WHAT ARE BINARY OPTIONS?
Binary options are unique trade types which are based on predictions of a possible outcome or scenario out of two provided scenario options. A correct prediction leads to the payment of a fixed amount of money known as the payout, while a wrong prediction leads to a loss of the investment in the trade. The word “binary” means “two”, referring to the fact that only two possible outcomes are provided in binary options. It is either the trader wins all (or loses none) or the trader loses all (wins none).
Characteristics of Binary Options
Binary options have peculiar characteristics which set them apart from other trade types. A valid binary option must have the following characteristics:
- There must be an underlying market instrument to trade. Binary options cannot be traded on nothing.
- There must be a set price on which the determination of the correct outcome can be referenced. This price is known as the strike price.
- All binary options trades have a fixed duration. Therefore, several expiry times are set. Once a binary option expires, the expiry value is compared with the market entry value to determine the correctness or otherwise of the predicted outcome.
- A correct outcome is compensated with a profit payout which is fixed and known before the onset of the trade.
- Binary options are unleveraged.
The Commonest Types of Binary Options
Binary options are of different types. You are offered a description of the binary options that are commonly found on trade platforms.
- Up/Down Options: Also known as the Call/Put or Above/Below trades, the expected outcome for an Up/Down or High/Low trade is for the expiry value of the asset to either be higher or lower than the strike price (entry price) once the trade duration is over.
- Short Term Options: These are Up/Down options that last for 30 seconds, 60 seconds, 2 minutes or 5 minutes. These four expiry times all constitute short term options.
- Long Term: These are Up/Down options with long duration: 1 day, 1 week or 1 month.
- One Touch options are highly speculative binary options trades that offer high payouts and in which price is expected to touch a strike price that is some distance from the market price within the allocated time for a payout to be made.
- In/Out: Also known as boundary or range options, this trade type presents two strike prices: one above and another one below the market price. The trader is to choose whether the price stays within the range defined by the boundary prices (IN) or whether the price will move out of the boundaries (OUT).
Some brokers will offer a few trade types outside of what has been described above, but these ones are a constant on every trading platform.
Asset Index
One unique property of the binary options market is the availability of several financial instruments that are pooled from various asset classes. Asset classes that are represented in the binary options market include the following:
- Stocks
- Indices
- Commodities
- Currencies (forex)
- Cryptocurrencies (Bitcoin and other altcoins).
Some brokers will also add bonds to the asset classes. On IQ Option, traders will also have the opportunity to trade Exchange Traded Funds (ETFs) as another unique asset class.
1)Stocks
These are shares of companies listed in major stock exchanges around the world. Stocks listed in the US, Asia, Europe and UK, constitute the bulk of stocks listed on binary options platforms. Some platforms also include stocks from exchanges in the MENA region (Middle East) and other emerging market economies. They are usually available for trading when the parent exchange on which they are listed is open for business.
Examples of these stocks are: Microsoft, Google, Facebook, Deutsche Telekom, Teva Pharma, BP, Amazon, Baidu, Saudi Aramco, Petrobras, etc. Stocks such as these constitute the bulk of stocks traded on binary options platforms.
2) Indices
Stock indices measure the performance of the underlying exchanges where stocks are traded.
3) Commodities
Commodities can be divided into the hard and soft commodities. Some other authorities prefer to classify them into their sub-classes: metals, agricultural and energy commodities. Under this category we have the following:
- Metals: silver, gold, platinum, copper.
- Energy: crude oil, natural gas, heating oil.
- Agricultural: corn, coffee, wheat, sugar, etc.
4) Currencies
Forex assets are the 4th asset class mentioned here, and apart from cryptocurrencies, are the only other asset class that is open all day, 5 days a week.
5) Cryptocurrencies
A new asset class has emerged: cryptocurrencies. These are digitally created currencies that work based on cryptography, and includes Bitcoin and other popular altcoins such as Dash, ZCash, Litecoin, Ethereum, Monero, Ripple, etc. They are traded 24/7: the only asset class that can be traded round the clock.
6) ETFs
ETFs or Exchange Traded Funds are asset funds that are made up of a basket of assets pooled from various asset classes, to reflect a particular market direction. They allow investors to be exposed to various markets, so as to potentially allow them profit from these markets all from a single investment vehicle. Usually, assets that correlate in the same direction are chosen.
Setting Up Binary Options Trades
This section discusses how the various trade types listed on binary options platforms can be executed.
Setting up a binary options trade goes through a sequence of choosing the asset to trade, selecting your investment amount, the duration you want the trade to last so as to allow your trade end in profit, and a few other details before trade execution.
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How to Trade the Up/Down Binary Option
The Up/Down option is a direction-based trade, with the outcome determined by comparing the expiry value with the market entry value of the asset. To trade the Up/Down option, do the following:
- Select the asset you want to trade.
- Choose the trade duration.
- Select UP (if you feel the expiry value > entry price) or DOWN (if you feel that the expiry value < entry price).
- Enter the investment amount.
- Click the ORDER button.
Once the trade ends, you will receive a payout of about 80% for a correct prediction.
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How to Trade the Touch-Up/Touch Down Binary Option
The One Touch trade features two strike prices: one above the market price (the TOUCH UP strike) and the second one below the market price (the TOUCH DOWN strike). The trader must choose which of the strike prices, if any at all, will be touched by the price movement during the active duration of the trade. To execute a One Touch trade involves the following steps:
- Select the asset to be traded.
- Select the trade duration from the default list.
- Click on TOUCH UP (if you feel the market will move higher than entry price and touch the upper strike price) or click on TOUCH DOWN (if you feel that the market will head lower than entry price and touch the lower strike price).
- Enter the investment amount.
- Click the ORDER button.
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How to Trade the In/Out Binary Option
The In/Out trade is known by several other names such as the Range option or the Boundary option. It features two strike prices; one above and one below the market price. These two prices form the boundaries, and the distance between the price floor and ceiling form the price “range”. Will the price stay between these two prices through the duration of the trade (IN) or will the price move out of the boundaries (OUT)? This is what the trade seeks to answer. To execute the In/Out trade involves the following steps:
- Select the asset to be traded.
- Choose the trade duration.
- Select IN (if you feel that the asset will stay at a price located between the two price boundaries) or OUT (if you feel the price will touch the price boundaries or step out of the boundaries, no matter how brief).
- Enter the investment amount.
- Click the ORDER button.
How to Trade the Short Term or Long Term Binary Options
These are basically Call/Put binary options, whose names are determined by the duration of the trade. Short term refers to trades that last for 30 seconds, 60 seconds, 2 minutes or 5 minutes. Long Term trades last a day, a week and sometimes up to a month or even three. To execute either the Short Term or Long Term trade, simply follow the same procedure as for the Call/Put trade, but choose the trade duration as indicated for each trade type.
Please note: Short Term trades usually have reduced payouts, while Long Term trades have a higher payout.
What You Need to Start Trading
What do you need to start trading binary options? You will need the following:
- A trading account with a binary options broker.
- Capital with which to trade the account.
- Your ID documents (international passport, national ID or drivers’ license) to verify your account.
- A computer or smartphone/tablet
- Access to trading tools.
- Knowledge of how to trade binary options.
Signing up with a binary options broker such as IQ Option is an easy process. Fill the account opening form, then submit your government ID card (such as an international passport or drivers’ license), as well as a utility bill or bank statement as proof of address. Once your account is verified, you can fund your account to commence trading.
Choosing a Binary Options Broker
The binary options broker will do the following for a trader:
- Hold your trading capital
- Grant access to the trading platform and trade types
- Set pricing for the trades
- Data control and management of all information./data on their clients.
Using a scam or unregulated broker is a risk no trader should ever take. So here is how to choose a binary options broker so as not to run into any problems.
- Choose only brokers that are regulated. Regulators require that a regulated broker displays their license number issued by the named regulator at the bottom of their homepage. Any broker without this information is not regulated, even if they claim to have an office in the country of the regulator. Crosscheck the websites of the regulators to confirm the information. Regulators usually have a search engine that can provide this information within seconds of a search being initiated by the user.
- Avoid any attempts by brokers to coerce you into accepting a bonus. If the broker insists that you cannot open an account without accepting a bonus, walk away and get another broker.
- Check online forums for any scam reports on brokers, especially when it comes to their fulfillment of withdrawal requests. This information resource can save you major headaches down the road.
- Avoid brokers located in areas with weak regulation (Mauritius, Seychelles, St.Vincent and the Grenadines, etc). There are too many cases of broker infractions which have either not been thoroughly investigated, or totally ignored by the regulators. Some of these countries depend on investor inflows for the survival of their economies. What are the chances of them taking any action against the brokers who make this happen?
Apply these rules and you will be safely in the hands of a broker who has your best interests at heart.
The Options for Deposits and Withdrawals
In order to trade binary options, traders must be able to fund their accounts and also withdraw any profits made. This means that traders must have access to acceptable payment systems that can be used for this purpose. Payment systems have evolved over the years. As at 2018, these are the common ones that are in use:
- Credit/debit cards (MasterCard, VISA)
- Bank wires
- Digital wallets such as Skrill, Neteller, Webmoney.
- Cryptocurrencies, usually Bitcoin (BTC) and Ether (ETH).
- Country-specific payment systems such as GiroPay, Moneta, Yandex Money, PaySafeCard, etc.
Not everyone will have access to ALL these payment systems, but everyone will be able to find at least one which will serve the purpose. Here is how these systems work for deposits and withdrawals.
Is it Safe to Trade Binary Options?
To understand whether binary options is safe or not, it is important to clearly define what the word “safe” means. A knife or a car can be safe, but used wrongly or put in the wrong hands, they become instruments of injury or death. So safety is not about the asset itself, but about how the individual goes about using the asset.
Binary options are safe to trade, but they carry an element of risk. How well you mitigate this risk will determine how safe binary options will be for you. In order for binary options to be considered a safe investment for you, it is important you understand that there are more scam brokers in binary options than you will find anywhere else, and this is not surprising because the market is not uniformly regulated. But there are also good brokers. The good ones are those which are regulated and have a good track record that can be testified to by real users of the platform, not paid actors who give video reviews. Therefore, binary options trading is safe if you take the pains to locate a regulated broker that makes the trading environment safe for you.
Classification of Binary Options Platforms
In this section, we discuss binary options platforms. These are basically the software that allow binary options traders access to the market and pricing engine of the broker. Using their pricing engine, brokers supply pricing of assets to the traders through the binary options platforms. All predictions and bets are made on the binary options platforms, and these are executed at the dealing desk, pending the outcomes of the trades that have been so setup.
It is important for traders to understand the binary options platforms that they are using to trade. Broadly speaking, binary options platforms are of two types:
- Proprietary platforms
- Turnkey platforms
Proprietary platforms are usually in-house software that have been designed by the brokerage house are unique to the brokers that designed them. The reasoning behind the creation of proprietary software is that certain brokers want to provide their clients with their own variations of the popular binary options trades. Since these are not found in the turnkey software, such brokers prefer to create and trademark their own software to be able to offer their clients these options. These binary options platforms can also serve as branding tools to distinguish a brand from another, especially in a market where there is a hustle for the global pool of potential clients. An example of a broker that presents a proprietary binary options trading platform is IQOption. Unlike other brands in the market, IQOption presents a downloadable version of its software, which is actually the first of its kind among binary options brokers.
Turnkey software are generic binary options platforms. These are usually created by a third-party company and are customizable. So a brokerage firm that does not have the resources to develop a proprietary software can easily acquire a turnkey license and have the generic platform customized to suit its brand. The advantages of this type of binary options platform are that it is cheap for brokers to acquire, and also presents some of the trade types that are already known to traders. The disadvantage is that it does not allow brokers to apply their own variations of trade types that may have been conceived in-house.
From the perspective of traders, it is a choice between the regular and the exotic. As a trader, you need to be aware of what is available for trading when you decide to choose a brokerage for your business. Is the broker offering you something special (like IQOption’s downloadable platform with 15 cryptocurrency assets and various trading tools)? Or is the broker offering the same stuff you can get elsewhere? Understanding the binary options platforms that are available will determine how well you enjoy your trading experience.
The Role of Binary Options Bots
Binary options trading software can also be used to trade prediction options in an automated fashion. These are known as binary options bots. They are of various types. However, the structure of the trading platform determines what program is used to create these binary options bots.
- Browser-based binary options platforms usually rely on software that are created as extensions. These can then be added to the browser on which the trader will be trading. These binary options bots, working as browser extensions, can communicate with the platform to initiate trades on the trader’s account. These were the first-generation binary options bots and have largely been replaced.
- Copy Trade bots are binary options bots which are programmed to work by communicating between a human trader at the back-end of the software, and the trader’s account at the front-end. So a human trader generates trades (e.g. High or Low), and clicks the relevant function buttons to communicate with the accounts of traders all over the world that have signed up for the service. The binary options bot then initiates the corresponding trade on every single account that has been setup. These copy trade binary options bots are the 2nd generation software that are largely in use today.
With the gradual development of downloadable binary options platforms, it is possible that a new generation of binary options bots will be developed to work on these platforms just as is the case in the forex market. However, these are not yet in plentiful quantity and development has been slow. It is possible that in the next two years, we will see greater developments occurring in this market.
As a trader, trading with a binary options bot is an ideal way of trading as it has the potential to allow you earn from the market passively, without committing too much of your time and resources to the market. Furthermore, the element of human emotion is taken out. Emotion tends to lead traders to make questionable trade decisions. Using a binary options bot will eliminate this factor, allowing the trading strategy to be the only deciding factor in determining the outcome of the trade.
It is important to take precautions when choosing a binary options bot, as there are many scams in the market. As a rule, the company that is selling the bot should allow for a free-trial period which can be used in evaluating the software’s performance. Try before you buy.
Other Binary Options Software: Binary Options Indicators
There are traders who have some experience and do not want to leave the work of trading entirely to binary options bots. For these traders, binary options indicators come in handy. These indicators are used to detect patterns on charts that display opportunities when these present themselves. There are many types of binary options indicators, majority of which are custom-made and have to be applied on third-party chart applications. Binary options brokers are notorious for not providing interactive charts that permit deep market analysis. Therefore, traders who want to use binary options indicators have to make use of third party charting applications from forex brokers and independent companies. It takes some knowledge and experience to make use of these indicators. Therefore, beginners are not advised to take this route.
Binary Options Bonuses: What are They?
Binary options bonuses have become a very controversial topic, especially as many brokers have abused them and caused them to become snares to traders instead of symbiotic tools of benefit to both traders and brokers. Binary options bonuses are additional trading capital that is provided to traders to boost their ability to trade larger contracts in the market.
The concept of binary options bonuses came about because the binary options market is an unleveraged market. Unlike in forex and other markets where trades are given leverage of between 1:20 and as high as 1:400, binary options traders have to come up with all the trading capital they will use for trading. To help these traders, the original concept of binary options bonuses was devised to provide these traders with additional capital to enable them trade larger contracts. This was to be a symbiotic relationship between traders and brokers. Traders would have access to greater capital than they could individually muster, trade larger contracts and possibly make more money per trade than would have been possible. Brokers would make more money from larger commissions on bigger trades generated by their clients. Everyone would go home happy, right? Well, that was before some greedy brokers decided it had to be all about them and not the traders.
Shortly after, many brokers introduced the trade volume requirement. Some brokers demanded that traders generated at least 30 – 50 times the bonus amount in trades before the bonus could be withdrawn. Some brokers took it further and blocked any withdrawals from accounts before the trade volume requirements were met, asking the traders to “buy off” the bonus by depositing the equivalent amount instead. Many traders found it impossible to meet such demands, and complaints became very loud. So loud, that many regulators across the world took notice. As it stands, the Cyprus Securities and Exchange Commission (CySEC), Australian Securities and Investment Commission (ASIC), Japan Financial Services Authority (JFSA) and CFTC have all prohibited the offering of bonuses to traders by their brokers.
Binary options bonuses are still being awarded by brokers located in jurisdictions such as Seychelles, Mauritius, St. Vincent and Grenadines, Vanuatu, etc. Traders must be aware of the volume requirements that come with each bonus as they sign up.
Bonuses are of two kinds:
- Deposit bonus
- No-deposit bonus
Deposit bonuses require the trader to open a live account and make an initial deposit, before the bonus is given. Bonuses are usually given as a percentage of the initial deposits, in amounts ranging from 25% to 100% of the deposit amount.
No-deposit bonuses are provided to the trader without an initial deposit. Such bonuses are typically of a small quantity. Rather than being used as regular trading capital, no-deposit bonuses are better suited for use as entry-level trader training in a live market scenario. Beginners should, therefore, use no-deposit bonus accounts as a transition point between demo account trading and live account trading.
Binary Options Demo Accounts Without Deposits
Demo accounts in binary options are not the norm; they are the exception. It is very rare to get a binary options demo account and where this is provided, a funded live account is required. However, if it is possible to get a binary options demo account without deposits, you should take advantage of this to get as much as practice as possible on how the trading of binary options works.
What should you use a binary options demo account for?
- Use a binary options demo account to get a hang of the binary options platform that you will use for your real money trading. Of course, this means that if you will use IQOption for live trading, you should use their binary options demo account without deposits.
- Try out your trading strategies with a binary options demo account.
- You should also take time to study how trade expiry times work. This is a very important but often neglected component of binary options trading.
- Use the binary options demo account to do your historical studies, especially if you have already started live account trading. You can learn from your mistakes using a binary options demo account.
Formulating a Binary Options Strategy
A good binary options strategy is at the heart of profitable trading. This section discusses how to formulate a good binary options strategy which will keep you profitable for a long time to come.
What are the components of a good binary options strategy?
- The strategy must be one which is easy to use. Binary option trading requires quick thinking and quick market reactions, especially on the short term trades. A strategy is no good if it is very complex and very hard to understand and utilize.
- A good binary options strategy must be one which delivers at least 2 profitable trades for every losing trade. The higher the ratio of profitable trades to losing trades, the better. Why is this important? A winning trade can only deliver an 80% payout. With short-term trades, the payout falls even further to about 65%. A losing trade leads to 100% loss of investment. So you need to have a payout of at least 160% (which can only come from at least 2 winning trades) to be profitable. Your strategy should be able to guarantee such returns.
- A good binary options strategy must take into account the durations for each trade. All binary options trades expire, and expiry times can be as low as 30 seconds to as high as a month. You cannot formulate a strategy with a daily chart for a trade with a 30 seconds expiry time; it will not work. So your strategy must be suited for a particular duration.
Is Binary Options Trading Legal?
Except for Israel, France, Italy and Belgium where binary options trading is outlawed, binary options trading is legal in other countries. However, each country has its own legal framework for the trading of binary options. Here is a summary of the legal considerations for binary options in countries that can be considered as the core trading hubs.
- US: Traders are only allowed by law to trade with local US brokers.
- Cyprus: Cyprus binary options brokers cater to international clients. After years of being very liberal with binary options, the new head of the Cyprus Securities and Exchange Commission (CySEC), the agency responsible for regulating binary options in Cyprus, has decided to get tougher and has called for prohibition on use of affiliates, bonuses and marketing call centers by binary options brokers.
- Japan: Japan is a major binary options trading hub. Emphasis is placed by the Japanese regulators (Japan Financial Services Authority) on traders using only platforms that it has registered. Since the JFSA only registers and licenses Japanese brokers, it can be deduced that there is a prohibition on Japanese traders trading with offshore brokers. The JFSA also imposed limitations on what can be offered to traders by its licensed brokers. No short-term duration trades are allowed, and use of bonuses as account opening incentives are expressly banned in Japan.
- Australia: The Australian regulator ASIC has a working agreement with the JFSA not to allow Japanese traders access to Australian brokers, and also not to allow Australian traders on Japanese platforms. Use of bonuses by brokers is expressly prohibited by ASIC.
- Malta has imposed a 730,000 Euros minimum capital requirement on its licensed brokers, as the Malta Financial Services Authority (MFSA) took over the regulation of the binary options market from the Gambling Commission in that country.
So if you are a trader, understand what the rules are in your jurisdiction so as to comply with the relevant laws.
Can You Make a Lot of Money Trading Binary Options?
It is difficult to make “a lot” of money in binary options. You must be realistic. The amount of money you make is a function of your trading capital. You need at least $10,000 in trade capital to start making reasonable money in binary options. Not many people can come up with that amount. So you should lower your expectations from “a lot of money” to “a reasonable sum” of money. On this blog, we do not create false hypes. We say it like it is.
Will Binary Options Work For You?
Binary options work, but you have to trade with wisdom. If you want binary options to work for you, do the following:
- Never accept bonuses. Trade only on your own money.
- Only trade with regulated brokers.
- Join binary options forums. They will be your source of first-hand information about binary options brokers. You can easily tell the good ones and the bad ones from here.
- Do not trade options that you do not understand. Only trade those you are familiar with.
- To succeed in binary options, you must ensure you win at least 2 trades for every one trade lost. There is a reason for this. A winning trade earns an 80% payout. 2 winning trades give you 160%. A losing trade causes a 100% loss. You need 2 trades (160%) to cancel out a losing trade (100%). One single winning trade will not be enough.
Well written article, in fact probably the best I have read on this trading.