Binary Options Basics
Binary options are considered to be a financial instrument that can be used to enter into contracts based on the predicted movement of an asset price. The most basic of binary options trades requires only that the trader predict whether the price will be either above or below the strike price at the end of the contract time period. A correct prediction will result in a profit. An incorrect prediction will result in a loss of the investment amount.
Part of the appeal of binary options trading is how transparent these transactions are. The trader will always know the exact percentage that will be paid out on successful trades and will always know that a loss amount can never exceed the initial investment amount on each trade. This level of control is not seen in standard trading, which does not offer any specific payout amount and does not operate under set contract expiry times.
The binary options trading market has grown immensely since 2008. Once the SEC approved the financial instrument it quickly became available in major markets around the globe. Today, there are plenty of reliable brokers to choose from and thousands upon thousands of individuals profiting from binary options. Recent changes in the area of regulation have rendered trading safer and has caused an even greater influx of new traders.
Who Trades Binary Options?
Binary options trading is not exclusive to only one group or type of individual. Anyone who is willing to take the time to learn how to trade can profit from this form of trading. There is no previous trading experience necessary, which is why a large number of traders enter into binary options trading without ever having traded within any market in their entire lives.
Of course there are also plenty of individuals who enter into binary options trading having already traded in the standard markets. The knowledge gained in these forms of trading can easily be applied to trading binary options. Though some abandon traditional trading altogether once they begin trading this financial instrument, others simply add binary options to their trading portfolio.
Forex traders also account for a large number of those who trade binary options. Since currency pairs are offered within the binary options platform, the transition will be an easy one. The simplicity of this form of trading renders forex prediction much easier. Additionally, the large minimum deposits that are required to enter into forex trading are not present in binary options trading.
The one common theme that can be found within all who trade binary options is the desire to earn money through trading. Some have the need to pad their existing income, some need to save for retirement, and some may just wish to have the better quality of life that only a better financial situation can bring. Binary options trading, when done correctly, can help individuals accomplish all of this and more.
Types of Options
There are several different trade types made available to traders today.
The High/Low trade (also known as Up/Down or Over/Under) is the most basic and therefore most popular. This type of trade only requires that the trader predict whether the price of the selected underlying asset will be higher or lower than the strike price at the end of the expiry time period. Expiry time periods can be as short as sixty seconds to as long as one month. The binary options trader is allowed to select the expiry time period they desire from the options presented by the broker.
Touch and No Touch trades are also quite simple. A Touch trade requires a prediction of whether the price of an asset will reach a pre-determined set price at some point while the trade is live. Should this happen at any point, the trade ends and the trader profits. No Touch is the opposite, with the asset price needing to not touch the pre-set price. No Touch trades do not end early, as the full time period is required to run its course in order to determine that the asset price did not touch.
Boundary trades (also known as range trading) are basic trades that require the binary options trader to decide whether an asset price will remain between two price points, one high and one low. Should the asset price remain between these two points during the entire expiry time period, the trade ends with the trader earning a profit. Broader price ranges are associated with less risk, while narrow price ranges bring a higher level of risk.
Analysis: The studying of financial data and market news in order to make an accurate prediction.
Asset: Either a stock, commodity, currency pair, or indices. Within each of these asset categories lie many underlying assets.
At the Money (ATM): Essentially a prediction that ends in a tie, with the asset price being the same as the strike price at the end of the trade. In this case, the investment amount is returned to the trader.
Binary Options: A financial instrument used to profit through the correct prediction of asset price movement.
Binary Options Trading: The actual act of purchasing a contract based on the prediction.
Binary Options Broker: The source of the trading platform as well as the entity with which contracts are entered into with.
Current Price: The actual price of the asset at the current time.
Demo Account: A practice account provided by a binary options broker. These may or may not allow for simulated trading, but do provide plenty of learning tools.
Expiry Time: The exact time at which a live trade ends.
Call: A prediction of the increasing price of an asset.
In the Money (ITM): A trade which ends with the trader profiting.
Out of the Money (OTM): A trade which ends in a loss of investment.
Payout Percentage: The exact percentage that will be earned should the trade end in the money.
Put: A prediction of the decreasing price of an asset.
Strategy: Specific methods of trading used to increase profits and limit risk.
Strike Price: The asset price associated with contract purchase. This price remains the same during the contract time period and will be used to determine whether the trade ends in or out of the money once the expiry time completes.
Trading Tools: Charts, graphs, news, and learning materials provided to binary options traders to assist in trading more successfully.