Binary option trading in its simplest form is just another way to bet on the movement of a financial instrument.
It involves speculating on the whether the price will be higher or lower than certain price (the strike price)
within a certain timeframe – this is typically minutes but could be anything from 30 seconds to months.
Binary options are available on a wide range of markets including currencies, stock market indices, individual stocks,
commodities such as gold, bonds and crypto-currencies such as Bitcoin.
Binary trading has become increasingly popular in recent years due to simple the higher/lower nature and low cost of entry for people new to trading.
What is binary trading?
Binary trading involves buying either a call option, if you think price will rise, or a put option if you think price will fall.
The option will specify a price level (the strike price) and a time-frame.
With a call option if the price finishes above the strike price at the end of the timeframe you get a fixed return on your initial
(for example 95% depending on your broker and how the binary option is structured) or nothing.
There is no in between. The outcome is binary – you either make a big profit or lose the initial stake.
For a put option you profit if price closes below the strike price.
There are lots of variants and brokers use different names, often simplifying into a simple buy/sell decision without mentioning options,
but in essence this is binary trading.
Binary online trading
There are a wide variety of options for trading binaries online.
Most platforms are web-based and easily accessible through a browser on PC or Mac, which is not always the case for more traditional trading with dedicated software platforms.
Most of the larger firms also offers mobile apps so it is possible to trade on the go via tablet or phone.
What is binary options trading strategy?
Just like with any form of trading the underlying strategy is key.
No strategy and it is just akin to blind gambling and you will lose over time.
There are two broad types of strategy – fundamental and technical.
Fundamental strategies relate to the fundamental prospects of a currency, company, country etc and short-term are heavily reliant on news.
For example, the release of good economic news for the US might lead to a quick rise in the US stock market indices or the US dollar.
Bad news for the world economy could lead to a surge in the price of gold or perhaps crypto currencies.
Similarly for a specific company short-term price movements can be heavily driven by the release of company news such as earnings announcements, product developments or regulatory news.
Technical strategies ignore fundamentals and focus on analysing the price movement on charts.
There are a huge number of different technical strategies but the most fall into one of three categories –
breakout/momentum, retracement and reversal.
Breakout and momentum trading involves jumping into a strong trend just as it begins or while in progress.
Retracement strategies involve waiting for a pull-back in an established trend in the hope that the trend gets going again.
Reversal strategies look to pick when strong trends will stop and reverse in the opposite direction.
These strategies all have their pro and cons.
The key is to find something that works for you and have the discipline to stick to it.
Binary trading platforms
Log onto a binary trading platform and what you see may vary hugely but there are some common aspects.
There will sections showing account balance, profit/loss on open trader etc, some kind of window showing the range of markets available and an interface for entering trades.
Most will also have a charting function with most probably an interface for entering trades directly from the chart.
The best platforms may also have streaming news.
To enter a trade typically you select a market which then brings up a chart.
Then either directly on the chart or via separate boxes you select a direction (buy or sell – effectively a call option or a put option),
a strike price and a timeframe along with the amount you want to bet which could be as little as a few dollars.
The best platforms will show your trade marked on the chart updating in real-time as time ticks down.
For a typical binary trade if the price closes above your strike price (for a call option) you will immediately be closed and credited with the profit (perhaps 95% depending on the broker).
If it closes below you will lose all of your stake.
This is the typical high/low binary option but some platforms offer more complex alternatives such as one touch options or boundary options.
One touch options pay-out immediately upon the strike price being hit even if it then moves back below.
Boundary options involve picking a high-low range and betting whether price will close within or outside the range in the chosen time-frame.
This can be particularly useful when major news is expected that could perhaps trigger volatility in one direction or the other.
A word of warning – some platforms offer auto-trading robots that will manage your money and trade on your behalf within certain parameters that you choose.
They sound tempting and the promise great returns while sitting back and doing nothing.
Well if it sounds too good to be true it probably is and while some of these robots may work, in the vast majority of cases they are just a quick way to losing your money.
ProsPotential High Return on your initial investment. |
ConsLosses are huge. |
Advantages of binary trading
Binary trading is fantastic way into the world of trading.
You can quickly set-up an account and get going with a small amount of money – maybe just $100 as an initial deposit.
You can effectively leverage that amount up several times giving you exposure to a much larger asset value and hence the ability to quickly make large returns.
With binary options lasting just five or ten minutes or even 30 seconds the potential is there to make large returns in a short-period of time.
The trading decision is also in a sense relatively straightforward.
There is no need for huge analysis and predictions as to what a market might do in the coming weeks or months.
You just need to make a judgement on whether price will be higher or lower in the next few minutes, depending on the time frame of the option.
If you spot a strong trend, for example, just make a judgement as to whether it will continue for the next few minutes and jump in.
Of course binary option trading can also be a little longer-term with brokers offering options expiring in 1 month or even more than 3 months for certain markets.
Disadvantages of binary trading
The natural flip side of potentially large short-term returns is that you can lose money very quickly if you get it wrong.
A string of losing binary bets can lead to large losses and the short timeframe makes it easy to get carried away.
Discipline is key – making small size bets relative to your account size and having a strategy and sticking to it.
The other issue with binary trading is that it has attracted a number of dubious brokers and one needs to tread carefully.
In some cases people have lost money through a broker going bust or making it extremely difficult to withdraw profits.
Tread carefully and stick to the big names with some kind of regulatory approval.
Is binary trading regulated?
Regulation of binary brokers varies hugely throughout the world and you should check the situation in your country.
In general regulation has tightened in recent years due to a large number of scams and if at all possible you should stick to a regulated broker.
In the EU, for example, a large number of brokers are regulated by CySEC, the Cyprus Securities and Exchange Commission.
Within the EU there is a temporary ban on marketing short-term binary options to retail clients but but there are ways around this
– for example registering as a professional if you are eligible or opening an account with a branch of the your broker located outside the EU.
Simple steps to start trading binary options
- Select a regulated broker
- Select an asset to trade
- Set the time frame of the trade
- Set the size of your trade
- Choose to Buy or Sell the trade
- Confirm the trade
What to look for in a binary trading broker?
There are large number of binary option brokers but you should pick carefully.
In general, stick to the bigger names that are well-known and regulated by a recognised organisation such as CySEC or the FCA in the UK.
This doesn’t protect you completely but is a sign they behave responsibly and in the worse case of them going bust your deposit will be protected up to certain limits.
Avoid those focusing on automatic or robo-trading which is a big red flag.
In practical terms, the most important issue is making sure they offer the markets you want to trade.
Almost all will offer say USD/EUR or S&P500 but some will offer a lot more markets than others.
Not all will offer crypto and some may offer no stocks at all or just a small handful of big names like Apple or Google.
Similarly on the time-frame for options.
Beyond that try the platforms and see which have features that fit with your plans.
Is there a demo account so you can practice?
Does the trading platform feel good and easy to use?
What is the minimum account deposit required?
Initially you might want to start small and build-up.
How is customer support? Send some messages and see how quickly you get a response. Some are notoriously poor.
What are arrangements for withdrawing money and at what cost? Ideally they offer free quick deposits to a bank in your country or one of the common payment systems such as Skrill or Neteller.
Recommended binary trading brokers
There is no right or wrong answer as to which broker is best but in general we recommend sticking to well-known names that offer a wide range of binary options markets and timeframes.
With these companies you will not be scammed and your money will be relatively safe leaving you free to focus on making the right trading decisions to make money.