What is binary options trading?
Binary options trading is a form of trade that offers two options – either the price of a particular asset goes up or down, and you have to guess which direction the price moves in a specified time. It first came as an over-the-counter trading system in bourses and stock exchanges. The Internet has ushered in its widespread popularity starting in 2008.
Even if you are not a market trader or financial specialist, you may have already heard of binary options simply because of its phenomenal growth. Although binary options has long been in existence, it wasn’t until the development of online platforms that binary options trading became popular.
Assets here may refer to major currencies, commodities, stocks, and indices that are freely traded in the world market and national exchanges. What is binary options trading but a type of investment; a financial instrument where you place a certain amount/investment on a particular asset and if its price goes to where you predicted it will be, you get your payout – your investment plus the promised percentage earnings offered by the broker. You’ll be using the services of binary options brokers which will provide you the trading platform and tools as well as any other assistance that you may need.
Sounds easy, right? It is, but you will be forewarned by binary options brokers themselves that this type of trading carries a high level of risk and may not be suitable for all investors because there is the real possibility that you may lose all your invested capital. Binary options is also called an “all-or-nothing” trading because if you make the wrong prediction, it’s goodbye to your investment, all of it. While some binary options brokers return a small portion of your investment even for losing trades, you’ll still be advised that you should never invest money that you cannot afford to lose.
In this article, we’ll examine the many aspects of binary options trading, including the following:
- What does binary options trading do?
- Why use binary options trading?
- How does binary options trading work?
- Advantages of binary options trading
- Cost of binary options trading
- Examples of binary options brokers
What Does Binary Options Trading Do?
What is binary options trading but a means for you to earn more. The purpose of binary options trading is basically to give you the opportunity to profit off your investment in the right and legal way. There are several common attributes and features of binary options. Understanding them will answer the question – what does binary options trading do? Here are 6 aspects to know before taking part in binary options.
- It’s simple. Binary option is a simple financial product which allows an investor to determine the future movement of an asset’s price which is just one of two directions – up or down.
- Underlying assets vary. Assets can be world currencies (USD, EURO, AUD, etc), stocks (Google, Microsoft, Apple, and many others), commodities (gold, silver, oil, agricultural produce), indices (index funds, futures, other derivatives), and lately cryptocurrencies (Bitcoin, Litecoin). Some brokers can offer you hundreds of assets that you can trade in.
- Trading is fast. Short-term timeframes can be as little as 30 seconds or 60 seconds to work your traded amount. This is riskier although you can make money quicker since you can trade multiple times in a day. On the other hand, you can opt for longer timeframes (minutes, hours or even a month) which generally gives bigger payout.
- You need a broker. You need a binary options broker so you can open an account with them, use their trading platform, avail of their tools (demo account, historical charts), and rely on their customer support and services (i.e. payment processing, withdrawals).
- Payouts vary. Payouts for correct predictions differ from broker to broker but are usually in the range of 70% to 90%. This means that if you place a trade for $100, you get $170 or $190 in return. For a wrong prediction, you lose all. Now you know how vital it is that you hone your skills and learn to make the right predictions which we’ll tackle in the next sections.
- Go for legitimate brokers. A most important reminder when it comes to choosing a binary options broker – get a legitimate one. A highly popular trading mechanism used by millions of people worldwide is bound to produce fake, fly-by-night brokers out to dupe unsuspecting investors. And there are many of them out there. Be fastidious in your research and background check to see, among others, if the broker is licensed and regulated by the proper government authority; has a professional and modern website complete with relevant information (office address, contact numbers, email); offers several payment/withdrawal methods (payment gateways, credit cards, wire transfers); boasts of having received awards and honors; and generally have good feedback/comments from users and clients. All these you can search online. If you find red flags, stay away. You’ll be entrusting your investment; hence it is paramount that you transact only with a real and reputable broker.
Why Use Binary Options Trading?
After reading the preceding section on what binary options trading do, you might be prompted to reply – why not? We’ll reinforce that positive response by showing you the distinction between binary options trading and conventional day trading or investment in forex and stock trading. Later in the article we’ll enumerate the advantages of binary options. But first, why use binary options trading? Why not invest in traditional trading? The two are different as far as the following are concerned: risk factor, profitability, assets handling, sustainability, and the learning aspect. Let’s go over each.
- Lower risk. Every investment using a financial instrument carries with it some risks; the levels just vary. In traditional trading, wins and losses are dependent on the rise and fall of the value of an asset. You can lose a considerable amount of money when that value drops significantly or vice versa – profit big if the value rises to a great degree. Either way, you won’t know beforehand how much you’ll win or lose. It’s the other way around with binary options trading because you can tell in advance how much you’ll win or lose since you have put in a particular amount you’re willing to risk before you commit to a trade. If you placed in $100 for a 70% return, you know you’ll get $170 for a right prediction and nothing for a wrong one. No surprises with this trade since you know the risk you’re willing to go through.
- More profitable. Both types of trading can be profitable to a seasoned investor who relies on experience and expertise. The edge of binary trading is when it comes to payouts. As you’ve learned earlier, the rates of payouts differ per broker; some can even give you 100% or more which means double the amount of your investment for a winning trade. In regular trading the profit rate can be up to 20%, and that is if you’re lucky. This means that in traditional trading you have to buy and sell very large number of assets or by volume if only to realize more profits. According to a 2014 Optimove statistics, binary option traders have a conversion rate 34% higher than forex traders.
- Simpler assets handling. This is a major difference between binary options trading and trading in forex or stocks. In the former you simply make a prediction in the price movement of an asset you choose while with the latter you need to buy assets and sell them later when their price appreciates in order to generate profits. You can see here that traditional trading is quite more complicated when it comes to how you handle assets.
- More sustainable. The time it takes to profit from your investment is very much shorter with binary options than with conventional trading. With short term trades in binary options, you have seconds, minutes or a few hours to generate substantial income if you come up with the right prediction. That is not the case with stock trading. When you buy stocks, you might have to wait several days or weeks for its value to inch up even just for a small percentage before you are able to sell to make a little profit. Just to compensate for that you have to buy in large volumes to make a bigger profit. Not so with binary options; you can sustain your earnings with smaller amounts and more frequent trading, and profit in shorter time.
- Easier to learn. The simple mechanism in binary options trading makes it easier to understand. You just predict the movement of an asset which, by definition of binary options, goes to only one of two directions. You can increase your chances of making the right predictions by going over historical movements of such assets, determine and anticipate events that affect their movements, and find patterns and trends that influence asset prices. Previous data can easily be provided by the broker and trading platform which you can study and analyze. Traditional trading is much more difficult because aside from predicting the movement of an asset you also have to asses the size or volume of the movement or else you won’t be able to make any profits. When it comes to money matters, you’re better off with a more straightforward system.
GTOptions: Uses the popular SpotOn trading platform that features several trading tools.
How Does Binary Options Trading Work?
As we’ve pointed out earlier, binary options have only one of two directions to go – up or down, or “high/low” which is one of the most popular options. You can get it right or you can get it wrong. There is no middle option. So how does binary options trading work? In its simplest, it goes like this with the broker and their online trading platform:
- Open an account. You open an account with the broker company. Some will require you to put in a minimum deposit while others will let you first open a demo account so you can practice trading with virtual currencies or credits.
- Start trading. When you already have an account you can start trading. With a demo account, you can choose to upgrade to a real trading account. You can then choose an asset and then predict whether its price will go up or down.
- Know your earnings. Before you commit money to the trade, the broker will show you the percentage amount that you will get in case you make the right prediction.
- Know the risks. You select the amount you want to risk (there are minimum and maximum amount you can put in) and the timeframe within which to work your trade which can be short term (30, 60, 120 seconds) or long-term (3, 5 minutes or longer).
- Wait. Once everything is accounted for, you click on a button to lock in the trade then wait.
- Withdraw your winnings. When you hit it right within the timeframe or expiry period, you get what was promised you by the broker which you can withdraw and deposit to your bank account using whatever payment/money transfer method is available.
- Or lose. If you make the wrong prediction, you lose your invested amount and you can start all over again.
When you think about it, the risk essentially lies with you and a volatile market. You may not be able to restrain yourself and put in bigger amounts without the use of better judgment and the tools made available to you by the broker to mitigate the risk. When your mindset goes into “gambling” mode and not think of binary options as a true investment opportunity then you’re setting yourself in for sustained losses.
You can discipline yourself but a volatile market is something you can’t control. The good news is that you can have enough information and data on how major currencies and prices of stocks and commodities behave in the market. Analyzing them can hone your trading skills and strategies, and prepare you to make more accurate predictions. That is the mark of a true investor.
OneTwoTrade: Offers more than 350 trading assets and 5 trading options.
Advantages of Binary Options Trading
The advantages of binary options trading are many as you’ve learned from the earlier sections. And one of the biggest edges that you get compared to other trading types is that you have readily available information on how trading with a particular asset can likely end up. You know exactly how much is at stake (your trading amount), how much you stand to gain (investment plus percentage if you make the right prediction), the risks involved (you may lose everything with the wrong prediction), and how long it takes to make a profit – or not – from your investment (timeframe you chose). Given all these, you have the following advantages with binary options particularly with your trusted broker and their online trading platform:
- Simplicity. Trading with binary options is literally just a click away.
- Accessibility. Since it’s online, you can trade from any internet connected device. With mobile apps provided by brokers, you can trade on the go.
- Control. Even before you make your first trade, you already know the possible outcomes. The risk and rewards are known so you have better grasp of your next move.
- Convenience. No need to be bogged down by details such as exiting trades, putting orders, monitoring positions, and the like; your broker and trading app can take care of that.
- Hassle-free. There are no liquidity concerns since you do not own underlying assets which allows your broker to offer numerous strike prices and timeframes, giving you lots of trading options.
- No commissions or fees. Brokers generally do not charge commissions or fees for winning trades.
- Multiple assets. Investors can select from a wide range of assets to trade in with some brokers offering hundreds of them.
- Trade as much as you like. With short term options, you can trade numerous times a day – as much as you can afford to invest.
- You can master it. You can study historical charts and analyze financial instrument quotes which usually come with the trading platform; you can be on the lookout for events that influence asset prices; try demo accounts to hone trading strategies; and just be wise, prudent and collected come trading time. You can be a seasoned binary options trader if you put enough effort in mastering it. After all, prediction is based on what happened in the past and it’s a skill that you can sharpen to your advantage and, in binary options, for your profits.
Stockpair: Trading platform built with the latest financial technology
Cost of Binary Options Trading
The cost of binary options trading here refers to the minimum deposit you have to make to open an account with the broker/company to start using their trading platform, as well as the minimum and maximum amount that you can trade (or purchase a contract/option as some brokers would call it) which will form part of your initial investment. The cost differs per broker but to give you an idea, here’s a sampling:
- IQ Option: Minimum deposit: $10; minimum & maximum trade: $1 – $1,000
- Marketsworld: $10; $1 – $1,000
- Ayrex: $25; $5 – $3,000
- HighLow: $50; $10 – $2,000
- OptionFair: $300; $25 – $3,000
Note that many brokers allow you to start off with a demo account (with virtual credits/currency) so you can practice trading. You can then convert the demo account into a real money account by which time you are required to deposit a certain amount that you will use for live trading.
Examples of Binary Options Brokers
To give you an idea of the current landscape, here are some examples of binary options brokers.
- GTOptions is a relatively new player in the industry established in 2011 by Eufal Ltd based in Nicosia, Cyprus. It offers several types of binary options such as Option Builder, One Touch, High/Low, and 60 seconds, with more than 70 assets that you can trade in. Payout per trade ranges from 65% to 85% depending on the asset and option you choose and the trade amount. The broker requires a minimum deposit of $250 with a minimum trade at $5 and maximum of $3,000. It uses the SpotOption trading platform and offers tools such as economic calendar, trading signals, and daily/weekly market review.
- OneTwoTrade operates out of Malta and also utilizes the popular SpotOption trading platform. It offers over 350 trading assets and five different trading options – Classic, Short Term, Long Term, Pairs and One Touch. Minimum deposit is $250 and payout can reach up to 80% of your investment for correct predictions. The broker offers four types of accounts and traders can avail of a variety of promotional deals and offers. It supports a number of deposit and withdrawal methods such as credit cards, bank transfers, e-wallet, and payment gateways.
- Stockpair offers its own in-house trading platform that has an array of tools and features to help both new investors and long-time traders. The platform is built with the latest financial technology to ensure the trade reliability, fund security, data transparency, and information privacy. It also has technical analysis charts to assist traders in financial business intelligence, and market forecast and assessment. The broker is based in Cyprus and licensed by CySEC. Its minimum deposit is $250, offers payouts from 75% to 80%, and has no limits on withdrawals.
- GrandOption provides binary option traders with the Tech Financials trading platform. While it is unlike most trading platforms offered by alternative binary options traders, Tech Financials features a wide interface with a customizable trading chart and allows traders to manage multiple trades while at the same time review their trading history. Also, the Tech Financials platform is easy to understand and use with built-in features such as informative price charts, dashboard with price history, traders choice bar, and technical analysis indicators, among others.