Binary options are the simplest financial asset to trade since it takes low capital and only requires you to predict whether a certain asset will rise or fall in price. The simplicity has attracted tons of traders and investors, with plenty of them earning a substantial living. If you’re interested in learning how to trade binary options as beginner, keep reading ahead for the basics, strategies and how to start.
How to Trade Binary Options
Binary options are simple but you should always enter a financial market with two things; knowledge and practice. If you can develop a deeper understanding how they operate, time frames, advantages, disadvantages and legalities then you will be ahead of the game and ready to earn.
What They Are & How They Work
You could say that they work on a “yes” or “no” basis since the goal is to speculate whether the asset will be lower or above a certain price after a certain time frame. An example of this could be speculating if the price of gold will rise above $1,000 at 3:00 PM. If you were to believe so, you’d buy the option then hold onto it. You would then receive a return on your investment if you are correct, simple huh?
Binary options can move very fast which means you can earn or lose money quickly. A binary option may be trading at $50.00(the bid price) and $55.00(the offer price) at noon. You buy it for the offer price($55.00) and can sell it or hold onto it. Remember that binary options are always between $0-100 dollars. This means that if you were correct on speculating that gold would rise above $1,000 at 3:00 PM, you would profit $45(100-55).
The bid and offer prices change until the binary option finally expires. This means you have the opportunity to close your spot to reduce losses or cash out on profit.
If the binary option speculation is true, it turns out to be $100. If it turns out to be false, it defaults to $0. That means that each option has the potential value of $100 and creates a zero sum game as some would classify it as. This implies that if you lose, someone else wins and if you win, someone else loses. It isn’t a necessary component to worry about but it’s good to understand that dynamic of trading this financial products.
Determining The Bid/Ask Prices
The bid and ask prices are calculated by the traders as they determine whether on the speculation is true or false. Normally if the bid and ask price are higher(80’s and up), traders are assuming that there is a high probability that the outcome will be true. On the other hand, if you see that the prices are lower then it most likely means traders believe the speculation to be false.
How To Trade Binary Options
Binary options trade on the what is known as the Nadex exchange. It is America’s first exchange focused purely on binary options. They provide you with a fantastic trading platform if you’d like to use them but there are endless platforms to check out. Many offer both a demo account to practice and a live account that you can use to make some big bucks. Real time charts and data will keep you in the loop on making the right choices and profitin more.
Most like most platforms and services, there are some form of fees so every Nadex contract traded costs $.90 to enter and the same price to exit. The fee will cap out at $9 though you could potentially get up to 20 contracts for example for just $9. If you were to profit on your option, the fee will be given to you on expiry. If you fail to speculate correctly, the trade fee to exit will not be charged. Individual brokers will also charge their own set amount for handling some of the work for you.
Binary options can be traded in various asset classes such as the Wall Street 30(Dow 30), US 500(S&P 500), Nasdaw 100, and many more. Trades could also be placed on currency pairs in the foreign exchange like CAD/USD or EUR/USD for example. This means you get tons of approaches and opportunities to trade how you like and find your own successful niche that works for you. You could even potentially trade on news like if the Federal Reserve is going to increase their rates.
The options you choose can expire in anywhere from hours, days to weeks. Obviously the quicker they expire, the sooner you can make money and the less time you have to invest into tracking them. For those that would enjoy speculating over the course of days or weeks, opt for a longer time frame. Day options are great for those interested in hedging commodities, foreign exchange or stocks. The event based contracts will expire after the news on that situation has been officially released.
Pros and Cons
A great advtange of trading binary options is that the risk and reward is actually capped. This can help stop beginners and even experienced investors from losing too much at times. This is unlike the stock or forex markets where you could potentially lose a fortunate all at once.
In the binary options market, it doesn’t matter if the market is being quiet or slow, there is still tons of room to profit. With the reward system also being capped, you are best to purchase several contracts at once after you are more experienced of course. Stick to single contracts in the beginning and keep it simple. Earn some money, get your feet wet then start increasing your portfolio. Check out Expert Option’s platform below to dive right into trading!