Binary Options Explained & Simplified
1) What Are Binary Options?
Binary options are estimates of underlying assets performance during a given time frame. To understand the beauty of binary options trading, let’s first take a look at how investment in other trading markets usually works.
In most forms of investment the investors actually purchases the asset they invest in and the value of the profit and loss is determined upon the changing value of the asset. If the investor sells the asset back to the market whenever its value increases then they’re making a profit, and if they sell the asset back to the market when its value decreases, then their money is lost.
This type of investment requires the investor to constantly worry about when to sell the asset and get out of the market to avoid exposing his entire account to the market’s volatility. Conversely, BO trading is simpler.
In options we trade futures on the market and not in the market like other trading methods, and thus the amount of psychological stress isn’t expressed, as you are just predicting the asset’s movement for a predetermine time frame.
2) The Definition of binary options trading
The word binary stands for “having two parts”. Generally speaking, all you need to do is predict either “Call” or “Put“. BO trading has only two investment possibilities for you to predict and then choose between.
One investment possibility is expressed when you predict that the price of the asset will rise, this type of investment is named “Call” option. The other possibility is presented when you predict that the price of the asset will fall, this type of investment is named “Put” option.
Choosing an asset is the first step of your investment. For instance, if you have an interest in gold prices, you may choose to place a binary investment in gold. Obviously, the more familiar you’re with the gold market the better your chances are of successfully predicting the fluctuations of gold prices.
3) What assets can be traded as Binary Options?
Opteck has a wide variety of binary contracts available to traders.
You can either trade with:
- Indices – Such as Nasdaq, Dow Jones, FTSE, Nikkei and many more
- Forex – Combinations for all the major currencies such as USD, EUR, GBP ,JPY and AUD just to name a few
- Commodities – Gold, Silver, Oil, Corn, Coffee and several more
- Stocks – Over 50 of the biggest and most interesting companies in the world from a variety of industries are available in the Opteck asset list, amongst them – Google, Deutsche Bank, Coca Cola and many many more.
What You Need To Know About Binary Options Outside The U.S
Binary options are a simple way to trade price fluctuations in multiple global markets, but a trader needs to understand the risks and rewards of these often-misunderstood instruments. Binary options are different from traditional options. If traded, one will find these options have different payouts, fees and risks, not to mention an entirely different liquidity structure and investment process. (For related reading, see: A Guide To Trading Binary Options In The U.S.)
Binary options traded outside the U.S. are also typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative, but only if the trader fully understands the two potential outcomes of these “exotic options.” In June 2013, the U.S. Securities and Exchange Commission warned investors about the potential risks of investing in binary options and charged a Cyprus-based company with selling them illegally to U.S. investors.
What Are Binary Options?
Binary options are classed as exotic options, yet binaries are extremely simple to use and understand functionally. The most common binary option is a “high-low” option. Providing access to stocks, indices, commodities and foreign exchange, a high-low binary option is also called a fixed-return option. This is because the option has an expiry date/time and also what is called a strike price. If a trader wagers correctly on the market’s direction and the price at the time of expiry is on the correct side of the strike price, the trader is paid a fixed return regardless of how much the instrument moved. A trader who wagers incorrectly on the market’s direction loses her/his investment.
If a trader believes the market is rising, she/he would purchase a “call.” If the trader believes the market is falling, she/he would buy a “put.” For a call to make money, the price must be above the strike price at the expiry time. For a put to make money, the price must be below the strike price at the expiry time. The strike price, expiry, payout and risk are all disclosed at the trade’s outset. For most high-low binary options outside the U.S., the strike price is the current price or rate of the underlying financial product, such as the S&P 500 index, EUR/USD currency pair or a particular stock. Therefore, the trader is wagering whether the future price at expiry will be higher or lower than the current price.
Foreign Versus U.S. Binary Options
Binary options outside the U.S. typically have a fixed payout and risk, and are offered by individual brokers, not on an exchange. These brokers make their money from the percentage discrepancy between what they pay out on winning trades and what they collect from losing trades. While there are exceptions, these binary options are meant to be held until expiry in an “all or nothing” payout structure. Most foreign binary options brokers are not legally allowed to solicit U.S. residents for trading purposes, unless that broker is registered with a U.S. regulatory body such as the SEC or Commodities Futures Trading Commission.
Starting in 2008, some options exchanges such as the Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents. The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Nadex is also a binary options exchange in the U.S., subject to oversight by the CFTC. These options can be traded at any time at a rate based on market forces. The rate fluctuates between one and 100 based on the probability of an option finishing in or out of the money. At all times there is full transparency, so a trader can exit with the profit or loss they see on their screen in each moment. They can also enter at any time as the rate fluctuates, thus being able to make trades based on varying risk-to-reward scenarios. The maximum gain and loss is still known if the trader decides to hold until expiry. Since these options trade through an exchange, each trade requires a willing buyer and seller. The exchanges make money from an exchange fee – to match buyers and sellers – and not from a binary options trade loser.
High-Low Binary Option Example
Assume your analysis indicates that the S&P 500 is going to rally for the rest of the afternoon, although you’re not sure by how much. You decide to buy a (binary) call option on the S&P 500 index. Suppose the index is currently at 1,800, so by buying a call option you’re wagering the price at expiry will be above 1,800. Since binary options are available on all sorts of time frames – from minutes to months away – you choose an expiry time (or date) that aligns with your analysis. You choose an option with an 1,800 strike price that expires 30 minutes from now. The option pays you 70% if the S&P 500 is above 1,800 at expiry (30 minutes from now); if the S&P 500 is below 1,800 in 30 minutes, you’ll lose your investment.
You can invest almost any amount, although this will vary from broker to broker. Often there is a minimum such as $10 and a maximum such as $10,000 (check with the broker for specific investment amounts).
Continuing with the example, you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiry determines whether you make or lose money. The price at expiry may be the last quoted price, or the (bid+ask)/2. Each broker specifies their own expiry price rules.
In this case, assume the last quote on the S&P 500 before expiry was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. Had the price finished below 1,800, you would lose your $100 investment. If the price had expired exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although each broker may have different rules as it is an over-the-counter (OTC) market. The broker transfers profits and losses into and out of the trader’s account automatically.
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The World’s 10 Most Famous Traders Of All Time
There are several famous former traders who moved on to different careers, such as John Key (Prime Minister of New Zealand) and Jimmy Wales (founder of Wikipedia). However, this list is made up of traders famous for being traders. The lives of the world’s most famous traders are colored by both triumph and tragedy, with some exploits achieving mythological status within the industry. The list begins with legendary traders of history and progresses to those of the present day.
1: Jesse Livermore: Jesse Lauriston Livermore (1877–1940) was an American trader famous for both colossal gains and losses in the market. He successfully shorted the 1929 market crash, building his fortune to $100 million. However, by 1934 he had lost his money and tragically took his own life in 1940.
2: William Delbert Gann: WD Gann (1878–1955) was a trader who used market forecasting methods based on geometry, astrology, and ancient mathematics. His mysterious technical tools include Gann angles and the Square of 9. As well as trading, Gann wrote a number of books and courses.
3: George Soros: Hungarian-born George Soros (born 1930) is the chairman of Soros Fund Management, one of the most successful firms in the history of the hedge fund industry. He earned the moniker “The Man Who Broke the Bank of England” in 1992 after his short sale of $10 billion worth of pounds, yielding a tidy $1 billion profit.
4: Jim Rogers: James Rogers, Jr. (born 1942) is the Chairman of Rogers Holdings. He co-founded the Quantum Fund along with George Soros in the early 1970s, which gained a staggering 4200% over 10 years. Rogers is renowned for his correct bullish call on commodities in the 1990’s and also for his books detailing his adventurous world travels.
5: Richard Dennis: Richard J. Dennis (born 1949) made his mark in the trading world as a highly successful Chicago-based commodities trader. He reportedly acquired a $200 million fortune over ten years from his speculating. Along with partner William Eckhardt, Dennis was co-creator of the mythical Turtle Trading experiment.
Read more: The World’s 10 Most Famous Traders Of All Time | Investopedia http://www.investopedia.com/articles/active-trading/041515/worlds-10-most-famous-traders-all-time.asp#ixzz4J7pJUSiR
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Top 10 Rules For Successful Trading
Most people who are interested in learning how to become profitable traders need only spend a few minutes online before reading such phrases as “plan your trade; trade your plan” and “keep your losses to a minimum.” For new traders, these tidbits of information can seem more like a distraction than any actionable advice. New traders often just want to know how to set up their charts so they can hurry up and make money.
To be successful in trading, however, one needs to understand the importance of and adhere to a set of rules that have guided all types of traders, with a variety of trading account sizes. Each rule alone is important, but when they work together the effects are strong. Trading with these rules can greatly increase the odds of succeeding in the markets.
Rule No.1: Always Use a Trading Plan
A trading plan is a written set of rules that specifies a trader’s entry, exit and money management criteria. Using a trading plan allows traders to do this, although it is a time consuming endeavor.
With today’s technology, it is easy to test a trading idea before risking real money. Backtesting, applying trading ideas to historical data, allows traders to determine if a trading plan is viable, and also shows the expectancy of the plan’s logic. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading. The key here is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, is considered poor trading and destroys any expectancy the plan may have had. (Learn more about backtesting in Backtesting: Interpreting the Past.)
Rule No.2: Treat Trading Like a Business
In order to be successful, one must approach trading as a full- or part-time business – not as a hobby or a job. As a hobby, where no real commitment to learning is made, trading can be very expensive. As a job it can be frustrating since there is no regular paycheck. Trading is a business, and incurs expenses, losses, taxes, uncertainty, stress and risk. As a trader, you are essentially a small business owner, and must do your research and strategize to maximize your business’s potential.
Rule No.3: Use Technology to Your Advantage
Trading is a competitive business, and one can assume the person sitting on the other side of a trade is taking full advantage of technology. Charting platforms allow traders an infinite variety of methods for viewing and analyzing the markets. Backtesting an idea on historical data prior to risking any cash can save a trading account, not to mention stress and frustration. Getting market updates with smartphones allows us to monitor trades virtually anywhere. Even technology that today we take for granted, like high-speed internet connections, can greatly increase trading performance.
Using technology to your advantage, and keeping current with available technological advances, can be fun and rewarding in trading.
Rule No.4: Protect Your Trading Capital
Saving money to fund a trading account can take a long time and much effort. It can be even more difficult (or impossible) the next time around. It is important to note that protecting your trading capital is not synonymous with not having any losing trades. All traders have losing trades; that is part of business. Protecting capital entails not taking any unnecessary risks and doing everything you can to preserve your trading business. (See Risk Management Techniques For Active Traders for more.)
Rule No.5: Become a Student of the Markets
Think of it as continuing education – traders need to remain focused on learning more each day. Since many concepts carry prerequisite knowledge, it is important to remember that understanding the markets, and all of their intricacies, is an ongoing, lifelong process.
Hard research allows traders to learn the facts, like what the different economic reports mean. Focus and observation allow traders to gain instinct and learn the nuances; this is what helps traders understand how those economic reports affect the market they are trading. (Read about 24 different economic reports in our Economic Indicators Tutorial.)
World politics, events, economies – even the weather – all have an impact on the markets. The market environment is dynamic. The more traders understand the past and current markets, the better prepared they will be to face the future.
Rule No.6: Risk Only What You Can Afford to Los
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Day Trading Strategies for Beginners
Day trading is the act of buying and selling a stock within the same day. Day traders seek to make profits by leveraging large amounts of capital to take advantage of small price movements in highly liquid stocks or indexes.
Day trading can be a dangerous game for traders who are new at it or who don’t adhere to a well-thought out method. Let’s take a look at some common day trading strategies that can be used by retail traders. (For more, see: Tutorial: An Introduction to Technical Analysis.)
Certain securities are ideal candidates for day trading. A typical day trader looks for two things in a stock—liquidity and volatility. Liquidity allows you to enter and exit a stock at a good price (i.e. tight spreads, or the difference between the bid and ask price of a stock, and low slippage, or the difference between the expected price of a trade and the actual price a stock trades at). Volatility is simply a measure of the expected daily price range—the range in which a day trader operates. More volatility means greater profit or loss. (For more, see Day Trading: An Introduction or Forex Walkthrough: Foreign Exchange.)
Once you know what kinds of stocks you are looking for, you need to learn how to identify possible entry points. There are three tools you can use to do this:
Intraday candlestick charts. Candles provide a raw analysis of price action.
Level II quotes/ECN. Level II and ECN provide a look at orders as they happen.
Real-time news service. News moves stocks; such services tell you when news comes out.
Looking at the intraday candlestick charts, we’ll focus on these factors:
Candlestick patterns, including engulfings and dojis.
Technical analysis, including trendlines and triangles.
Volume, as in increasing or decreasing volume.
There are many candlestick setups that we can look for to find an entry point. If properly used, the doji reversal pattern (highlighted in yellow in Figure 1) is one of the most reliable ones.
Figure 1: Looking at candlesticks – the highlighted doji signals a reversal.
Typically, we will look for a pattern like this with several confirmations:
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