- What are binary options?
- How do they work?
- What types are most profitable?
Binary options trading is one of the most popular online trading methods. The internet massification gave access to traders all around the world to this easy-to-understand trading system.
Binary options platforms offer their user return up to 170% and even 195%. However, this is a high-risk investment. 80% of users report losses when trading binary options.
This article will study one by one the most important aspects of binary options trading so you can decide whether it is right for you or not.
What are binary options?
This trading type consists of a market in which trades have a simple choice to make. That is, whether the price will go up or down in the specified time frame, which is often short. The name “binary” comes from the fact that there are only two choices. But these options are also called “all or nothing options,” and that name has in it another vital principle. When trading these instruments, the risk is always the total amount of the traded volume.
How do binary options work?
In this trading style, the market participants enter their preferences. There are many available pairs. The trader’s job is to predict in which direction the price will go. After making a decision, he chooses the time frame and how much money he puts on the line.
If he trades $100, in case he is right, he could win as much as $195, depending on the broker. On the other hand, if he loses, his losses will be limited to the amount traded.
Binary options are bets that the trades make about the future trend of the currency. You don’t own any asset, contrary to what happens with other types of trades.
In traditional trading, brokers make money out of the commission for each trade. Binary brokers make money like a casino. The commission collected for the broker comes from the total amount of the bets made over the trades.
What types of binary options are?
Besides the traditional binary option that depends only on which direction the price took at the end of the period, there are other types.
One-touch binary option
In this option type, the trader doesn’t need the price to end on a particular side. Instead, he needs that the price reaches the strike price at least once during the specified time frame. That’s enough for the trader to win the option. The return for this type of option can be even 550%. Let’s see how this would be.
Consider the trade represented above. On September 5 at 10:50 pm, the trader made a one-touch binary option that will expire 15 minutes later.
By the time the option was made, the price level was 78.481. The trader made the one-touch call with a strike price of 78.506. By the time the option expired, the price was below the strike price. But since during the period the price reached the strike price, the trader won the option.
Range binary option
While traditional binary options predict the market’s direction in the next period, there is another type of option in which the trader doubles the bet to predict the direction the price will go and where it will end. The way of doing this is by trading a range option.
So, the trade sets an upper and lower limit to build a range in which the trader believes that the price will be at expiration.
In the example above, the trader sets a range option predicting that the pair price will be 1.18823 and 1.18860. However, once the option expires, we see that the price was not in the money (green range), and the red range represents the difference between the final price and the winning level.
If we pay attention, there is a crucial difference between the one-touch option and the range one. However, the price reached the winning range during the period, with range options, the price at the end of the period matters. So the price came in the winning range during and after the option but not at the end of it, so the trader loses his investment, and the only thing he can do is try again.
How to buy and sell binary options?
Binary options are simple. If you think that the price will go up — buy. If you believe that the price will go down — sell. Now, let’s review the simple steps you need to take before starting binary trading.
- Open an account
The first thing you need to do is register on a broker’s platform. Unfortunately, because of the popularity of this market, there are a lot of fraudulent brokers. So, before you sign in on any platform, do a little research on the broker.
- Test your strategy
Once you register, you can start trading immediately, but we recommend not doing it. Brokers offer a demo account where you can prove your strategies. This will make you a better trader and will improve the chances of winning.
- Risk what you are willing to lose
The binary option is a difficult market, even for experienced traders. It is hard to predict where the price of an asset will go in a short time frame. If you risk more than you can lose, you can spiral down and lose even more money by trying to recover your losses.
- Start trading
Once you have done all the steps, you are set to trade with binary options on a real account.
How much could you earn with binary options?
Let’s start by repeating that the risks are high. It is a market where you lose the totality of your investment every time you lose. On the other hand, on traditional binary options, the profits are very high.
For example, a simple trade gives you from 170% to 195% return. Now, with more advanced options, the returns could rise to 550% with just one trade.
Final thoughts
Binary options trading doesn’t have a good reputation today. The massification of the market allows many inexperienced traders to enter, and due to their inexperience, they lose money quickly.
Also, the lack of regulation makes scammers enter the game. In any case, although the profits are high and attractive, the risk is very high, and the probabilities are against you even if you are an experienced trader.