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A Beginners Guide to Trading Binary Options

Binary options trading can seem quite intimidating from the outside. With lots of uncommon terms like strike price, indices and binaries being thrown, around it can seem like quite a maze to beginners. In this article we are going to examine each of the key concepts in turn and give you the information that you need to know. This Dummy’s guide will progressively take you through the key concepts and in doing so, it will teach you about the fundamentals of binaries trading. By the end of the article you will be ready to start trading yourself.

 

Binary option

Lets start with the real fundamentals of binary option trading, Binary means two options. So, when you are trading binary options there are two different possible outcomes from the trade. Much like flipping a coin, the first outcome is that you win and the second option is that you lose. There cannot possibly be any other outcome.


Unlike flipping a coin though the odds of you winning and losing are not 50/50. This is because binary options have an underlying asset that you wager on such as oil, gold or a currency exchange. The odds of the two outcomes being correct, changes with the movement of the assets value.


This means that when you trade a binary option your decision on which outcome to choose is not a complete guess. A good trader will inform their trading decision on how the assets price has behaving over the recent history. A correct prediction results in you winning money and an incorrect one, a loss.

 

Broker

Before you can start trading you will need to find a binary options broker. The broker is the place where the trade will be hosted. When you trade binaries over the Internet, the broker will be a website. Each broker has a different set of conditions to offer so you will need to shop around before you find the one that is right for you. The brokers may have different rates, in terms of the percentage profit that you take for a win and the percentage rebate they offer in the case of a loss. The broker makes their money by taking a percentage of the win or loss. This is their commission for hosting the trade.


The amount that they take in commission is an important condition to look out for when you are searching for a broker. You are more likely to make greater profits yourself by choosing a broker that takes lower commission.

 

 

 

Another condition to think about is the method of payment. Brokers can pay you in different ways. Unsurprisingly, the most popular payment is cash. This is a quick and easy way to get winnings into your account and out of assets. The other option is to have a broker pay you in assets. If you are not strapped for cash this type of payment can serve as a way to keep your money invested and increase its value. Say you win a binary option on the price movements of oil. If the price of oil is rising quicker than the inflation of your home currency over the long term, you can keep your money invested in oil for a while and make extra money in the long term.

This adds an extra dimension to the trades because you have to think extra carefully about what type of asset you want to trade on. Please note that not all brokers will have this option to be paid in assets. Once again, you may have to shop around to find one that does.

 

It is important that you can trust your broker because you are placing your money in their online deposit box. True to the general rule of the Internet, the bigger companies are often the most reliable and competitive in terms of rates. This is not to say that the smaller, less popular brokers provide a poor service.It is just a fact that popularity on the Internet indicates security.



If a broker has a bad reputation for reliability and are the subject of some bad online reviews, no doubt, their popularity will plummet.

 

Underlying asset

The underlying asset is the commodity, stock, currency pair, or indices that you make your trade on.

Commodities can be anything from oil, gas and gold to iron and steel. So, if you had a commodity as the underlying asset for your binary options trade you would be trading on changes to the value of something like a barrel of oil.

Stocks are the total amount of shares that are owned in a particular corporation. So, if stocks were the underlying assets of your trade, you would be trading on the value of a large company.

Currency pairs are pairs of currencies whose values are measured against each other as an exchange rate. If you had currency pairs as your underlying asset, you would be trading on changes to their exchange rate.

Indices are groups of stocks together. Trading with indices as the underlying asset would have you speculating on the price movements of the conglomeration of stocks. Indices represent a vast amount of complex data about the performance of numerous companies. To simplify it, the data is usually compiled and expressed as a factor of 100.

 

Strike Price

The strike price is the value of the underlying asset at the very moment when you initialise the trade. The most popular type of binary option trade, call/ pull trades, use the strike price as the comparison point. The objective of the trader is to predict whether the asset value will rise or fall in the time period of the trade. When the time period expires, the current value of the asset is compared to the strike price. If it is higher than the strike price, a call trade has taken place, if it is lower a pull trade has taken place. The trader is in the money if they predicted the asset prices movement correctly and they are out of the money if their forecast was incorrect.

 

 

 

 

Trade time period

Each trade has a start time and an expiration time. The trader selects how long the trade will last before they make the trade. The clock starts when they initiate the trade by clicking the trade button and it stops when this trade time period has expired.

The trade time period is very important in binary options trading because it is one of the factors that influences which of the two possible binary outcomes a trader will choose. Asset prices generally fluctuate from high to low repeatedly. The assets value will change significantly over a matter of days, weeks and months due to modulations in supply and demand but will only change insignificantly over seconds minutes and hours
(that is unless there is a major supply and demand crisis that causes a dramatic price change).

As binary trade options take place over short periods of time, sometimes as little as 30 seconds, your objective will be to chart at what stage of the fluctuation the asset price will be when the time period ends. With such short time periods the margins are tight between winning and losing.

 

Trading minimum

This is the minimum amount that the broker will let you put in to a trade. When you start a trade you will be asked to state how much you want to wager on the binary option. In the fashion of any other type of investment, the more that you put in, the more you stand to gain. Some brokers will only accept high amounts for a trading minimum because this is where they make the most money. There are brokers out there who accept as little as £30 though.

 

Types of binary option trade

There are four main types of binary option trade. Up/ down trades, where you predict whether the asset price will rise or fall, boundary trades where you predict whether it will expire in a particular price range, touch/ no touch trades where you predict whether the asset price will touch a particular figure and double touch where you predict whether it will touch two figures. Each of these types requires a different reading of the market. These are the most popular types of binary trades out there but broker may have more to offer.