What are Binary Options?
You might have heard of binary code, which consists of 0 and 1. Those are the only two characters. Hence binary, Binary means relating to, composed of, or involving two things.
In standard Binary Options trading you have two types of trades, Put or Call. If you place a call trade this means that you predict the asset you select will go above current value. And if you place a put trade this means you predict the asset you are trading on will go lower than the current value.
It seems rather simple when said like that right?
There are generally also 2 outcomes to the trades – either your trade is correct (In The Money) or your trade loses, in which case it is considered to be Out of the Money. Both these terms are commonly abbreviated to ITM and OTM respectively.
In some rare circumstances, the outcome price is the same as the strike in which case normally the original investment is simply returned.
The reason Binary Options trading are so popular is their relative simplicity to begin trading as there aren’t too many factors to consider when starting out.
It is very easy to get into Binary Options trading as all you have to do is open an account with the Broker, deposit your money and you are away. Everything is laid out for you.
If you want to make money trading binary options though, there are a few things you need to bear in mind; otherwise it is like going to the casino and betting black or red and the roulette table. It is always a good idea to learn a little about what you are doing.
DON’T start binary options trading if you are in financial difficulty and are looking for a quick fix. This is NOT the answer. You will see disclaimers on every single binary options broker site warning you that losses can occur - this disclaimer is there for a reason.
What do you trade in Binary Options?
The assets that can be traded in Binary Options trading are broken down into 4 groups:
Currency pairs
A currency pair is defining the value of the base currency (first one written) against the other currency. So for example EUR/USD; EUR is the base currency and you are saying if it will rise or fall against the USD. How many USD do you get for every EUR.
If the Price increases it can be due to the EUR getting stronger or the USD getting weaker. Or on the other hand if the price decreases this would be due to the EUR getting weaker or the USD getting stronger. So there are two sides that can affect the price either way.
Commodities
These are things like Gold, Silver, Oil, and Sugar to name a few. These assets are commonly trading in commodities markets but you can also trade on them in Binary Options.
Now indices are basically a measurement of the performance of a section of a market. so the FSTE 100 for example is an average measurement of the prices of the top 100 companies in the London stock exchange. Other indices include NASDAQ and IBEX.
Finally you can trade on the stock prices of the bigger stock companies like Google, Santander and Apple.
I find this particularly interesting as I am a bit of a techie and I like to follow the technological news. The big launches like Apple and Google I/O can really affect the stock price so it is always good to bear all this in mind. And a good Binary Options Signal service will inform you of these events as they affect the market value.
So those are the Assets tradable in Binary Options. A lot of people stick to just Currency pairs but with the right information and market conditions the other assets can make you money so don’t be afraid to trade on them.
The Three Major Factors in Binary Options Trading
Strike rate / Price
This is the price at which you place the trade. The price at the start of the trade.
This is especially important when using a Binary Options signal service - as when they send out the signal, there will also normally be a strike rate.
So if for example it is a call signal and the strike rate is 1.01 if you place that trade when the strike rate is at 1.05 the asset is already moving in the direction of the signals so it may be too late to place that trade.
You need to check this with the service you are using, how exact you need to be with the strake rate. But normally you want to be pretty exact.
If you miss the Strike rate skip the trade, wait for the next one.
Expiry time – short /medium/ long
This is how long the trade will last. So the very short trades can be as quick as 60 seconds. The medium trades will be anything from 5 minutes to end of day. For example with Signals Binary there are a lot of end of day signals generated.
The long term trades in Binary Options can be days, weeks even months. If you have a long term view on where the market will go this is the one to go for as you remove daily fluctuations from the equation.
This is the return on your investment. For example if you invest 100 dollars and the payout is 70% and you are correct the trade come in ITM you will get your 100 Dollars back and 70 dollars profit.
The payout rate varies from broker to broker.
Some brokers offer insurance, so if your trade loses you get 10% on the dollar for example.
I have created a Profitability chart to help with the calculating of the return rate. To sum it up the higher the return/ payout the less often you need to be correct to make a profit.
You can see me demonstrating this in the Binary Options Basics video. You can also download the profitability chart for free from my website. I have created this chart to help you calculate the return rate and how often you need to win to break even.
I have taken into account that some brokers offer insurance so all you need to do is adjust the % in both the win rate and the insurance part and the spread sheet will do the rest.
1 major factor at the end of a Binary Options Trade.
expiry rate/ price – ITM vs OTM
For example if you placed a call trade, the expiry rate needs to be higher than the strike rate of the trade for it to come in ITM. The opposite applies for a put trade; the expiry rate needs to be lower than the strike rate.
How to get started
You can choose one of two ways to get started in Binary Options trading now you understand the basics.
First you can find a broker. There are many reputable brokers out there, but there are also some very unreputable ones. So do your research.
I have almost finished my website where I will have a section dedicated to my favorite brokers. So if you would like to join a broker through one of those links then please go ahead.
Or secondly you can sign up to a trusted Binary Options Signal Service or software provider and register with one of their recommended brokers.
The Signal service or software provider gets a commission from the broker you sign up with via their service. This way you gain access to some great services without having to pay for them.
You are killing two birds with one stone this way as most people will find a broker then look for a signal service. But this way you get both right away and you do not have to pay for an additional signal service, or end up with unwanted broker accounts.
I have links to all my favorite signal services and software on my home page. I keep it very up to date. As you may or may not know I am always testing out new software and products. And when I find worthwhile things I will update you all on them.
In a nutshell these are the Binary Options basics that you should know before trading binary options. Now you better understand what you are trading you can commence binary options trading.
There are no auto traders that make you millions over night. Trading can be exciting and fun but you have to put a little effort into it. Learning about binary options themselves is just the beginning.
I plan to cover many subjects within the Binary Options trading world, as well as Forex and other trading opportunities that there available. I will also be showing some trading strategies. This is just the beginning as I had to start somewhere.
You must bear in mind that all trading has its risks. If you check the disclaimers the brokers have, this should make it rather clear. So please do not start Trading Binary Options, or anything really to get some quick cash, or to get you out of a fix – this is not a healthy way to approach trading and you will more than likely lose your money due to stress and bad choices. You should not get emotional about trading.
Please help me spread the word by sharing this Binary Options Basics guide on your social network.
Stay tuned to the channel for the next Trading Fundamentals installment and other trading videos. Subscribe to the channel to get notified as I release the videos.
If you are interested in making money trading binary options and you have your head around the basics then check out my favorite software. Or take a look at Signals Binary which is also performing very well at the moment.
I will leave you with those thoughts. That is all from me for now, Louis at Trusted Binary Reviews.