What are Binary Options?
A binary option is a trading strategy in which either the payoff is full or nothing at all. Hence there are only two possible outcomes, which makes this trading option easier to understand and practice than other forex methods. Just like other European based trading methods, binary options are also cash settled, meaning that you can exercise them only when the expiration date is over. If at this time, the option result in – the – money situation, investors receive an amount according to the payout rate specified with the contract. On the other hand, if the option results in out – of – the- money situation, the investor does not receiver anything.
In the entire process mentioned above, the investor either enjoys an upside or gain or he has to bear a downside or loss. Moreover, in contrast to other trading options, binary options also provide the investor with the full payout even if the pip movement is single.
Binary options are also referred to with other names in the financial market. For instance, in quite a few countries, the term ‘digital options’ also implies binary options.
• Choose a renowned broker that offers an easy to understand platform.
• If you are new to forex trading, open a demo account with the broker and practice trading through it.
• Once you get a grip of all that is involved, you can switch to a proper account and make an investment in the market.
• Choose an underlying asset and select a direction in which you think the price will move. Make your trade, and then wait for it to expire. When it closes, you will know if it resulted in a win or loss.
Here is a look at the main guidelines that are required for binary options.
Be wary of the two outcomes
When you trade an option, you will have to predict the price movements of underlying assets. With other trading options, there is a need for you to know the direction in which the price is moving as well as the magnitude of the moment, but this is not so with a binary option. The only thing which you need to do is make an investment in the forex world, observe any of the assets such as indices or stock, and accordingly make your trade.
Decide a suitable position
Observe the current situation in the forex market before you make an investment. If you think market prices are going to rise or predict an economic occurrence, buy an asset. If you forecast an opposite scenario sell your assets. Assuming that your analyses are correct when the trade expires, you will receive a payoff which is or the value of your contract.
Learn the way in which prices are evaluated
For all contracts, the price is just the probability that the event will come true. As an example, if the contract has a price of $100 and the previous trade was $96, then this just serves as a sign that almost 96% of the market believes that the event will take place and the so binary options will result in a win situation.
Binary options are popular in quite a few areas. Be it Australia, Europe or the United States, you would come across several people who have heavy investments in the financial world, and largely rely on binary options as their sole income source. In Europe, contracts are traded in all major stock exchanges such as EUREX. In Australia, they are offered by the Chicago Board of Trade or CBOT.
In order to trade a binary option, you have to be a member of the exchange or you have to make trades through investors that are already members.
Advantages of Binary Option Trading Style
- Binary options are a simple way to earn big profits. The offered platforms are easy to understand and the steps are fairly easy to execute.
- You can control your risk to reward ratio. Both these factors are determined when you sign up for a contract, which is before you make a trade. In all other options, profits and losses are unpredictable and as such your investment is always subjected to increased risks.