Learning how to trade and invest in binary options is actually simpler than you might think. The first thing you’re going to need is a binary options broker. Most mainstream brokers don’t yet offer access to binary options, I’m sure that will change in the future but for now here’s a list of top binary option brokers for you to choose from.
The world of binary options may seem a little alien to you initially, talk of calls and puts and profit and refund rates aren’t exactly what a traditional trader is used to. But it won’t take you long to get your head around.
There are two types of binary trade, a call which means you think the price will rise and a put which means you think the price will fall. Think of it in the same way as going long or short in a traditional trade.
Then you have a profit and refund rate. The profit, usually shown as a percentage is the amount of money you win if you’re right and the refund rate is the percentage you’re refunded if the trade goes wrong.
Let’s look at an example. You think the value of the S&P 500 is going to rise in the next hour of trading, so you buy a call option with a profit rate of 75% and a refund rate of 5%. The option is set to expire in 1 hour.
This trade now has only two possible outcomes, if you’re right and after 1 hour the value of the S&P500 rises above the rate at which you bought the option you win a 75% payout, if you invested $50 your payout would be $87.5 ($50 + 75% = $87.50). Your profit for the trade would therefore be $37.50.
If you’re wrong and the S&P500 falls below the price at which you bought the option you have to cover the cost of the trade less a 5% refund, in this case you would lose $47.5. The profit and refund rates vary from broker to broker, some offer higher profits but lower refund rates and vice versa.
Of course this isn’t some get rich quick scheme and it should only be used to supplement a more balanced portfolio. It is however an excellent way to trade the markets if you’re short of funds. But whatever you do make sure the money you invest is yours to lose. Betting the rent money every month is sure fire way to end up homeless.
You should expect to lose a few trades along the way, just like any other form of trading. But assuming a 75% profit rate and a 65% win rate you would have a profit of $775 to show over 100 trades risking $50 on each trade.
You would have risked $5000 to do this but that’s still a pretty good return on investment and a great way of supplementing your income. You could easily increase the value of your trades and make even more money, so long as you consistently win more trades than you lose.
So just how do you maximize your win rate? Well if you’re new to binary options trading you need to find a market that isn’t too volatile, for me that rules out Forex.
The Forex market can be unpredictable and small reversals can happen at any time. That’s fine for medium term swing traders but binary options are time limited and a reversal at the wrong time can wipe you out.
So it’s much better to follow Indices, here you’ll find a much more stable market but still liquid enough to make significant gains throughout the day. Now all you have to do is jump on one of these runs and make a profit.
There are a number of strategies you can use to do this and we’ll cover a few of them in future posts. But it’s safe to assume that the most successful binary options traders are using technical analysis.
They’re certainly not guessing, because each trade has a 50/50 outcome it’s easy to be lulled into a false sense of security. But if you win exactly the same amount of trades as you lose you’re going to lose money, a lot of money.
So proper money management skills should be applied at all times, you should have a set goal in mind before you enter the trade and if the momentum looks like its going to reverse i.e. a hanging man candlestick pattern emerges you should think about getting out.
Forex Binary Options
Binary options are available on a number of underlying assets but the market where the most profit potential is available is the Forex market.
Forex binary options are available for most of the major currency pairs from all binary options brokers. But just because they’re available doesn’t mean you should trade them.
Binary options are easy to understand and easy to trade but the Forex market is a difficult market to master, no matter what instrument you use to trade it.
The Forex market is very fluid and trend reversals can happen at any time. Most Hi/Low binary options have an expiry time of an hour. 1 hour is an age in Forex; many currencies can go on a run and then fall back two or three times in that amount of time.
It’s for that reason I suggest if you’re just starting out with binary options you should choose a less volatile market like the NASDAQ or S&P500 to begin with.
But sooner or later you’re going to want to try Forex out for yourself. So here’s a quick guide to trading Forex binary options profitably.
First of all you must master technical analysis, it’s no good guessing. If there’s one market that can stay irrational for longer than you can stay solvent it’s the Forex market.
Check out these binary options signals and learn to master them, once you can comfortably spot the formation of these signals you can put them together into a working Forex binary options strategy.
Here’s a few pointers to help you stay solvent in the volatile Forex market.
- Only trade Forex short term; using binary options to predict Forex over the long term isn’t going to prove very profitable. Trading Forex long term should only be done using traditional options because of the freedom you have to exit the trade at any time without penalty. So stick to 1 hour intervals, that way you’ll maximize your return and limit your exposure.
- Never stray from your trading strategy, you have a strategy for a reason. It’s there to help you make decisions in the heat of the moment. You should have clear entry points; exit points are less crucial with binary options but if you see the market is moving against you get out sooner rather than later and preserve your capital.
- Stick to major currency pairs, currency pairs with a lot of liquidity perform a lot more predictably than smaller currency pairs that can fluctuate on the merest hint of an interest rate change in Uruguay.
- Only trade when you’re sure a trade is developing, never be tempted to trade on a whim. The Forex market is likely to create a lot of potential trades in a day and with binary options you have to be right 6 times out of 10 to make it worthwhile.
- Concentrate on a few currency pairs, if you’re just starting out with currencies choose one pair and learn to master it before moving on to another. The EUR/USD is a good place to start because it’s the most liquid.
If you follow these points you’ll go a long way to mastering Forex, but remember the Forex market takes time and skill to master even if you’re an experienced trader. Only the most dedicated survive, but if you do the rewards are there for the taking. Just don’t underestimate how hard it will be.
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.
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.
In the next part of this article we’ll look at a few binary options trading signals to help you trade.
Binary Option Signals
In order to trade binary options profitably you’re going to need to brush up on your technical analysis. Don’t go thinking you can beat the market; every trade you make should have sound reasoning behind it.
Here we’re going to look at some of the most popular trending signals for trading binary options. All these signals are from the candlestick chart, so make sure you set your charting software to show candlesticks.
The time-frame will depend on the length of options you want to trade. We’ll go into more detail when we put these signals together in a strategy in the next article, but for now we’ll set the chart to 1 hour intervals.
Bear in mind that none of these signals should be taken in isolation but the appearance of one or two of them coupled with breakouts from lines of resistance should give you a pretty strong signal to trade.
The engulfing signal has proved to be a very accurate trend reversal signal since the beginning of time.
It’s characterized by two opposite colored bodies; the bottom of the current body will be lower than the previous bodies low and higher than the previous bodies high. Thus completely engulfing the previous body (hence the name), ignore the tails and shadows.
The appearance of this candle signifies a reversal of the trend in either a downward or upward fashion. So you should be looking to either enter or exit a trade depending on your current position.
The hanging man is a bearish signal that appears at the end of an upward trend. It’s characterized by a short body with a long tail. The hammer is the same signal but appearing at the end of a downward trend and has a short body and a long shadow.
This is a very reliable signal but it shouldn’t be taken in isolation. It typically appears only within intraday charts so it’s a popular signal for day traders but binary options traders can also use it to determine the top of a trend and the start of a reversal.
If you’re going to trade this signal it’s best to wait until the price passes beyond the lowest low or highest high as it’s prone to give false breakouts especially in the lower time frames.
Morning Star/Evening Star
The morning star signal is found at the bottom of a downward trend and the evening star is found at the top of an upward trend. This is a very powerful signal for spotting trend reversals and therefore useful to binary traders.
It always consists of three candles the first candlestick consists of a long black body, the second candlestick gaps down from the first (the body’s display a gap, but the tails and shadows may still overlap). The final candlestick has a long white body which closes in the top half of the body of the first candlestick.
This set-up can be made considerably more powerful if combined with another candle formation like a shooting star. Such a set-up is golden and is sure to result in a trend change.
Shooting Star/Inverted Hammer
The shooting star is one of the most easily recognized signals, consisting of one candle with a small body and a shadow at least two times the length of the body. It appears at the top of an upward trend.
Its counter part the inverted hammer appears at the bottom of a downward trend. Its appearance is the same but in reverse; it has a short body with a long tail.
The appearance of either signal is a strong indication of a change of direction. The shooting star is one of the most popular signals partly because its so easily recognized but also because its incredibly accurate.
The abandoned baby signal is a rare occurrence but has proved to be very accurate over the years so it would be foolish to ignore it. It consists of a three candle formation and appears at the top of an uptrend (abandoned baby bearish) or the bottom of a downward trend (abandoned baby bullish).
The first candle will show a strong body in the direction of the current trend; this will be followed by a small candle or doji which will appear at the top or bottom of the previous candle, depending on the current trend. The final candle will show a strong body in the opposite direction of the trend.
When combined with lines of resistance this is a very powerful indicator which should be added to the arsenal of every binary options trader.
In the next post we’ll be looking at combining a few of these signals into a working strategy. But for the mean time fire up your charting program and start looking for these formations. Professional traders will know these formations off by heart, and with time so will you.
Binary Options Trading Strategy
In this post we’re going to take what we learned in the last post about binary trading signals and use them to build a profitable binary options trading strategy.
Before we start we’ll cover the basics of what every strategy needs. The whole point of a strategy is to help you trade without emotion and to give you some structural entry and exit points.
So a good strategy needs to include proper money management, provide valid entry and exit points as well as a stop loss for losing trades, all of these things should be decided before you make a trade. Trading on the fly is sure to end in disaster especially when you’re just starting out.
This is a simple strategy that’s perfect for beginners to learn the ropes. So first things first we need to know the levels of resistance for the day. We’re going to do this by using an old favorite the Bollinger band.
Named after John Bollinger and not after the amount of Champagne you can buy with your profits. The Bollinger band is a reliable indicator used by trading professionals and gives a useful trading range for the day.
For this strategy I’m going to recommend you trade the S&P500 as its a little less volatile than other markets but still liquid enough to create significant trends throughout the day. When you get more experience you can use this strategy on other more volatile markets like Forex.
So open up your charting program, change the default pattern to candlesticks and set the time frame to 1hr intervals. Now set the Bollinger band to a 20 day moving average, this will give you an average range over the previous 20 days trading.
You will quickly see that 90% of the time the price remains within this band, what we’re looking for is a price breakout above or below.
When the price breaks through these lines of resistance one of two things will happen. The price will either go on a run and create a new high or low for the day or more likely the price will reverse and head in the opposite direction. Both these situations are opportunities for profit.
But how are you going to distinguish which is which? Well you could trade a reversal every time the price breaks through the top of the band, place a put trade meaning you think the price will fall and place a call trade when the price breaks through the bottom of the band, meaning you think the price will rise.
That’s fine but you’ll get a lot of false readings trading this way and you won’t be able to spot when the price is about to go on a run. So it’s going to be much more profitable to look out for one of the binary options signals you learned in the previous part of this article.
When you combine one of these signals near the top or bottom of the Bollinger band you have a powerful signal which is much more likely to result in a profitable trade because you’ll have a good idea where the price is headed.
Take a look at the chart above and you’ll see how the price bounces around between the two Bollinger bands. If you placed a trade every time the price broke through the top or bottom band you would have made 11 trades and been right 50% of the time.
As you already know losing 50% of your trades would mean an overall loss, but what if you only traded when you saw one of the binary option signals appear? Then you would have only traded 7 times, and you would have been right for 5 of those trades, meaning a 70% success rate.
The particular example above is an intraday trading system which means you would have to be monitoring the market once every hour. You could easily adapt this system to a daily system by setting the chart to daily intervals and trading daily binaries instead of hourly ones.
This will result in considerably less trades maybe only one or two a week but it’s a good way to start if you have a full time job without access to the internet. You can always move on to more liquid markets like EUR/USD once you have gained enough experience spotting the various signals.
One final thing I would say is don’t try to take on too many markets at once, concentrate on one or two markets and become expert at trading them. Trying to monitor 5 or 6 markets at once is sure to end in disaster especially when you’re just starting out.
Binary Options System
It doesn’t matter what you trade or how much money you have to invest, if you’re going to be a successful trader you’re going to need a system.
Systems do a number of things like giving you entry and exit points along with stop losses and projected profits. Trading is stressful and making decisions on the fly is sure to end in disaster.
Binary options are a little different to normal trading but that doesn’t mean you should trade without a valid system in place. In this article we’re going to explain how to develop a profitable binary options system that enables you to stay solvent even when the markets are completely irrational.
First of all before you even begin to trade you need to implement a money management strategy. In normal trading using leverage it would be unwise to risk more than 2% of your equity on a single trade. Sure if you have a number of strong signals it might be worth increasing that to 5% but certainly no more than that.
With binary options you are risking up to 95% of your capital on one trade, doing that over the short term is going to bankrupt you very quickly, so proper money management is important here as well.
If we apply the same rules as a conventional trading strategy you shouldn’t risk more than 2% of your available equity on a single trade. This means if you have equity of $1000 the maximum you should risk per trade is $20.
Most beginners will think this is a little conservative but look at it this way; you can afford to lose 50 trades in row before you lose your deposit and if you lose 50 trades in a row you don’t have valid strategy.
If you increased it to say $50 you could still afford to lose 20 trades in a row which still isn’t going to be a very successful strategy. But what if you lost 7 trades in a row; you would have lost $350 which is a significant drawdown and a much more likely scenario, even with a successful strategy.
Having lost that much money you would start trading conservatively, trades that you would ordinarily have made would be missed along with their corresponding profits. Those missed trades and profits would make you even more stressed and you’d compensate by making reckless trades resulting in more losses.
You would be trading using your emotions the very thing a strategy is meant to avoid, all because you risked more per trade than you should have. And why did you risk more per trade, because you were greedy and that greed caused fear which combined destroyed your trading methodology.
So do yourself a favor and limit your trades to 2% of your available equity. If you only have $500 then you shouldn’t risk more than $10 per trade. It might not be sexy but you’ll thank me in the long run.
If you do go on a losing streak, and you will at some point, no strategy is perfect. Adjust your trades accordingly, if for instance you lose 20% of your equity ($100) then adjust your trades to a maximum of $8 (5% of $400).
When you get into this mindset you won’t really care if a trade has been successful or not, because accepting losses is all a part of trading and you have proper money management in place to stop you from blowing you float.
Now you’re trading without emotion and your brain is in control not your heart. You’re now ready to move on to the next part of any successful binary options system, technical analysis. In the next post we’ll look at a few of the best binary options signals for you to look for and then we’ll put it all together into one profitable binary options strategy.
How To Compute Expiry For Binary Options
Calculating the expiry price for a particular option isn’t normally something you need to worry about since most brokers calculate the price for you. But since binary options are an over the counter market, meaning it’s controlled by the broker himself it’s a good idea to know how they calculate the expiry price.
This system is open to abuse by some unscrupulous brokers so try to establish what formula they use before you begin trading. The honest brokers will list it on their website, but if you can’t find it you can always ask them. Always be wary of a broker that refuses to tell you.
All traded options have two prices, the bid (for selling an asset) and the ask (for buying an asset). To save confusion the actual expiry price is calculated from these two prices using the formula above to get one expiry price.
This in itself causes confusion with regular traders because a conventional option would close at the bid price. But due to the way binary options are traded only one price can be given at anyone time.
As I said you don’t generally need to calculate this yourself as your broker will do it for you, but it’s important you’re aware how its calculated, especially when the price closes at or near the opening price.
Every broker uses a slightly different method for calculating expiry but the following is one of the most popular and most binary options brokers use a variation of it.
The following terminology is used to calculate the expiry rates of binary options:
Bid Price – The last known price quoted for selling an asset prior to expiry.
Ask Price – The last known price quoted for buying an asset prior to expiry.
Last Trade – The last price actually paid for the asset prior to expiry.
Last Quoted Index Price – The last quoted price for an index prior to expiry.
Expiry Level Calculations
Use the following formula to calculate expiry levels:
|Option Type||Expiry Level Formula|
|Indices||The last quoted index price that appears in the Data Provider field at expiry|
|Currencies||The sum of the bid and ask price (at expiry) / 2|
|Stocks||The sum of the bid and ask price (at expiry) / 2|
|Commodities||The sum of the bid and ask price (at expiry) / 2|