Binary options trading
- What are binary options?
- What are the main differences with Forex trading?
Technological advancements are presenting new ways through which people can earn extra income as well as work from home. Binary options are one of the online trading systems that can be said to have emerged and tremendously grown due to technological advancement. The online trading system has only been in existence in for a few years but has seen a phenomenal growth with more sites offering it and at the same time the number of subscribers rising at a very high margin. The phenomenal growth of binary options has largely been attributed to ease of entry, its ability to give an extra income and providing many employees with an opportunity to work from home and gain exactly the same amount they were getting from formal employment and in some occasion earn more.
So, what are binary options?
Putting it in simpler terms, this phrase contains two words binary and options, taking their meaning literary will be the first step through which one can understand what the phrase really means. Binary basically means two where as the word options stands for the ways which are available to accomplish a task.
Therefore the phrase basically means two ways. One definition that is used widely when it comes to explaining the term binary options is a payoff where the options are all or nothing. This basically means that the person who is participating in this trade either gets all or loses all.
Binary options is structured in such a way that the pay off is either a fixed compensation upon expiry in the money or nothing if the options gets to expire out of money. The gain or success in the Binary options is based on the proposition of Yes or No, explaining why it is referred to as a binary.
Binary options are flexible; they are known to give the investors options which do not exist in traditional trading markets. They are normally designed for short term investment periods and investors can use them to hedge their trading portfolio. Their payout rates are incredibly high and at the same time the investment requirements are at minimal.
As the trade progresses the people who are participating know the exact amount they expect to win as well as what is in stake in the event of a loss. This means that any investor who is engaging in this trade does so in an informed platform, clearly aware of what would happen in an event of a loss of a gain. This characteristic of binary options, distinguishes it with other types of trade where one is uncertain about the outcomes of the engagement.
There are different types of assets that can be traded on a Binary Option, they include, currency pairs, stocks, indices, commodities among others. To engage in trade the investor selects the kind of assets which he or she would like to trade, one is also supposed to select the direction in which the asset will move as well as the expiry time and investment amount. Upon the expiry of the period which the investor had selected the trader may either land in or out of the money. Landing in, mean that the investor is within the option which he or she had selected, and therefore wins the payoff ,whereas landing out of money means a loss.
Most investors actually find Binary options very attractive due to their simplicity, it basically involves making a guess of whether something will or will not occur. A simpler explanation of what this involves would be; a binary option may be on stock price, where one predicts a rise of a company stock above $30 at a given time. If at the appointed time, the price rises up to $35 then the option holder will end up getting the preset amount.
Two outcomes options
An investor in Binary options is supposed to predict or anticipate the direction through which the selected asset will move in terms of price. In normal circumstances if not all, the price can either move upwards or downwards. The two choices are normally referred to as call and put. A Put prediction is when the price is expected to decline while a Call prediction anticipates a price rise. Here the investor is not required to state the magnitude through which the price will change making it easy to make prediction. In traditional options, one is required to know the magnitude of movement making it very hard since it is hard to get it right in the two calls. Here one is only required to state whether the price of the asset will be higher or lower than the starting price. When an investor is presented in such a scenario, the current market situation will come in hand in making the right prediction. One should evaluate the existing price as well as analyze on how it has been moving in the recent times. If there are no major announcements which are expected within the chosen time frame, it will be easy to make the right prediction.
The main types of Binary options
This type of Binary Option is also referred to as up or down option. With this type of option, if the investor believes that the price will be higher than the starting price upon the expiration of the contract, he or she places a Call. On the other hand if the trader believes that the price will be lower than the starting price at the expiry, he or she will place a Put. The drill here is making a prediction on whether the digital option will be lower or higher than the active price at an expiry time that the investor has stated. Various expiry durations are available; one can select sixty seconds, fifteen minutes, one hour or at the end of the day. Once a trader has committed to the trade, he or she does not to follow up to monitor the movement of the price. The platform automatically monitors and once the time has lapses, its exits without the need of the investor logging in the system. A notification is sent to the investor either through an email or a text message informing of the closing status of the trade.
Touch Binary Option
This method has several varieties, they include: Double Touch, Touch and No Touch. This method goes a bit deeper since the investor is required to state the level at which the asset price will change. It has predetermined rates for the investor to win. In addition to predicting the win, the investor also makes a note on where it will reach or touch or where it will not reach or not reach. The level which the trader selects can either be higher or lower of the current active price. Unlike the Digital Options which is only purchased when a particular asset market is open, the Touch Binary options can be bought during the weekends and holidays and then traded during the week. A No Touch Option pays upon reaching the level which the investor defined as not reached whereas the Double Touch pays when the two levels are defined as pay out are reached. One touch comes in handy for the investors who have hope that the asset price will get to the predefined levels in the near future but are not sure whether the price will be sustained.
The sixty seconds Binary Option
This method is becoming popular among the traders, it normally upon the lapse of sixty seconds. It is based on the fact that the price of assets moves fast and within a minute major change cans occur in terms of price. One of the advantages which have made this Binary Option popular is the fact that it moves in one direction. An investor can take full advantage of the trades which follow to maximize the gains. Those who would like to get quick returns and are in a position to respond fast and effectively to the market movement will find this method ideal for trade. This method requires the investor to be on the look out as the expiry time is very short.
Buy back binary options
This is an offer which has an option of buying back, it works well for the options which in the categories of in or the money. There are variations of this type of Binary options among the brokers. There are some who require traders to sell back strictly only those options which are in the money and at the end of it all make a sixty per cent profit. Other brokers allow the trader to sell back the option which is out of money. Here they do not get all the money back.
This methods has an upper and lower boundaries defined, a specific timeframe either lies outside or inside the boundary. The investors make their predictions on whether the rate will stay in the set boundaries .For the markets which are volatile, investors can be happy since the closing price will fall within the boundaries.
One of the most influential parameters in Binary Option is the expiration rate; it greatly determines the investor’s payout. An investor when making a prediction ought to pay close attention to the expiration rates which are listed in the previous expires of an asset which has been chosen. This assists the trader to analyze the actual movement and be in a position to make accurate predictions. Investors are advised to trade as many times as possible so that they can get the actual market movement and use them as helpers in making the right predictions.
Differences between Binary options and Forex
When it comes to payouts and losses, this is where the real difference comes in, for the Forex the investor is never aware of the maximum profit he or she can make on a trade. The investor can set a stop order so that a certain percentage profit can be guaranteed. The losses can be controlled with a limit order in the same manner that the profits are managed. The loss incurred in Forex trade may be all the money that the investor had put in the trading account. In the case of an investor who is engaging in binary options, knows exactly the payout and loss return that he or she will get upon the expiry of an option. Some brokers are even known to offer a loss back option meaning that unlike a Forex trade, the investor will only lose the amount which they invested in that particular trade and nothing more. Trading with binary options is simpler compared to Forex given that there is no variability, the risk is known before hand and upon the expiry of the option one either wins or losses the predetermined amount. In the Forex trade, the ultimate risk or profit is not known until such a time when the trade closes.
One of the downside of the binary options is the risk they carry compared to other trades. The fact that they are not as regulated as other forms of trades make them prone to fraud, therefore investors need to be very careful. They need to register and trade with brokers who are reputable. Also the fact that they are typically a nothing or all trade makes them a risky investment, as mitigation against this, the investors are required to be very careful when making prediction. They need to have a thorough knowledge on the assets they using to make prediction. Knowledge on assets, their price movements and trends will help them to make predictions which are successful.