The binary options industry is pretty new, but it has come a long way in just a few years. It has gone from a shaky, unregulated start, to a well established and respected form of short term trading. It’s a great way for new traders to enter the marketplace, but it is also an effective way for experienced professionals to supplement their income.
Still, a lot of people have concerns about binary options. Here, you will find the answers to your basic questions, and get a head start on finding out what type of binary options are right for you, if any. We’ll also show you what benefits you should be looking for with a binary options broker when you are making your choice. Binaries seem simple in nature, but there is actually a lot going on and you need to be well educated as to what to look for before you ever execute your first trade.
Types of Trades
Pretty much all binary options brokers focus on four main categories for assets: currency pairs from the Forex market, stocks, indices from within the stock market, and globally traded commodities. These are called underlying assets within the binary field since you’re not actually trading them, but rather speculating on their price action.
There are several different types of binary options besides the original call and put choices. Calls and puts are predictions as to whether or not the price of your underlying asset will go up or down, but there are a few other types that also fit under the label “binary” option. There is the boundary trade, where you are trying to predict whether or not the price at the expiration will be within a certain range of prices or without. There is also the one touch option, where you receive a full payout if the price ever touches or goes beyond a certain price during the life of the option–regardless of what the final price is upon expiration. These can be for a regular payout, or they can fall under what is often called a “high yield” trade, where the payout is much higher than normal. In these instances, the profit conditions will be much more difficult to achieve.
You may also find paired trades. These are not binary options, but they are often available from binary brokers. Basically, two assets are put side by side, and you need to pick the one that will outperform the other based upon the percentage of change. So if Apple and Microsoft are the two within the pair, which of these will grow more during the day based upon percentage change.
These are the basic types of trades, but it’s not quite that simple. You will need to choose a timeframe, and this in itself can be overwhelming if you don’t know what you’re looking for. Trades range in time from 30 seconds to one month in length. Some brokers even have year long trades, but these are rare. This is a long time to choose from, so you need to have an educated guess before deciding. This means knowledge of the market is necessary before proceeding. So, if you think that the euro/U.S. dollar pair is going to go up in price, you need to have a solid grasp on how long this will take. Will it be immediate, or a month from now? Without this knowledge, your gambling and not trading. This random guess strategy will eventually cause you to lose money.
Next, you need to look at seemingly little details, like how much return you will get, whether there is a return on losing trades, and whether you can end a trade early or not. These might seem inconsequential, but they can lead to earning thousands of extra dollars over time. The rate of return will vary from broker to broker, and as a general rule, you want the best rate possible. If you can get an 81 percent return on correct trades, why would you settle for 75 percent? If you are risking $100 per trade, this is a $6 difference each time, and if you make 10 trades per day, that’s $60. Now, trade 300 days per year, and you are sacrificing $18,000 in potential profits each year. That’s more than a full time, minimum wage job over a year! In other words, the percentage returned to you is extremely important.
The return on losing trades debate still hasn’t been settled, on the other hand. For most people, it is helpful because it gives you a safety net, but higher calibre traders should ignore this. If you are right often enough, the drop in return for correct trades is too much and you will not benefit. But if you are just starting out, or just trading binaries as a hobby, this is a good idea since you can get a small return on your incorrect trades. It’s not enough to make up for your loss, but it’s something.
Ending your trade early is also a debatable topic. Inexperienced traders should stay away from this since it will lead to second guessing and lower profits. Pros can use it, but sparingly. Ending a trade early is meant to protect you when a trade appears to be either unwinnable, or clearly about to become so. It’s something that you should only use once in a while since you should have made your trade for a solid reason and shouldn’t be looking for reasons to get out of it. The more you research a position beforehand, the less you will need this. And you should always research your positions.
Different brokers have different perks. Some offer welcome bonuses. Some have different tiered accounts for different levels of traders. And some have more educational content than others. Bonuses and gifts are great since they are basically free giveaways, but they are a short term perk. Your real focus should be on the long term. If you get an extra $1,000 credited to your account, that’s great, but if you aren’t getting the most out of a broker long term, the cost would be tens of thousands of dollars over a longer period of time. These are definitely beneficial, but often they just mask inadequate long term benefits. Always focus on what will benefit you the most if you were to keep your account active for the next couple years. Once this is achieved, then look for the free cash. Educational content is great, too, but a lot of those things can be found with a separate web search. Consolidation can save you time, but again, this isn’t always the first thing you should look at.
The Bottom Line
Your broker should be earning you as much money as possible over as long of a time as possible, not just attracting your business with gimmicks and flashy charts and graphics.