Binary trading or binary options trading basically involves speculating on whether a particular asset will be above or below a specific price at a given time. Are you considering becoming a binary trader? If so, you might benefit handsomely from one of the simplest trading alternatives. But what exactly are binary options, and how does binary trading work exactly?
This piece seeks to provide answers to these and more burning questions that may linger in your mind as a newbie trader before you take the leap. By the end of the article, you will have also acquired critical information to help you get started in trading binary options. You can take it as an easy guide to understanding how binary trading works.
Why They Are Called Binary Options
To best understand binary trading, it pays to know where the name binary comes from. Well, the “Bi” in the name means two. It means that you have two main payoff options in the trade, where you get a fixed sum of money at the contract expiration time or nothing at all.
These are the only two possible settlements, thus the name binary options. As Andre Witzel from https://www.binaryoptions.com/glossary/ puts it, binary options are based on a simplistic “yes or no” proposition on whether the asset in question will have gone above a specific price at a certain time. It’s all about predicting the price of gold, stocks, or currencies in the next few seconds, minutes, or days.
How Binary Options Work
Basically, binary options trading comprises several important main elements. The main elements that make up a binary option include the following:
● Underlying market:
As you might already have guessed, the underlying market refers to the market you choose for your trades. Your options may include stock indices, forex, commodities, or even events. Some binary options brokers offer synthetic indices and a wide range of other markets/assets. Choosing the right market is a critical aspect for anyone who wants to profit from binary trading.
● The strike price:
This is the element that drives your decision-making. The strike price is basically the current price level of the underlying market you are interested in as a trader. When placing a trade, you need to decide whether the underlying market will be below or above the strike price by a certain time or date (called expiration time).
Having said this, binary options normally have a price range of $0 to $100, allowing you to choose how much money you want to risk. Each contract will show you the greatest profit and loss possible, ensuring that you always make an educated decision and that losses do not spiral out of hand.
● Expiration date/time:
This is the time or date when the contract for your trade expires. Some brokers allow you to trade contracts from as short as a few seconds to as long as 365 days. However, most contracts will last anything between five minutes to a week.
When trading binary options, you are either a buyer or a seller. If you acquire a binary option and the asset’s expiry price is equal to or more than the strike price at expiration, you make a profit. On the other hand, sellers benefit if the asset’s execution price is less than its strike price at expiry.
How to Trade Binary Options
Binary options trading is a pretty straightforward process. However, learning the ins and outs of the underlying markets and selecting the best trading chances for you will require some research and effort. Here are some helpful step-wise tips to summarize the entire process.
1. Be familiar with market trends.
The last thing you want as a binary trader is to rely solely on your gut feeling when transacting trades. It is paramount to conduct lengthy research and understand the market trends first before taking a leap.
2. Decide which market you’d want to trade.
After conducting thorough research, you will want to go ahead and decide which markets you prefer to trade. Your decision will also dictate which trading platform to choose because different brokers may provide different market options.
3. Pick a strike price and an expiration date.
The next important step is choosing a strike price. This will dictate whether or not you make a profit from your trade.
4. Execute your deal and wait.
At this point, you already know what you want to trade; and you have a binary trading account. You have also identified a strike price and expiry date. All you need to do is execute the trade, wait for your deal to expire, or close it off early.
A Classical Example
Let us look at an example of a binary options trade below. John Doe purchases a contract (his position) that predicts that on December 1, the price of gold (the underlying asset) will be $52 per gram (the strike price). He executes the trade at a spread/bid price of $70-$74. Upon expiry (December 1), gold is $53 a gram (the expiration price). John’s position is now profitable, and he will be paid $100. His profit is a decent $26 because he spent $74 on this binary option.
And there you basically have it. Binary trading is quite a simple process, but most traders often make hefty losses because they approach it ill-advised. Thankfully, the above piece has outlined how it works alongside ways you can maximize your profit potential.