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What are binary options | Advantages Disadvantages |work Process

what are binary options

Binary options Details

What are binary options ?- there is no simple answer to this question!

Binary Options are a way that anyone can profit from the movement in value of a large and dynamic range of commodities, assets, stocks and shares or even Forex.

Binary Options, also known as Digital Options or All-or-Nothing Options, have been available to the public-at-large since 2008. Basically, Binary Options have two possible outcomes: “in the money”- when a specific asset reaches a certain value after the fixed expiry time and “out of the money”- exactly the opposite outcome.

The reason why these types of financial trades have become so hugely popular is that traders have to make just one of two possible decisions when placing them, that being yes or no decision which in Binary Options trading are known as Put or Call trades.

Binary Option Trading is a revolutionary way in which traders can achieve high returns within a very short period of time. In case the investment doesn’t expire “in the money”, some brokers give a specific percentage of the cash invested as a refund to the binary option trader. This refund can go as high as 15% of the original investment, so not all is lost if your option expires out of the money.

There is no requirement to actually purchase for example gold bullion if you wish to place a Binary Options trade on the value of gold, you simply need to decide whether the value of gold will rise in value or fall in value over any given time period.

How does Binary Options Work?

The Binary Options trader uses a wide range of assets, from Forex to Stocks, Indices and Commodities. These are commonly referred to as underlying assets because the value of the option is derived from their value, making underlying assets the backbone of binary option trading and we win or lose out on binary trades based on the movement of these underlying assets. Basically, a trader speculates that the price of X asset will be above or below the opening level at expiry time and if he is right, he will receive a specific, prearranged profit. Let’s say, I speculate Google will be above X value within one hour (X is the opening price level of Google), I will put my money on the Call Option (in contrast to the Put Option – when I speculate that the asset price will be below X value). If the Google stock is just one point above X value when my option expires, one could generate up to 85% profit from the investment. Many brokers will refund up to 15% of the investment loss in case I was wrong in my speculation.

Nowadays, with the Binary Options market growing rapidly, traders have many more trading options, such as Boundary Options, Touch Options, Up/Down, and the more recent type of fast trading called 60 Seconds trading where all options expire after one minute, so you could potentially increase your account balance almost faster than you can say “I love Binary Options Trading”. Each category of options is slightly different from the others in terms of its properties. Our readers can find more information about the different trading tools and options, by having a glance at our binary options glossary terms.

In order to become a Forex market guru to trade Binary Options, but he needs to be knowledgeable, alert and aware. To begin with, Binary Options require only a small level of investment but give a very rewarding level of return. Online platforms have made the trading of Binary Options easier because any trader across the globe can trade Binary Options and receive the needed information for trading. Making a few smart and profitable investments while losing some other minor investments could generate high profits in a short amount of time. Binary Options trading is breathtaking, profitable and fun.

Why Trading Binary Options?

Binary Options trading definitely adds an extra dimension to speculation because there are so many trading tools and trading options that it is quite possible that one could make a correct speculation. Binary Options trading is mainly based on research and a certain amount of knowledge (about the markets and assets), but it is also strongly based on risk management.

Pros

           Minimal Financial Risk

If you have traded forex or its more volatile cousins, crude oil or spot metals such as gold or silver, you will have probably learnt one thing: these markets carry a lot of risk and it is very easy to be blown off the market. Too many parameters affect trade outcomes that traders have to battle with. Things like leverage and margin, news events, slippages and price re-quotes, etc can all affect a trade negatively. This is why trading the currency and commodities markets is a risky venture. The situation is different in binary options trading. There is no leverage to contend with, and phenomena such as slippage and price re-quotes have no effect on binary option trade outcomes. This reduces the risk in binary option trading to the barest minimum. Unlike what obtains in other markets, many binary options brokers return a fraction of the amount used in purchasing binary options contracts when the trade is a losing one.

          Flexibility

The binary options market allows traders to trade financial instruments spread across the currency and commodity markets as well as indices and bonds. This flexibility is unparalleled, and gives traders with the knowledge of how to trade these markets, a one-stop shop to trade all these instruments.

           Simplicity

A binary trade outcome is based on just one parameter: direction. The trader is essentially betting on whether a financial asset will end up in a particular direction. In addition, the trader is at liberty to determine when the trade ends, by setting an expiry date. This gives a trade that initially started badly the opportunity to end well. This is not the case with other markets. For example, control of losses can only be achieved using a stop loss. Otherwise, a trader has to endure a drawdown if a trade takes an adverse turn in order to give it room to turn profitable. The simple point being made here is that in binary options, the trader has less to worry about than if he were to trade other markets.

           Greater Control of Trades

Traders have better control of trades in binary options. For example, if a trader wants to buy a binary options contract, he knows in advance, what he stands to gain and what he will lose if the trade is out-of-the-money. This is not the case with other markets. For example, when a trader sets a pending order in the forex market to trade a high-impact news event, there is no assurance that his trade will be filled at the entry price or that a losing trade will be closed out at the exit stop loss. This is not the case with binary options trading.

            Payouts

The payouts per trade for binary options are usually higher in binary options than with other forms of trading. Some binary options brokers offer payouts of up to 80% on a trade. This is achievable without jeopardizing the account. In other markets, such payouts can only occur if a trader disregards all rules of money management and exposes a large amount of trading capital to the market, hoping for one big payout.

           Accessibility

In order to trade the highly volatile forex or commodities markets, a trader has to have a reasonable amount of money as trading capital. For instance, trading gold, a commodity with an intra-day volatility of up to 10,000 pips in times of high volatility, requires trading capital in tens of thousands of dollars. This restricts the access of everyday people to such markets. However, binary options has much lower entry requirements, as some brokers allow people to start trading with as low as $200.

Cons

Here are some of the disadvantages associated with binary options trading.

          Lack of Simulated Trading Facilities

One of the greatest drawbacks of binary options trading is the lack of simulated trading support provided by brokers for traders. The number of brokers providing demo trading accounts for traders are very few indeed, and this means that traders enter the binary options market without any form of testing or training to hone their skills. This exposes the traders to an increased risk of losing money in live markets while “learning on the job” as it were.

           Reduced Trading Odds for Sure-Banker Trades

The payouts for binary options trades are drastically reduced when the odds for that trade succeeding are very high. While it is true that some trades offer as much as 85% payouts per trade, such high payouts are possible only when a trade is made with the expiry date set at some distance away from the date of the trade. Of course in such situations, the trades are more unpredictable.

           Lack of Trading Tools

Many brokers do not offer trading tools such as charts and tools of technical analysis to their clients. As such, traders are virtually trading in the dark when trading binary options. Experienced traders can get around this by sourcing for these tools elsewhere; inexperienced traders who are new to the market are not as fortunate.

           Limitations on Risk Management

Unlike in forex where traders can get accounts that allow them to trade mini- and micro-lots on small account sizes, many binary option brokers set a trading floor; minimum amounts which a trader can trade in the market. This makes it easier to lose an entire trading capital when trading binary options. As an illustration, a forex broker may allow you to open an account with $200 and trade micro-lots, which allows a trader to expose only acceptable amounts of his capital to the market. However, you will be hard put finding many binary options brokers that will allow you to trade below $50 on any binary options contract, even with a $200 account. In this situation, four losing trades will blow the account.

          Cost of Losing Trades

Unlike in other markets where the risk – reward ratio can be controlled and set to give an edge to winning trades, the odds of binary options tilt the risk-reward ratio in favour of losing trades. In other words, traders lose more money when their trades end as losses than they can gain when their trades end up as profits.  It is estimated that for every 70% profit in binary options trades that end up in profits, the corresponding loss of the same trade if it ends in a loss is 85%. The implication of this is that for a trader to break even in binary options trading, the winning percentage has to be at least 55%. It will therefore take a trader winning 6 trades out of ten to get into profit, but only 4 trades out of ten to end up in the red.

             Trade Corrections

When trading a market like the forex or commodities market, it is possible to close a trade with minimal losses and open another profitable one, if a repeat analysis of the trade reveals the first trade to have been a mistake. I have done this several times. I once traded a forex news item where I closed a wrong call with a 20 pips loss, and ended up making 350 pips on the reverse trade, giving me a net profit of 330 pips. This scenario cannot be replicated in binary options. The moment a trader has placed a trade in the binary options market, the value of his equity in the trade drops to reflect the trade commission’s taken off by the broker. The payout on the reverse trade is fixed and cannot be used to cover the loss from the wrong trade.

Is Binary Options a Scam?

It has become a million dollar question to the people around the world! That is because- Binary Options have been surrounded by a vibe of Scam right from the start and this makes a lot of people stay away from the industry. Here’s the long story made short: Binary Options are NOT a Scam! But some binary options brokers definitely are. Binaries are a legit trading instrument and cannot be called scam but to trade them, you need a brokerage and unfortunately, among these brokerages there are a lot of scammers. This doesn’t mean that binary options are a scam, however it does mean you must be extra careful with whom you are doing business with.

Think about this: a guy sells you a fake iPhone, saying it’s the real deal. After a while you realize you’ve just bought a fake and you’ve paid full price. Does that make Apple a scam??? NO! If someone sells you 14 karat Gold and claims it’s 22 karat, does that make Gold a scam??? See where I’m going? Binary options are not a scam, but some of the websites that offer them are scams. Open your eyes when reaching for the wallet.

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Binary Option Kindergarten

All Lessons in Part 1: Binary Options basics

Lesson 1: What are binary options
Lesson 2: Binary Options VS Forex
Lesson 3: Binary Option VS Gambling
Lesson 4: Options trading basics
Lesson 5: Types of Binary options
Lesson 6: What is traded in Binary Option
Lesson 7: 60 seconds Binary option

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David Richard

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