Binary Options Guide

With the sudden influx of binary options brokers flooding the market you might be tempted to take a look at what binary options actually are and whether they’re right for you.

So we’ve put together this binary options guide to help you understand what binary options are and how they work.

Binary options are simple to understand and even simpler to trade but it’s important you understand the risks before you make a decision about whether to trade them.

So read through our guide and we’ll give you some pointers about choosing a broker and developing a profitable strategy.

The beauty of binary options is they’re easy to use, but it’s not so easy to make money out of them.

Why Trade Binary Options

Binary options don’t require as much capital to trade as more traditional forms of trading. You can start with as little as $500 assuming you have proper money management in place.

You’ll see some brokers have a minimum deposit of $100 but they also have a minimum trade of $25. So assuming you risk 5% of your capital per trade, $500 is the absolute minimum you should start trading with. But that’s still a quarter of what you would need using a traditional retail broker.

Binary options are also a lot easier to get your head around than traditional options; trading more conventional options can be a daunting prospect for someone new to trading so binary options are an excellent alternative for rookies.

Types of Binary Options Trading

When we talk about binary options we’re typically talking about cash or nothing binary options. These are the most popular type and are pretty much self explanatory. But there are a few other types of binary options available so we’ll cover them all here.

Cash or Nothing – This is the most popular type of binary option offered by all brokers. The title tells you everything you need to know. If you’re right and your option rises above the purchase price you win a cash reward, typically 75% to 90%, and if you’re wrong you get nothing. Some brokers have taken this a step further by offering refund rates but these are still essentially cash or nothing options.

One Touch – This option is offered by some brokers and works in a slightly different way to Cash or Nothing. You basically have to decide whether a particular asset will reach a predetermined price within the duration of the contract. Once the price has been met the option closes immediately and you win.

No Touch – As you might have guessed this is the opposite of a One Touch option. The contract pays out if the price doesn’t reach the predetermined price. You basically have to decide if you think the predetermined price is a step too far and if so place a No Touch trade.

Boundary Option – A boundary option means the price has to remain inside a given price range. If the price breaks out of either side of the range you lose. These are the highest risk options and should only be traded with great care.

Binary Options Trading Tutorial

In this binary options tutorial we’ll take a look at how to trade a simple cash or nothing binary option. First of all we need to decide what underlying asset to trade. I suggest if you’re new to binary options you look at a one of the less volatile markets like the S&P500.

Now we have our underlying asset we have to decide on price movement. There’s a number of ways we can do that. There’s an excellent article here about using technical analysis for trading binary options here.

Now we have our market and decided on the current direction, we’re ready to make a trade. There are two possible trades we can make, the first is a call trade, which means we think the price will rise and a put which means the price will fall.

Let’s say we think the current price of the S&P500 is undervalued and the price will rise within the next hour of trading. So we place a call trade with an expiry of 1 hour. The amount you want to risk on this trade will depend how much equity you have. I would suggest not risking more than 5% of your equity per trade.

If you have equity of $500 you should not risk more than $25 per trade. When you place a binary option trade you’re given a profit rate and a refund rate. These rates are set by the broker and not related to the price of the underlying asset.

In the example above our S&P500 trade has a profit rate of 80% and a refund rate of 5%. We now know our potential reward and our maximum loss. If we’re right and the price rises, we win 80% of the value of our trade. So we would receive a payout of $45 ($25 to cover the initial trade and $20 profit).

If we’re wrong however and the price falls we have to cover the cost of the trade, less the refund rate. Which in this case would be $23.75 ($25 – 5% = $23.75).

So you can see trading binary options can be very profitable but you must correctly judge the market on a consistent basis to remain profitable long term. If your win rate is anything less than 60% of your trades you would make a loss.

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