Binary Options Trading Basics
This page covers the fundamentals of binary options trading. You will learn a couple of different things. “What the heck are binary options? How do I trade them / buy one and why would I want to?” In this article you will learn about the binary options trade. How they work, how to buy one, the benefits, and how easy it is for you to get started. Have no fear, even if you have no prior experience trading and aren’t some kind of Wall Street expert you can trade and profit from binary options. Let’s break it down.
What Is A Binary Option Anyway?
You have two choices. Choose correctly and profit. Choose incorrect and lose money as your option closes out of the money. Put simply, binary options are about the simplest and hottest investment style online in terms of new growth when it comes to investing. Wikipedia defines binary options in the following way: “In finance, a binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all.”
Binary options are a simple fixed contract that allows you to make a one or the other choice and receive a one or the other payout. If you choose correctly you get a fixed return, regardless of magnitude of movement. If you choose incorrectly, you lose a set amount of money, regardless of the magnitude of movement.
To put in laymen’s terms, there are one of two possible outcomes: you win or you lose. If you win, your trade profits a set amount of money (often up to 85%+). If you lose, you lose a set amount of money (often 85%-100%).
Most binary options offer an UP/DOWN trade. Meaning do you think the value of “gold” will be higher or lower in value in “one hour” from now. You can change that “one hour” to longer or shorter time frames. As short as 60 seconds if you are feeling lucky.
There are a few other types of binary options trades in addition to the UP / DOWN binary option. Common variations include a “touch or no touch” or an “in range / out of range” trade. The familiar factor is that there are two choices (hence ‘binary’). You will see other types of binary options trades referred to as Range or Boundary trades, One Touch, and No Touch. Binary options trades are generally offered on stocks, commodities (futures), currencies, and indices. Depending on where you are located, you may be able to trade any of these different options. In some locations though your choices may be restricted. US traders usually can only trade indices and stocks, not commodities or currencies (this is due to some awkward regulatory phrasing by the CFTC).
This is actually an oversimplification of binary options trading, which you probably already know about since you are looking for a good broker to trade with. Many online binary options brokers actually offer you a small refund instead of nothing if you lose, usually around 5-15% of your initial investment. And if you win, you do not usually get it “all” either. Generally you are paid out a percentage that ranges between 65-85%. On some types of investments under certain circumstances though, you can earn as much as 500% on your investment.
Binary Options Trading Example
What is a simpler way to describe binary options? I will make it crystal clear by giving you an example. You should have no problem at all following this, even if you have never studied finance or economics. Check it out:
Let us say you want to do an UP/DOWN trade, which is the most basic type of binary options trade. You have been watching the AUD/USD currency pair for a while, and you have reason to believe that within the next 16 minutes, AUD/USD will rise above its current position. You navigate to your binary options broker website and look for this currency pair on the trading platform.
The screenshot above is taken from Banc De Binary’s binary options trading platform. They’re an excellent broker, well worth checking into. Banc De Binary refers to this as a Call/Put trade, but on other binary options websites, you might see this referred to as High/Low or Up/Down, as we mentioned above. They all mean the exact same thing. “Call” can be compared to buy, and “Put” can be compared to sell.
You will notice that the trading platform asks you one simple question. “Will AUD/USD go up or down?” In the upper right hand corner, you see “Option Expires In: 15 minutes, 46 seconds.” You can read the entire question like this:
Will AUD/USD go up or down in the next 15 minutes and 46 seconds?
Or you can rephrase this even more accurately as:
Will AUD/USD be trading above or below its current position in 15 minutes and 46 seconds?
Price can, after all, jump around quite a bit. What you are really saying when you select “Up” or “Down” in this trade is that price will be above or below the current level when you reach the expiry time.
Below the expiry time you see the payout listed, of 75%. If you win your trade, you will be paid that percentage of your initial investment in profit. In this example if you risk $100 on the trade and win, you will end up with $175 total after the trade is complete, profiting $75. Since you believe the price of AUD/USD will rise and will be trading above its current level at the end of the expiry period, you simply select “Up” on your trading platform. You will then be asked how much money you want to risk on your trade. At that point, you sit back and wait. If at the end of ~16 minutes, the price of AUD/USD is trading above 1.05047, you will win 75% of your initial investment. This means you get your original investment back plus 75% more return. If at the end of that time AUD/USD is trading below that price, you will lose your investment.
Suppose you wagered $100 on your trade. That means that if you were to win your trade, you would win $75 for a total of $175. If you were to lose your trade and the refund was set at 15%, you would receive $15 back and lose $85. You need to calculate your risk each time you enter into a trade. Always decide how much money you will be risking based on how much you can afford to lose, not how much you hope to win. You would only want to wager $100 on a trade if you had a lot of money in your account and that represented a relatively small percentage. It is generally considered responsible to invest about 2.5-5% of your account on any one trade. If you only had $100 in your account, you would only want to wager a few dollars on a trade (which is why you generally want to start out with a bit more than that, maybe $500). These are basic principles of money management.
Can Small / Medium Traders Actually Trade Binary Options?
“Wait a second – I can start out trading with as little as $100? I thought I had to be rich to trade.”
That is one of the beautiful things about the online binary options brokers. They have leveled the playing field for the retail, average trader who wants to risk a few hundred bucks and start out small. You can literally start out for as little as $100. However, it is advised to start out with around a $500 initial investment if you are new and just starting out. This gives you enough capital to trade small and learn to manage your trading bankroll. Being surprised that you can start with so little money is a common reaction to binary options trading among new traders who have never participated in any market before. “Retail trading” refers to individuals who trade for themselves to make money, rather than trading for a business or investment firm. Retail trading used to be very inaccessible, but since the advent of online technology, it has become a very common phenomena, and it is only continuing to grow. A few years ago, Forex was the most popular investment vehicle for retail traders. Nowadays it’s binary options.
So yes, you can get started with as little as $100 (where?) and no prior experience. If you understood the example above, you are theoretically ready to trade binary options. Can you trade them successfully, though? That is another question altogether. Binary options traders usually fall under two categories: gamblers and serious traders. Which do you want to be? There is no “right” answer here. You may be interested in binary options trading for fun, or you may be hoping to trade for a living. What is most important is you know what you hope to get out of the market, and that you take a responsible approach to getting what you want.
Wait, is Binary Options Trading Just A Scam?
Binary options are not a scam. That is not to say that some traders have not been scammed, because they have. If you deal with shady binary options brokers it is likely you will be scammed at some point in time. You are bound to find some articles on prominent website, like Forbes, claiming that binary options trading is a scam. Is this true or not?
There are legitimate concerns about binary options trading. However these are things you can navigate around if you are not in a hurry and you are willing to take a little time to make sure you’re on the right track. The dangers of binary options trading include:
- Inherent risk in trading
- Unregulated (for the most part) market that is still “young”
- Untrustworthy brokers have tarnished the image of the legit binary options brokers.
- Bad trading decisions and just bad luck.
You can legitimately trade binary options by depositing money at one of our top binary brokers where you know that you will be given a fair trade and paid any money you earn. Avoiding the bad and unreputable brokers first is a question of reading reviews and making intelligent decisions about where you invest your money. If you are reading up on binary options brokers on our website, you’re already well on your way to choosing a trustworthy broker. I have reviewed literally hundreds of different binary options brokers and have found that most of them indeed are not very good, and some are downright scary. But there are a number of trustworthy brokers, and some of them are excellent. Those top-shelf brokers are the ones I recommend here on this website.
As far as the bigger threat to profitable trading goes, and that goes with your trading decisions, that is totally within your control. The only person who can make good or bad trading decisions is you, so if you want to maximize your gains and minimize your losses, it is important to do a lot more research and testing before you trade live. This is not as important if you are trading for fun and want to treat binary options trading like a slot machine. Even if you are trading for entertainment, though, you can choose to treat binary options trading like a game of poker and actually let your skill impact your gains.
In the our other articles, you read other information about binary options to help you get started. You will learn about the different types of binary options and how to choose a great broker. We are dedicated to helping you find the best websites for trading, the finest trading apps, and the best possible customer service so that you can embark as soon as possible on a profitable new career as a binary options trader!