How to Trade Binary Options

Learning how to trade 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.

In the next post we’ll look at a few binary options trading signals to help you trade.

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