What are Binary Options and how does Binary Option Trading differ from Regular Foreign Exchange Trading?
Binary Options are a very easy way of Trading Currencies, Hot Assets like Gold and Oil and other assets such as Shares – because the mechanics of their operation is so simple.
The word Binary in Itself means that it is a base-2 numeral system. It may sound complicated but actually all it means is making a choice of up and down – this is your Option. And there is not much else to it in terms of the mechanical operation of the Binary Option platforms. It is an all or nothing, or Win/Loss Decision – And you will know whether you have made the correct decision within a few minutes of your choice.
Okay, so perhaps this is an oversimplification of Binary Option Trading, but we shall go into more detail immediately. So you are faced with a question… Will the EURO rise against the USD Dollar in the next half an hour? That is the question.
If you are watching this currency pair and you think that the Euro will rise you will take what is called a “Call” Option and if you think it will fall you will take a “PUT” Option for the amount which you would like to put at stake. Depending on the Binary Option Platform or broker you use, it can just be an UP and DOWN Button or a CALL and PUT button.
Let us for the sake of the argument, assume that you have a lot of cash to spare, and that you will wager a $100 on this trade because you feel it in your bones that the Euro will be rising steadily in the next half an hour and therefore you take a CALL or UP option.
What happens in the next half hour, is that according to how the market will move, you will know whether it has moved in your favour or against your direction. If let us say, you took your call option, when the rate was at 1.1111 – this is called your STRIKE PRICE and the market swings up and down for a couple of minutes but eventually steadily climbs to 1.1122 – at the end of the Half Hour, which is your Expiry Time – you will win your stake. Clap your hands and shake your booty… you are IN THE MONEY or ITM as the lingos like to say.
How much will you win?
Well different brokers, hand out different payouts, or a percentage of your invested capital but let us say on average they would be paying you 75% of your staked investment. In this case you would be getting $175 since the market moved in your favour. Hurray.
If however, you were wrong and the Euro dropped to 1.1100 within that half hour, then you would loose all of your original staked cash deposit of $100. Good-bye Margaritas at Sunset because you are OUT OF THE MONEY, or OTM for the Gurus. Ouch burnt fingers – your bones don’t feel that great anymore, and you start thinking of your money Management. (Check this out in Nappy Stage)
For Binary Options you will win or loose even with just a fraction of a pip movement up and down…. Now if you don’t know what pips are, we will discuss this in Teething Problems.
One thing that you will start calculating immediately, is how many times you can play the currency or stock market, in order to have financial gain.
Let us assume that you will continue playing the market with a $100 cash investment per trade, and that the Percentage Payout is for $75.
If out of 10 trades you loose 2 trades, then you loose $200 but your make $75 on the other 8 trades. This will total $600 in profits less the $200 loss, and you will collect a neat $400 in net profits. Not too bad or a few trades just pushing a YES OR NO BUTTON, right?
Wrong. If you have a 7/10 win rate with the same currency pair and with the same amount staked per trade and pay out, you will make $225 – not as great but hey, we are still making money right?
Wrong. If your win rate falls down to a 6/10 with the same variables, you are suddenly down to just $50… This is starting to become tricky… and with a 5/10 win situation you are actually losing $125.
So what are you going to do??
Looking into the glass ball to make your best bet is not an option. Luckily, there are mentors and an even better solution. You could be doing this job with people who know what they are doing, because they have studied how the market will react. One Manual Trading Signal group that I would definitely recommend is Michael Freeman’s Manual Trading Signal Group. Here a bunch of bright young people, who dedicate their lives to studying the market, give you signals over a facebook page on which options to take.. Hey check it out, and it is actually for FREE.
Few words of advice before we go any further on education.
1. Binary Option Trading is not for Everyone. You can loose a lot of money, especially if you are not level headed and prepared to understand what you are doing.
2. Never invest more than what you are prepared to loose. Check this out on our money management.
3. Go with Binary Option Traders that are regulated and which will offer you a DEMO ACCOUNT once you open an account with them.
4. Practice only on DEMO ACCOUNT or PAPER MONEY until you consistently have a minimum of 7/10 win rate.
5. Follow others who know what they are doing. You don’t have to go this alone. It’s more fun making money with plenty of others
Happy trading and remember to trade safely.