Welcome to part 2 of our 4 part series on the basics of binary options trading. If you missed the previous part, check it out now or keep reading.
What Is Binary Options Trading All About?
Binary options is not the same as trading regular option contracts. Both are based on similar underlying principles, such as with the use of expiry times, but both these forms of financial speculation are very very different.
So now this begs the question, What is binary options trading?
Binary options trading involves you, the investor, simply selecting one of two options: Call or Put. Call is the equivalent to buying an asset while Put is selling.
You select Call or Put based on whether you believe the selected asset will rise or fall in price. The good thing about binary options trading is that you get to decide when the trade ends, which is called an expiry. The expiry is the duration of time that a binary options trade is open and takes to close. The expiry times you are able to choose will vary, and depends largely on which binary option broker you’re using.
Here’s my personal list of the top 5 binary options brokers for U.S. based traders.
Some brokers offer dozens of time expiry periods ranging from 30 seconds to one week. The most common binary options expiries tend to be: 60-seconds, 5-minutes, 10-minutes, 15-minutes, 1-hour, and end of day (3:00 pm EST.)
Making Money with Binary Options Trading
So how do you trade binary options? What specific steps do you need to take to make money?
Each year trading binary options becomes more and more popular. And it’s easy to see why. Anyone from around the world, even people with zero experience in the financial world, can easily turn a $100 investment into $180 with a few mouse clicks.
Binary options trading can seem intimidating to newbies, but all-in-all it’s relatively simple to place a trade.
Placing a binary options trade boils down to four steps:
- Select your asset (currency pair, major stock, whatever your broker offers.)
- Select the direction you believe price will take and end up at at the time of expiry. (up/down=buy/sell)
- Select the amount of time you want to give your trade to play out. Select an expiry time, in other words.
- Select the amount of money you are willing to risk on the trade.
If you win, you make a large percentage of the original wagered amount, which tends to range from 70% to 85% returns given by most brokers.
So as an example, if you select the popular EUR/USD currency pair and wager $100 at a 80% return that price will fall at the 5-minute expiry, (if this is the time expiry you select) and after five minutes you find out that you’re right, you make $80 in instant profit. If you lose, you lose the entire $100.
Sounds simple, right? It is simple! But it’s also incredibly difficult to generate winning binary options trades on a consistent basis.
Pro’s & Con’s of Trading Binary Options
The biggest advantage to trading binary options over traditional stocks or Forex trading is that binary options doesn’t have to deal with spreads, fee’s (usually,) hedging rules (you can hedge in binary options,) or worry about when you should close a trade or take your profits.
One of the things that truly makes binary options trading stand apart from Forex trading is in the fact that risk is capped, so it is not possible to lose more than the amount you put in, unlike with other forms of financial speculation.
Above average returns are very possible with binary options trading. This is because you can profit in bear or bull markets, and even in quiet and especially during volatile markets.
It’s difficult to generate large profits with stocks in a market that’s barely moving, but with binary options trading you know exactly how much profit you’ll earn with each trade you take.
The downside is also its strength, in that binary options has a capped profit return. So no matter how much the market moves in the direction you anticipate, your winnings will be the same if you win by 1 pip or if you win by 100 pips.
Another benefit to binary options trading is that binary options are derivatives to underlying assets, so you don’t actually own the asset, you’re just speculating whether it will rise or fall in price.
No binding agreement, no contracts.
Is Binary Options Trading Legal In The U.S.?
Yes, absolutely! Binary options trading is legally allowed in the USA as well as most parts of the world.
But even with this said, the question isn’t “is binary options legal in the USA,” it should be, “Is this binary options broker regulated?” Most are not, but some are. For binary options traders living in the United States, Nadex is a Chicago-based binary options broker that is currently the one and only broker regulated by the CFTC.
Many binary options brokers establish their businesses on overseas islands to become legally regulated by that area and to get away from the microscopic scrutiny that naturally comes with doing business in large developed countries, such is the case with the U.K. and U.S. But this doesn’t mean that all off-shore binary options brokers are scammers, there are in fact several that can be trusted.
Congrats you’ve finished part 2! Now keep going!Next