With as many articles as I’ve had on binary options lately, I thought it would be good to give an introduction to everyone who still isn’t really sure what it all means. Like always, do your research before investing in anything and only invest in what you understand. This is simply one of the many spectrums of investing.
There is a new investment vehicle in town that is turning out to be very fast to learn and promised to give very high returns. But as usual, it has its own risks since you might end up losing your money when trading just like in any other financial market. I am talking about binary options trading; which is catching up with many millennials as a very easy way to earn an extra income without much ado. However, before you burn your fingers in this new lucrative source of passive income, you first need to learn how to trade binary options from the experts.
What is binary options trading?
Binary options trading is simply making a prediction as to whether the price of an underlying asset will go up or go down. In that simple decision you are able to make money if the outcome corresponds with your prediction; while you lose money if the prediction turns out to be the opposite of what you predicted. The prediction you make is valid within a given period of time after which the outcome is reviewed before determining whether you made a gain or a loss.
From the explanation above we are able to derive the two major types of binary options. The first type of binary option is a Call Binary Option. This is when you predict that the price of the underlying asset will go up within a given time frame and place a trade based on that forecast. If the price of the underlying asset goes up, you end up a winner and make money. However, if the price of the underlying asset goes lower by the end of the agreed upon trading period, you lose your money that you placed in that particular trade. The reverse is true for a Put Binary Option; whereby you make money when you correctly predict a fall in the price of an underlying asset and the price ends up actually falling by the time the agreed upon time frame for the trade lapses.
Note that these characteristics of binary options are the same as those for other traditional derivative instruments including futures and options. The similarities are in three major areas including: the trade is placed for a specified period of time with an expiry date or time. In addition there must be a strike price for each trade and finally there must be an underlying asset whose price fluctuation is the subject of the binary option trade being placed. The underlying assets could be commodities such as gold or oil, stocks, currencies or even indices in the commodity, stocks or futures markets.
How is binary option trading done?
There is a very straight forward way of trading in binary options; you only need to decide which underlying assets you are going to be placing trades on then make a prediction about how their prices will move; whether the prices will go up or down. The prediction you make will then determine the type of binary option trade you place. As described above, for rising prices it is a call binary option while for predicted falling prices it will be referred to as a put binary option.
When placing your order, you agree on the strike price which is the fixed amount that you stand to gain upon exercising the option after the expiration date. For instance if you place a 70% call binary option for $100, you stand to get $70 more after the trade if the price of the underlying asset goes up; meaning that you go home with $170. If our example was a put binary option, then you could only make the extra $70 if the price of the underlying asset dropped as per your prediction.
How do I become an expert in binary options trading?
It does not take rocket science to be an expert binary options trader. All you need to do is to have visibility in the trends in the markets that affect the supply and demand of the underlying asset that you placed a trade on. This will help to better figure out how the price of the asset might move within the trade period. You also need to diversify your trade by placing different trades for different asset categories so that you are covered in case you lose money from one of your trades. Most importantly, you should ensure that you place trades based on a logical analysis of the market rather than basing trades on emotions. With these tips, you should be able to start trading in binary options and improve your game as you make more trades and move up the ladder from being a novice to a veteran binary options trader.