The stock market contains many complex trading options that surpass the simple buying and selling of individual stocks. A popular trading method is speculating by using binary options. These asset derivates offer us exciting all or nothing investments and allow us to profit from negative market movements as well as rising values. If you are interested in binary trading, here is our step-by-step guide to trading binary options.
What is a Binary Option, and How Does it Make Money?
A binary option is what we call an asset derivate. Assets are the items we can buy or sell on the stock market. That includes stocks for companies, precious metals, currencies, indices and many more. When we ‘buy’ a binary option, we base the success of our speculation on the movement of one of these assets.
Let’s say this asset our binary option is based on is the value of Google as a company. We do not buy a Google stock and hope for the price of the asset to grow, so we can sell it with profit. Instead, we speculate that the market value of Google will rise (call option) or fall (put option) by a set date of our choice.
- Simply put: If we buy a call option on Google, we speculate that the value of the asset will have risen when we reach the expiration date of our trade.
The significant difference between binary trading and other trading options is the unique ability to profit from assets that are losing value.
Additionally, how much we gain or lose is not tied to the exact value of an asset. Instead, the result can only be binary (hence the name): If your speculation was correct, you receive a payout, if you guessed wrong, you lose the investment.
This way, the amount you win or lose can be calculated beforehand, and you can estimate and control risks easily. This makes binary trading a good starting option for trading beginners.
How to Trade
We trade by using an online broker. These trading platforms allow us access to the stock market. We can choose assets that interest us and use the software to perform transactions.
Choose a Broker
Which broker we use for our trading is critical. Not all trading apps give us the right tools for binary option trading. To make sure you get a fitting service, look up review sites and the information they collect on providers. They test these platforms and give you a rating based on their performance and service. (For example: binaryoptions.com/broker/pocket-option)
Within these reviews, the following criteria are essential:
➔ Asset Lists
An asset list tells you which assets you can use to base your binary option trade on. Make sure the assets you are interested in are part of your broker’s service.
To fight fraud, many government bodies have installed regulations and licensing processes. Make sure the app of your choice follows your country’s laws and has the appropriate licenses.
The European Securities and Markets Authority (ESMA) has banned the sale and marketing of binary options as a trading method for private investors. This ban applies to every broker that is regulated in the EU. Those who want to keep trading with regulated services must choose brokers licensed by foreign regulators, for example the Australian Securities and Investments Commission (ASIC). They are still allowed to accept EU traders.
Another option is to register as a professional trader. These need to have at least two years of experience working in the financial sector, must own at least €500,000 in assets, and have at least ten open trades per quarter with at least €150 investments each.
Before we do anything, we should analyze the market and calculate how much of our budget to use, so we can make informed decisions and avoid bankruptcy.
Naturally, there are more complex forms of this trading as well. For example, we can decide to speculate in ranges (whether the value will be in a specific price range or not) or use touch options (we get a payout when the asset hits a predetermined value, even before the expiration date). For the beginning, getting used to the basic binary trading is the best choice.
If we want to trade with binary options, we pick the asset our option should be a derivate of, chose an expiration date, the amount we want to invest and whether we expect the asset to rise or fall in value. Afterwards, we wait for the expiration date to come, so we can collect our wins or accept our losses.
The Trading Process:
- Pick a Broker
- Analyze & Calculate
- Chose an Asset
- Chose a Pull or Call Option
- Set an Expiration Date
- Wait & Repeat
Binary trading lets us speculate on how an asset will develop on the stock market. We chose a direction to go and a day to wait for and receive a binary result: total loss or great profit. This trading form is easy to understand. Since we can calculate our losses separately from the exact market value of an asset, we can control our losses and the risks we can allow ourselves to face.
This makes binary trading a great option for beginners. To trade, we need a good broker and some background knowledge on trading and the assets of our choice, to make informed decisions. Afterwards, we place our ‘bets’ and wait for the result.