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What Are Binary Options?
Binary options are a fairly new trend which is quickly gaining popularity, especially among novice traders. The reason for this is the simplicity of binaries – this unique trading tool is simpler and much easier to predict. Of course, trading with binary options doesn’t necessarily mean easy money, but beginners will certainly appreciate the idea behind trading binaries.
In short, binary options are an interesting trading product which provides the trader with much more detailed information regarding the potential losses and gains. Binary options are often referred to as all-or-nothing options, because this is exactly what they are – you either get your payout or lose the money you invested. The best thing is that you’ll know how much money you are going to win or lose before placing the trade, so traders can easily calculate the risk they are taking.
In order to trade binary options, you have to predict whether the price of an asset will rise up or go down below a certain level. Another thing you should know about binary options is that they have specific expiration times that depend on the binary options broker you are using – some brokers offer daily, hourly or even 15-minute expiration terms.
As it was mentioned earlier, the biggest advantage of binary options trading is that you have pre-determined potential losses and gains. Another good thing about binary options is that you don’t have to take so many things in consideration when making your trade and the reason for this is the simple prediction you have to make – vanilla options must be predicted carefully, and they are riskier, because the losses and gains are infinite while in the meantime, trading binary options gives you complete control over the amount of money you’ll win or lose.
Let’s take a closer look at binary options trading and see some of the more specific things about this trading tool. When you place your trade, you can choose between two options – Call and Put. If you choose the Call option, then you expect that the asset’s price will rise before the expiration time, and if you pick the Put option, then you are predicting that when the contract expires, the price will be lower than it was when you placed the trades. Keep in mind that unlike vanilla options, binary options can’t be resold before the expiration of the contract, so once you open the trade, you can’t go back.
Binary options trading can be executed with the help of four main classes of assets – stocks, currencies, commodities and indices. Of course, each one of these classes consists of many assets and it is up to you to choose which one best suits your trading style. There are many online communities that discuss binary options trading, so you have access to tons of information regarding this trading tool. There are also many binary options trading strategies, tutorials and tips available online, so don’t hesitate to dig deeper and find the information that you need. In the next part of this post we’ll tell you how to trade binary options.
How to Trade Binary Options?
Before you start trading binary options, you need to find a binary options broker/operator that suits your strategy, budget and requirements. Later in this post we’ll talk about different binary options brokers, their advantages and disadvantages, bonuses, extras, etc. so don’t worry about this topic – you’ll learn everything you need to know about binary options operators in just a few minutes.
Let’s imagine you have already picked a binary options broker and created your trading account. From now on you have two choices:
Invest real money and trade with them
Trade with fake money until you get familiar with binary options trading and the trading platform that your broker uses
We strongly recommend opening a demo account and using it for several days or even weeks, before you switch to a regular account. The reason for this is that you need to get familiar with all the features and extras offered by the trading platform which you’ll be using from now on. Keep in mind that demo accounts are a great way to test different trading strategies and to learn about some of the important aspects of binary options trading.
Trading binary options is much simpler than trading vanilla options, because you have two choices – you can either put your money on a Call option or on a Put option, depending on your prediction. As we mentioned earlier, putting your money on the Call option means that you think that the asset’s price will be higher when the contract expires. The Put option is the exact opposite – you think that the asset’s price will have gone down when the expiry time comes.
The trading process varies depending on the platform used, but in most cases you’ll be able to place a trade with just a few clicks:
Pick an asset
- See the “Return” that the broker offers
- Choose the length of the contract
- Pick a “Call” or “Put” option
If you complete these 4 simple steps, then you have already placed a trade and now you have to wait for the contract to expire. In the mean time you can follow the asset’s price and see if your prediction is on target.
Of course, when you trade binary options you have access to the same graphs and tools that Forex traders use to make predictions. However, as we mentioned earlier, your prediction doesn’t have to be so accurate – you just need to tell if the asset’s price will go up or down. In the meantime, Forex traders have to accurately predict the magnitude of the price’s movement and how long it will last. Now that you know more about the trading process, it’s time to learn how to choose the best binary options operator.
How to Choose the Best Binary Options Operator?
Thanks to the rapid development of internet technologies over the past two decades, we can now access thousands of things from the comfort of our own home. One of the best things about the Internet is that you can make money from it and what better way to make money than to trade binary options? In order to trade binary options, you’ll have to pick a broker that meets your needs and requirements, and in this part of our post we’ll familiarize traders with the most important characteristics of binary options brokers.
Binary options operators are quite different from Forex trading operators, because of one main reason – they don’t need to be regulated. In fact, 95% of binary options brokers are unregulated, but this doesn’t mean that they aren’t trustworthy. You can find thousands of different operators, but just a small fraction of them will be regulated and in most cases these regulated brokers will be located in Cyprus and regulated by Cysec. Some of the most reputable and popular binary options are operators are unregulated, so don’t worry if the broker you’ve chosen isn’t regulated.
Reviews and Ratings of Options Brokers
Unfortunately, you can’t check the financial condition of a binary options broker, but you must do a little bit of research in order to find out whether your broker has enough money in capitalization in order to keep itself in the business. In the past many people lost their money due to using the services of binary options brokers who had just $100,000 in their banks. These money are far from enough to support a binary options broker, so don’t forget to check the capitalization of the binary options operator you’ve chosen.
The next thing you need to keep in mind is the trading platform used. Different platforms come with different features, but nowadays almost all platforms have the extras that most traders use. For example, one of the most popular and widely used platforms is MetaTrader 5, and there is a very good chance that the broker you’ve chosen uses this trading platform. Some brokers may operate with more than one platform in order to provide their clients with the best trading experience. You should also check what your broker offers in terms of compatibility:
- Web based trading platform
- Non-web based trading platform
- Mobile trading
Mobile trading platforms are quickly gaining popularity and it is an undisputable fact that nowadays almost everyone uses a smartphone. Binary options brokers that support mobile trading are becoming more and more popular, so definitely check whether your broker offers this feature.
Two of the most important things you should check are the payouts and assets that your binary options broker offers. In the ideal case, your broker will support all types of assets, but in some rare cases, brokers will only allow you to trade binary options by using just commodities or just currency pairs. We advise you to stay away from such brokers.
The payouts that the broker offers are also important and in most cases they’ll vary between 60% and 70%. However, some binary options brokers offer payouts up to 85%, so with a little research you may find a good deal!
Last, but not least – check the payment methods which your binary options operator supports. Usually, brokers allow you to deposit or withdraw money via a wide range of payment methods such as debit/credit card, bank transfer, PayPal, Skrill, etc. if you can only use a specific payment method, then make sure that the broker you’ve chosen supports it. Some brokers offer bonuses for your initial deposit, but you’ll be able to read more about these bonuses in the next chapter of our article.
Binary Options Bonuses
Bonuses weren’t so popular among traders and brokers until a couple of years ago when several binary options operators tried to attract more clients by offering special bonuses for their initial deposit. Since then, more and more brokers have adopted this approach and do their best to attract new clients by offering them special bonuses. Keep in mind that these bonuses may seem attractive, but you must always carefully read the terms & conditions related with them. The reason for this is that in many cases brokers will set special requirements which you must meet in order to withdraw the money you’ve won via your bonus, but we’ll talk about this later.
As you probably already know, there is a minimum amount of money you can deposit in your trading account. This requirement is different for every broker, but in most cases you won’t be able to invest less than $150-$200. When it comes to trading binary options, there is also a minimum limit on the amount of money you can use to place a trade, so take a look at the requirements your broker has set.
Trading bonuses are a great way to increase your bank balance, especially if you plan to invest a smaller amount of money. For example, a trader looking to start trading with just $500 will welcome the opportunity to increase his balance to $1,000 by taking advantage of the initial deposit bonus. Take a good look at the bonuses offered by your broker – some operators offer a 100% bonus to your initial deposit, but this bonus only applies for a certain amount of money. For example, some brokers will give you a bonus up to $2,000, so if you have already chosen a binary options operator, make sure you check the terms of the bonus they offer.
Keep in mind that there is a reason why these bonuses are called ‘trading bonuses’. You can’t withdraw the money you get via this bonus unless you use them to generate a certain amount of trading commissions. In most cases, brokers will require you to generate trading commission equivalent to the bonus in order to be able to withdraw it, but in some cases you may have to generate trading commissions greater than the bonus itself.
In short, bonuses are a great way to boost the amount of money you have in your trading account. They are offered by just about every broker, so it is up to you to find a bonus offer that suits your requirements. Just remember to always check the amount of the bonus and the requirements you have to meet in order to withdraw the money you generate by using the bonus.
Binary Options Payouts
This is the thing that every binary options trader wants to know – what determines the payout and how is it calculated. The answer is quite simple – every broker offers different payouts, but in most cases the payout for trading via the Put/Call options will vary between 60-80%. As we mentioned earlier, one of the huge advantages of trading binary options is that you’ll know how much money you can make with the trade before putting your money on “Put” or “Call”.
Calculating your profits is easy as long as you know the max payout that your broker offers. For example, let’s say that you are trading with an asset that offers a winning stake of 75% and you put $1,000 on a Call option. You’re prediction turns out to be correct, and the trade closes in your favor, so how money will you receive? The answer is simple – $1,000 + (75% of $1,000). So the total payout for this trade will be $1,750.
Keep in mind that different types of binary options will have a different payout ratio. As we mentioned earlier, the payout usually varies between 60% and 80%, but in some cases you may come across lower or higher rates. Keep in mind that if your broker offers a payout below 60%, then you might want to re-consider using their services, because you can easily find a better offer. On the other hand, if your broker offers payouts above 80%, you should take a look at the company’s reputation, because there are many fraud schemes that involve binary options operators offering high payouts.
Some binary options brokers offer two types of payouts – you can either request a full payout or a smaller one that includes a refund in case your prediction goes the wrong way. For example, the regular payout of a certain broker may be 80%. However, the broker also offers a “Refund” option. In this case, if you win you’ll receive a payout of only 65%, but if you lose, you’ll get a 15% refund. It is up to you decide whether you’ll risk all your money aiming for a bigger profit or if you’ll play it safe and save some of your investment in case your trade doesn’t go well.
Some brokers offer the so called High Yield Options which can offer you a profit percentage of up to 500%, but keep in mind that trading via this option is more complex and riskier. High Yield binary options come with many restrictions which are put there in order to protect the binary options operator. This is why you should stay away from them unless you are very experienced and knowledgeable.