This article will explain what you need to know about binary options, including how to trade them and the best strategies to use.
What are Binary Options?
Binary options are financial contracts that will only have one of two outcomes by the time of their expiration, turning a trade into a simple yes-or-no question. The investor will place a trade depending on their prediction as to whether an asset will reach a certain price at a certain time. If they guess correctly, they will make a pre-defined profit. However, guessing incorrectly will result in them losing all the money they invested.
For instance, you’re investing in a binary option for gold. The question is, “Will the price of gold be above $1,830 at 1:30 p.m. today?” You think it will happen, so you buy the option.
The bid (selling) and ask (buying) price will always be between $0 and $100. If the gold bid is $42.50, then that will be the trade price for selling, and if the ask price is $44.50, then that will the price for buying. The profit from the trade will be calculated as $100 minus the trade price.
Going back to the example, if you answered yes to the question and bought at $44.50, then your profit will be $55.50 per the formula above. But if you answered the question wrong, you will have zero profit and lose the money you invested, plus fees.
The bid and ask can fluctuate until the option expires. You can close your position at any time before the expiration to lock in a profit or prevent further loss instead of letting the contract expire.
Strategies in Trading Binary Options
It is important to have the right strategies in your arsenal, both to build your confidence in trading binary options and to help minimize risk. Apart from an entry and exit plan, you must have a monetary goal. This helps ensure you are not essentially gambling away your money.
Follow the Trends
A good strategy a beginner can immediately apply is to follow the trends in the market. Asset prices usually move according to the trends, since the market is constantly changing in real-time.
Keep in mind that a trend will typically have a zig-zag pattern, with asset prices going up or down. When you recognize the pattern, you can estimate whether an option’s price will be higher or lower at expiration.
To apply the strategy, examine the chart with the trend lines. If the line is flat, look for a different trade option. But if the line is going up, the price will probably go higher, and the same goes for the downtrend line. You can use a binary option to earn a profit once you learn to accurately identify these movements.
The Straddle Strategy
This strategy will require you to stay tuned to news related to the market. Straddle trades must be made before an important announcement, since an asset’s value may briefly increase for a short period after it.
For instance, you can buy an option upon estimating that the price will come back down. You can create another option trade when the prices drop, predicting they will rise again. This strategy leverages the swings of a trend, making it a consistent way to make profits even in volatile markets.
For example, news that a gold mine exploded is highly likely to significantly affect the market and cause the price of gold to fluctuate. Investors cannot estimate an accurate price, thus driving it up and down while affected companies scramble to find a solution to the incident.
The straddle strategy will allow you to leverage the waxing and waning of the market until the incident has been resolved. You may be able to make profits in binary options regardless of what happens in the market in the long run.
Beware of Scams
According to the Financial Conduct Authority, investors in the United Kingdom lost an average of £87,000 per day because of binary options scams in 2018. It was mainly due to online investment frauds promoting binary, forex, and crypto opportunities on social media platforms.
Brokers and investors must remain vigilant against binary options scams online, especially any beginners who are still learning about the market.
Trade Binary Options with a Trusted Broker
Binary options are financial options that novice and experienced traders can take advantage of. However, beginners will find that having a reliable broker by their side can help them make better trading decisions.
Trusted Options is a reliable binary broker regulated by the IFMRRC. With payouts of up to 95%, we are trusted by more than 1.7 million traders for trading and safe withdrawals.
Our secure platform is easy to use, with helpful features such as multichart layouts, advanced technical analysis, and historical quotes. Users also get 24/7 access to bilingual support.