In this article, we shall go over the basics of trading binary options. These basics would include:
- Knowing the basics of what binary options are.
- Understanding the trade types.
- The basics of opening a binary options trading account.
- Understanding the concept of expiry times.
- Understanding the acceptable methods of transacting on the account.
- Payouts and price.
- Traded Assets
What Binary Options Are
Binary options are also known as digital option, fixed odds option or fixed return option contracts. They are used to trade forex and other underlying assets in the financial market, and the trade contracts are structured in such a way that they can only end in one of two possible ways.
Understanding the Trade Types
There are several ways of trading digital options, and these are known as the trade types. Following from the description given above about the nature of fixed odds contracts, the trade types are usually given in pairs, which are indicative of the “one or the other” outcomes that are possible. Thus we have the following trade types:
- High or Low, Call or Put, Above or Below, Rise or Fall, Up or Down. These are basically the same trade type, given different names on various platforms. This mimics how forex positions are placed.
- Touch or No Touch.
- In or Out (boundary or range bet).
- High Yield Trades which are basically Touch or No Touch trades with high payouts (SpotOption partner dealers), or In/Out trades with high payout (Tech Financials partner dealers).
- Time-based bets (60 seconds, 2 minutes, 5 minutes, etc) which are all variations of the Call/Put contracts but which have a definite time limit or expiry.
Opening a Binary Options Trading Account
The binary bet market is there for traders to make money from, but they can only do so if they have market access by opening a trading account with their selected broker. There are several brokers in the market, and they will provide either their own custom-made platforms, or any of the existing white-label brands in the market (SpotOption, Tech Financials, Tradologic). Account opening is done in a few simple steps online.
A unique factor in binary options is that all trades have time limits. In other words, they expire after some time. Some brokers will allow traders to set their own expiry time limits for their trades, while other brokers will provide a restricted expiry time basket from which the trader must make a choice when setting the trade in the market. The trades must expire in the trader’s desired outcome for money to be made.
Transacting on the Account
A trader must have an acceptable means of depositing money or withdrawing same from the trading account. Why do we use the word “acceptable”? A trader may be able to use a credit card freely in his country, and suddenly discover that he is unable to use this card to deposit or withdraw money from his binary options trading account. There are several restrictions that a digital option broker may place on what means a trader may move a certain amount of money into or out of his fixed odds option trading account. It is up to the intending trader to learn the basics of funding and withdrawals and to learn them in time so as not to pay a hefty price afterwards.
Payouts and Price
A bet will be assigned a payout and price based on the probability of trade success when the bet is placed, and the use of certain features that allow the bet to be ended before maturity. The closer the asset price is to the target, the lower the payout and vice versa.
Forex is an example of an asset class traded in this market. There are other assets such as stocks, indices and commodities, but forex is the number one traded instrument.
These are the basics that every fixed return option market participant should learn and be familiar with in order to profit consistently.