money might even find betting websites that offer financial spreads. An alternative to these types of trading is options trading. At Bank of Trade, we specifically deal with binary options.What is binary options trading, and why is it a sound financial opportunity?
Binary Options Explained
Before going into detail about binary options trading, it will be easier to understand the matter if we take a step back and look at options in general. In normal options trading, in fact, wherever options are involved anywhere in life, owning an option gives the owner the right to buy or sell something at a set price prior to a deadline, should they wish to do so.For example, if you saw a second hand car on a forecourt near to your home, but did not have the money to buy it, you could negotiate with the salesman and buy an option, which you would pay for, to buy the car at an agreed price at a point in the future. This would allow the salesman to make some money while keeping the car off sale, and give you the time to get the cash together to buy it.
What is a Binary Option?
When it comes to binary options trading, it works a little differently, as you do not actually purchase the asset, commodity, currency, or stock that you are trading against. Instead, you are trading options against whether the price will increase or decrease. At the point of expiry, the movement of the market will dictate whether your option is in the money and delivers you a return. Binary options offer an “all or nothing” type of trading. If your option is in the money, you receive the full return, if it is not you receive nothing. This simplicity makes binary options great for beginners who are new to options trading or online trading platforms in general.
What is Binary Trading? An Example
Now that you have taken the time to learn what binary options are and why trade binary options, the next stage is to get signed up to your online binary trading platform and start trading. However, to make it easier for you to understand and get to grips with, it helps to know in your mind exactly what a binary trade looks like.Say you are now a trader and you are sitting at your laptop looking at the finance charts. If you were trading in the traditional manner, you would be looking for assets that are likely to increase in value, aiming to buy at the bottom and sell at the top. With binary options, all you need to do is say whether the asset will increase or decrease in value by the end of the trading period. The trading period of a binary option can vary hugely. 60-second trades are available for those who want to trade quickly, one touch trades are available for those looking to trade over a week, while some options last for months. Most investors will trade in short to medium term intervals, up to a few hours, although binary options can last for weeks and even months on occasions.You find an asset that you are sure will increase in value, so you buy a call option. If you thought it was going to decrease, you would buy a put option. The call option has a potential return of 85% per unit if your trade finishes in the money, with a 100% loss if it does not. You purchase an option that expires in one hour, taking 5 options at $100 each.Your binary option finishes in the money, giving you an 85% profit on your initial $500 investment. In total, you will receive $925: your $500 initial investment and your $425 profit.If you use a binary option broker to trade on your behalf, you will see a small amount of your profit taken as the broker’s commission.
What are Binary Options’ Upsides & Downsides?
Before you start committing potentially large sums of money to binary options trading, it pays to know the upsides and downsides, especially if you have looked at spread betting, foreign exchange, or other alternative platforms in addition to binary trading.
Understanding Risk & Reward
The advantage of knowing the precise level of risk and potential rewards makes binary options trading perfect for beginners. When you trade stocks or commodities, for example, you have no idea how far a price may crash or how far it may grow. Critics of binary trading have dismissed it as a method of gambling, but it is actually far less of a gamble than a traditional trade or investment.When you trade binary options, you know how much you are paying to place a call or put trade, how much you will make if the trade expires in the money, and how much you will lose if it does not.
When you trade on the stock market you actually own the asset. With binary trading, you are simply forecasting whether a price will go up or down. As you do not own anything you will never have any problems concerning liquidity, nor will you find yourself with a poorly performing part of a portfolio that is haemorrhaging money but you are unable to sell it.Will the price go up, or will the price go down? That is all there is to binary options trading. Simple.
Certain Trades Offer Low Value Risk
The whole balance between risk and reward revolves around whether the risk you take is justified by the reward on offer. As binary options offer a percentage return on your investment, and finishing out of the money usually means you lose your full purchase sum, the risk outweighs the return. To go back to our example from earlier, we were risking $500 to earn $425. This is equivalent to backing an odds-on favourite at a sports event, but with less surety around what the outcome will be.At the same time, it should be appreciated that 75% – 85% returns still offers great value, while other types of binary option trade, such as one touch trades, offer up to 500% returns, which clearly tips the balance hugely in favour of reward, definitely representing a justifiable risk.
Lack of Regulation
Lack of binary trading regulation is a downside, but only if you decide to trade with unregulated brokers and platforms. Regulations for leading binary trading platforms have been in place since 2008.
Binary Options for Dummies: A Simple Guide
By now you know what binary options are and have read an example of how it works. We have broken down the major aspects of binary trading so that you can not only start trading well-aware of “what is binary option trading,” but also leave with a firm grasp of what the terminology means, in addition to understanding everything about binary options and how you can get yourself started.
Many individuals new to this type of trading often ask what are binary options trading systems. The platforms you will use for binary trading do not differ too much from those you might already be familiar with as a result of foreign exchange or commodities trading. Certainly, the financial charts that you are able to access will be similar, and at Bank of Trade, they are designed and optimized to make it as easy as possible for our traders to choose a market or an asset, discover the direction something is trending, and make their trading decisions decisively based on this information.While your binary options trading platform at Bank of Trade gives you everything you need from a knowledge perspective, it also provides a wide range of different ‘instruments’ that you can use for your binary trading.
- High/Low Trading
This is the simplest type of binary trade, where you simply pick whether or not you think a price will finish above or below the target price stated when you are presented with the binary option. When given a target price, simply pick ‘high’ if you believe the price will exceed the target, and ‘low’ if you believe it will not. This might be presented as ‘call’ and ‘put.’ You usually set the expiry time yourself, although some platforms will offer specific term binary trades,Remember to look at price performance over the long-term and the short-term, and recognise that you can profit from assets both gaining and falling in price, as well as from assets showing long-term growth, but short-term price decreases, and vice versa.
- Touch TradingCommonly known as one-touch trading, these are longer trades that are typically one week in length, although longer-term one-touch trades are available. When taking out a one- touch trade, you are investing against the price of something touching a pre-determined target. All you need is for the asset to hit the target at some point during the trading period, and you are in the money. It does not matter if it touches the target price and then moves back in the opposite direction. To participate in these trades, hit ‘touch’ if you believe the price displayed will be hit during the trading period, or ‘no touch’ if you believe it will not. This is the highest risk trade available, as binary trading over a longer period invariably brings a speculative element into play. However, the returns for one-touch trading can be as high as 500%, making it a worthwhile risk to take, if you have the capital to do so. Before placing a one-touch binary trade, it is best to look at the longer-term performance of an asset, specifically at recent historical highs and lows in comparison to the prices offered, to determine the likelihood of success.
- Boundary TradingBoundary, or range trading, will typically offer a lower percentage return, as you are given a range of prices between which the asset may land. Higher profits can be found if you take out a binary option where the price has to stay within the range specified, and not just expire in the range. You simply select ‘in’ or ‘out’ depending on whether you believe the asset in question will expire within the upper and lower price boundaries presented to you.
- 60-Second TradesThese binary options are self-explanatory, lasting just one minute, using the high/low (call/put) method of trading. Performing 60-second trades can be lucrative, although the fast decision making needed means it is usually best to become experienced and confident with binary trading before exploring this area.
Get Started with Binary Trading at Bank of Trade
You now have a basic overview of what binary options trading is, the different types of trading that is available, and how you can get started yourself.Use the other resources available here at Bank of Trade to further your knowledge, and don’t forget to sign up for your binary trading account so you can start making money straight away.