What is the Best Binary Options Broker? Binary options trading hinges on a simple question — will the underlying asset be above or below a certain price at a specified time? If so, you can make substantial profits with one of the most straightforward financial instruments to trade. But what exactly are binary options, and what are their benefits and drawbacks?
Then practice what you've learned with our free stock market simulation. Compared to traditional options, binary options have different payouts, fees and risks.
BINARY OPTIONS: STRATEGIES AND TIPS
Binary options are a form of options trading based on a single question: did a stock index, commodity or Forex pair reach a certain price by a certain time period, or not? You can trade binary options on a whole range of different events.
On the Nadex exchange, for example, you can trade on foreign exchange rates, commodity futures prices, and major economic stats like unemployment figures or the Fed funds rate.
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You can take either side of a trade — buying if you think the underlying market price will be above the strike at expiration, and selling if you think it will not be. There are also plenty of different contracts to choose from — you could trade based on gold being above at PM this afternoon, for example, or above at PM. There are hourly, daily or weekly options at a range of different prices, so you have a lot of flexibility in how you trade.
Because short-term market events are hard to predict, there is certainly risk involved, as with other types of options.
When you make a binary trade, you know exactly how much money you could lose, and how much you could make. You could use binary options as a way to trade direction with the expected volatility while keeping your exposure limited.
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In this case you could buy out-of-the-money binaries; this is where the binary strike price levels would be higher than the current price of the underlying. The higher the strike, the cheaper the initial cost reflecting a bigger trade disadvantage but offering a much higher net payout if the binary finishes in the money. Buying binaries would mean the underlying is already over the strike or selling binaries means the underlying is already below the strike.
If the underlying market stays flat, as you expect, then your binary finishes in the money. If the gold market price stays flat, or even slips a small amount, the binary will finish in the money as long as the gold price finishes above the strike at expiration.
Resist the urge to over-invest New traders often lose money by getting carried away and over-investing.
Invest with both rational thinking and self-control. Everyone, but beginners especially should avoid trading when they are emotionally disturbed.
Who knows what binary options are yourself before trading Studying the market, look at graphs. Keep apprised of trading news.