What is Binary Options Trading and How does it Work?
Binary options trading based on making predictions about the future movement of an asset. Each binary option will present you with a situation after which you will have to decide if you either agree or disagree with the proposition of that situation.
A typical binary option position looks like this:
– Apple’s stocks will be above $500 by tomorrow 20:00
This is a statement that will either be true to not true by the time the option expires (in this example by 20:00 tomorrow).
Such a proposition can have only two outcomes (hence the name binary), which is either that the stock price will be above or below $500.
As a trader, you will have to analyze the situation and decide which outcome will likely come true based on the available information.
If, for example, at the time you see this proposition, Apple’s stocks are at $480, then it’s unlikely that they would jump above $500 in just one day. In this case, you should predict that the statement above would turn out to be incorrect.
However, imagine that in the example above Apple is about to release a new line of products tomorrow. In this case, it’s very likely that by end of day tomorrow the stock price of the company will be above $500. Knowing this, you will predict that the statement will turn out to be correct.
So, in short, in binary options trading you will be making predictions regarding the future movement of assets based on available information and research.
This obviously isn’t gambling, as you aren’t just picking and choosing the predictions by random, but instead you are evaluating the presented proposition based on the available information about the asset (like in this case Apple) and make an accurate prediction based on this information.
How do you actually execute a trade?
Executing trades such as the above is very simple. This is how a trade such as in the example would look like.
– The broker presents you an option stating that Apple’s stocks will be above $500 by tomorrow 20:00
– The broker offers you a payout rate of 90%
– You will have to decide whether to invest “for” or “against” the proposition
– You will have to decide how much to invest.
Now, assume you decide to invest $100 and invest against the proposition.
In case your prediction will be correct, you will be paid out your investment multiplied with the payout percentage. In this case this will be $190. If you prediction will be incorrect, you will lose your investment. (Often times brokers will offer rebates on losing trades, so in a case like this you could get back around $20 in case your prediction was incorrect).
Terms and Expressions Used in Binary Options Trading
Binary trading has certain terms and notions traders will have to understand before they begin trading. Read about all these notions below:
Online trading contract – This is what is commonly called a “binary option”. This contract contains an asset, a statement, a strike, a payout rate and an expiry time. If traders will manage to predict the outcome of this option by the time of the expiry, they will win.
Essentially, the entirety of the example described above in the previous section was the “binary contract” or the binary option.
The statement – The statement is what the binary contract claims will happen after a certain time frame. In the example that was mentioned above, the statement was that Apple’s stocks will be above $500 by 20:00 the next day day.
Traders will have the possibility to invest for or against this statement.
The asset – The asset is the subject of a trading contract. In the example given above, the asset was Appel’s stock. In financial trading there are multiple assets offered such as stocks, commodities, indices and Forex currency pairs.
The initial investment – The initial investment is not part of the initial contract. This investment is the amount of money traders decide to invest on a binary options contract. Most commonly, this sum can be anything between $10 and $1,000.
The payout rate – The payout rate in a binary contract is the percentage of the initial investment that will be returned to traders in the form of profits. In case a trader accurately predicts the outcome of an options contract, he or she will be awarded with the initial investment plus the promised percentage of the initial investment.
Most commonly, payout rates range from 75% to 95% in binary trading. However, there are certain exotic option types such as boundary- and one-touch options that can promise extremely high payout rates of 200% and above.
The strike – The strike of a contract is the value of an asset that will be used as the initial reference by the broker. In the example above, the strike was $500. In the example, traders’ task was to predict that by 20:00 the value of Apple’s stocks will be above or below the mentioned strike.
The expiry time – The expiry of a trading contract is the moment on which traders’ prediction will have to come true. In the example given above, the expiry was 20:00 next day. This means that whatever prediction the trader made, it will have to come true by precisely 20:00 (obviously it can come true sooner but traders only win if by the expiration time their prediction is still correct).
So, if the trader predicted that Apple’s stocks would be above $500, then they will have to have a value that’s higher than $500 at precisely 20:00. Naturally they can have any value before 20:00. Due to price fluctuation, the value of asset can be either lower or higher than the strike before the expiry. – What matters is that it should coincide with the trader’s prediction at the moment of the expiry in order for the trader to win.
Is Binary Options Trading Hard to Learn?
If you’ve read everything that’s written above, then you already know how to trade binary options online. Yes, it’s really this simple. Like I said, some people are under the false impression that you’ll have to be an expert economist in order to trade binary options.
So, basically everyone can learn how to trade in the financial world. However, not everyone is able to learn how to trade binary options successfully. – On the other hand, learning how to win is as easy as learning how to trade. A good way to become a winner in binary trading is to read all my educational and strategy articles.
If you have some patience and go though all of my educational and strategy articles, then I guarantee that you’ll become a winner in binary trading. Most people unfortunately are not able to learn how o trade binary options because they are lazy.
It’s really up to you, to be honest. You can either choose to trade options without first learning all the winning strategies, or stick around on my website to read all the guides and tutorials I have to offer. – This can mean the difference between losing or winning in binary options.