If you’re looking for a simple way to trade and invest in financial assets, why not consider binary options? They’re easy to understand and preferred among newbies, so you’ve pretty much already got a head start in the right direction. Benzinga will help launch you the rest of the way.
What is Binary Options Trading?
Binary traders profit from price fluctuation just like other traders, but binary options have a preliminary stated risk and profit potential. That’s why this type of contract is called a “binary” option. You get one of the two possible outcomes: suffer the risk or profit from the reward.
In binary trading, you bet if the price will be higher or lower after a certain time passes: the expiration. If you’re right, you win. If you’re wrong, you lose. When you lose, you lose the amount you’ve bet in the trade. When you win, you win around 80% of the amount you’ve bet (this depends on the broker as well).
Let’s say you believe the price of the EUR/USD will be higher in one minute and you bet $10. If you’re correct, you’ll profit around $8, depending on the broker. If you’re wrong, you lose your $10.
There’s some specific terminology wrapped with binary options. Can you sell an option? No, but you can buy a “put” option.
This is how it works:
You buy a call option when you expect the price to increase. This means you enter a deal where you bet that the market will increase in price.
You buy a put option when you expect the price to drop. This means you enter a deal where you bet that the price will go down.
Calls and Puts
It’s easy to understand the difference between “buy” and “sell,” and which corresponds to bullish and bearish markets. However, it might be tricky to remember the difference between calls and puts. Here’s an easy way to remember:
Imagine a phone is on a table. When you want to “call” you need to lift the phone “up,” an increase. When you want to “put” it down, it needs to go downward, or “drop.”
How To Start Trading Binary Options
Step 1: Build your strategy
Test different approaches and check which one is profitable for you. You can also combine different indicators to build your strategy. Some indicators could be:
- Price levels
- Candle patterns
- Chart patterns
- Moving average indicators
- Fibonacci levels
- On-chart indicators
- Area indicators
These are not the only indicators available; there are many more and each of them works in a different way. Match signals from different indicators to reduce the chance of getting a bad signal and incline the scales in your favor.
Step 2: Calculate the returns
Say that your broker will give you 80% return if you guess the right price direction. You risk 100% of the invested amount, a return of 8:10. How successful should your strategy be and where is your break-even point?
Say that you do 100 trades by investing $10 in each. This means that you’ve invested a total amount of $1,000. Your strategy has a 55% success rate, meaning that you will get an approximation of 55 successful trades out of 100.
If you guess correctly, you’ll win $8. If you guess incorrectly, you’ll lose $10. Since you’ll get around 55 winners, this means you will make 55 x $8 = $440. Since you’ll get around 45 losers, then you will lose 45 x $10 = $450.
A profit of $440 – $450 (loss) = -$10 per 100 trades with this strategy, which isn’t ideal.
Here’s another test with the same brokerage conditions: 80% return on a successful guess. Let’s say our strategy has a proven record of 70% success rate. This means we’ll have 70 winners and 30 losers after 100 trades:
70 x $8 = $560 (profit)
30 x $10 = $300 (loss)
Net profit = $260
Step 3: Money management strategy
Don’t forget to factor in luck. If you deposit $100 in your account and you invest $20 in each trade, you’ll likely fail. The reason for this is that you will be able to handle only five losing trades in a row, which is very likely to happen.
It’s safe to have money for at least 100 trades. What is the chance to get 100 losing trades in a row? It’s just like flipping a coin and getting 100 heads in a row: pretty unlikely.
Step 4: Choose your binary options trading broker
Pay attention to some important rules when you choose a broker. There are scam brokers who will not let you withdraw your money, so research in advance. Good brokers:
- Are regulated and conform to the laws of a country.
- Have existed for a while. Scam brokers get caught and typically close after a year or two.
- Have good reviews online. What are people saying about the broker? Can you withdraw your winnings?
- Offer a variety of trading assets. You don’t want to have only five currency pairs available for trading.
- Have a friendly interface.
- Include a rich set of trading indicators. These indicators will assist in your analysis and help you build a successful strategy.
Step 5: Create and fund your trading account
This is the easiest step as long as you have the money! Follow your broker rules for creating an account. You’ll need to identify yourself and to confirm your account, then deposit the amount you are willing to start with.
Make sure you conform to the money management rules we already discussed. If you’re willing to invest $10 in a single trade, this means you’ll need to deposit at least $1,000. This way, you’ll have enough money to conduct 100 trades and you’ll be able to handle an eventual downswing.
Step 6: Execute your first trade
Now you’re ready to go! If you’ve deposited $1,000 in your account, then it is safer to invest only 1% per trade, or $10.
- Change the investment per trade to $10.
- Choose the expiration time of the binary option.
- Do your analysis and apply your strategy.
- Click “call” if your analysis shows that the price will go up or “put” if you believe that the price will go down.
- Wait until the binary option expires.
- Track results.
Binary options are an innovative and easy way to invest in the financial markets. Rules are simple (that’s why many traders prefer this type of trading) and there is a limited risk per trade, based on the amount you invest.
You’ll still need to conform to the well-known trading rules if you want to be successful. Build a strong strategy, calculate the amounts, manage your bank well and be smart, and you’ll increase your chances of success. A demo account is always a helpful test before jumping in with real money.