E-mail:    

OPTIONS TRADING

Binary Options

A New Opportunity for Forex Traders

Binary options trading is a form of options trading that offers new and exciting opportunities for traders to make serious money quickly. A binary option is so called because there are only two possible outcomes — a trader will receive a payment when finishing in the money or will lose their whole investment, or a proportion of it, if the option expires out of the money. The likely return is fixed at the time the trade is made.

Trading binary options is different to most other forms of trading in that you don’t actually own anything. Instead, you invest an amount of money on a forecast that the price of an asset will move in a particular way.
The accuracy of your forecast will determine whether you finish in the money or not.

The development of binary options

Binary options have been available for some time but were originally considered ‘exotic’ instruments with no liquid market. To trade binary options, you needed a specialist broker.

This all changed in 2008 when the Securities and Exchange Commission approved the listing of binary options in the US. The American Stock Exchange then launched binary options in May 2008 followed by the Chicago Board Options Exchange a month later. Since then, many organizations have entered the sector to provide binary options broker services and a number of trading platforms are now available.

This opening up of the market meant that binary options became more accessible and trading became a much simpler process. As a result, many more people have been attracted to this form of trading and its popularity grew at an increasingly fast pace. So far, this pace shows no sign of slowing as more and more traders begin to recognize the attractions of trading binary options.

How binary options are traded

Trading binary options is really a straightforward process. Once you’ve selected a broker, registered and deposited some funds, making a trade involves just a few steps. Firstly, you’ll select an asset from those that are available, which will be individual stocks, market indices, currency pairs and commodities. Each will show the asset’s current quoted price, the option’s expiration time and the percentage payout for a correct forecast.

You’ll then make your forecast by choosing a call option if you think the asset’s price will be higher at the expiration time or select a put option if you expect it to fall. Enter your investment amount, which will be fixed when you confirm the trade. This will determine the payout you’ll receive if your forecast is correct.

Once the option expires, you’ll receive your original investment plus the stated percentage payout if you’ve forecast correctly. If you’re incorrect, however, you’ll either receive nothing or a small percentage of your investment amount. This depends on the policy of the individual broker.

The assets that can be traded

Since binary options trading is about forecasting the direction of price movements, anything with a price that changes and which is quoted on a recognized market can in theory be traded. In practice, only specific types of assets are traded. You can trade individual company shares that are quoted on a stock market or a complete market index such as the NASDAQ, FTSE, etc. You can also trade any commodity, such as gold or oil,or a currency pair, such as the EUR/USD, which are quoted on a foreign exchange market.

These assets are known as underlying assets because you never actually own them as you would do an actual asset but simply forecast how they’re going to change in price. Trading platforms will quote the actual assets that are available to trade.

Trading currency pairs is particularly attractive to forex traders who have knowledge of the market. Since there are large numbers of combinations of currency pairs and these are changing constantly in different directions, there are tremendous opportunities to make money.

Foreign exchange offers the largest financial trading market in the world with the greatest liquidity. You can trade with zero commission and no spread, which will lead to increased profits for successful trades.

What you need to do to trade binary options successfully

If you’re going to trade binary options successfully, you need to gain as much knowledge as you can about the asset you’re going to trade. For example, although you may be fully conversant with how forex trading works, you’ll be better placed if you have detailed information about the individual currency pairs you’re going to trade. It’s also vital that the information is kept current so you’re not relying on out-of-date data. To improve your chances of success, there are two types of analysis you can undertake:

1. Technical analysis

Technical analysis assumes that assets are always priced correctly and the price will have been discounted to take account of events. Consequently, prices will always move in a consistent manner and identifying the ways they have moved in the past will give a guide to the way they will move in the future.

One of the main tools of technical analysis is a price chart that is constantly updated to show the latest prices. Each chart may show recognizable patterns that will indicate whether prices are likely to continue along their current trend or whether a reversal is due. Identifying these patterns and interpreting them correctly will enable you to forecast how prices are likely to move.

2. Fundamental analysis

Fundamental analysis is based on the principle that assets are generally priced incorrectly and that markets are constantly attempting to correct them. These corrections are based on events that occur and therefore you will need to constantly check news items, announcements and various publications.

This type of analysis can be subjective because you are forming a view based on events that you see. However, you need to look at all levels of data, depending on the asset you’re trading, from company level through industry, markets and to country and global level. Many events are inter-related and can affect the price of different assets and even different classes of assets.

Each type of analysis will help you be more successful in your forecasts. Using a combination of technical and fundamental analysis will, however, give you the greatest chance of success.

What to look for when choosing a binary options broker

The growing popularity of binary options trading has attracted a number of brokers into the market. They will have some common features but all will have certain points that differentiate them from the rest. Since you need a broker to be able to trade, it’s important that you choose one who provides the type and level of service that you need. When choosing a broker, look at a particular feature to compare what each one offers.

The trading platform is your access to the markets and it’s crucial that the platform has comprehensive features so you’re not limited in what you can do. Equally, it has to be easy to use so you can concentrate on trading rather than having to work out how to achieve particular objectives. The organization’s website and sign-up procedure usually give a good pointer because, if they’re easy to use, it’s likely that the trading platform will be as well.

Most trading platforms are web-based so you can access your account using a browser. Ideally, a mobile version of the platform will be available so you can trade using a smart phone or similar device and trade from anywhere and at any time.

Some brokers may offer only a limited range of tradable assets in a relatively small number of markets; this can seriously restrict your opportunities to trade and make money. What you really need is a broker that offers plenty of assets across as many global markets as possible. That means there will usually be at least one open market to trade and you have a better chance of choosing the asset you actually want to trade rather than having to settle for something simply because of the choice that’s available.

Security is crucial because you will be providing your broker with your personal details and will also be depositing money to fund your trading. You need to be sure the broker offers a safe trading environment. There must be a privacy policy so your details aren’t divulged to others and thereneeds to be adequate authentication to prevent unauthorized access to your account. It’s also vital that all data and transmissions are securely encrypted so others can’t gain access them.

Check and compare what each broker provides and go for the one that has the absolutely highest level of security.

You have to deposit money to fund your trades and will want to withdraw accumulated profits. Ensure the broker makes this a simple, quick and inexpensive process so you’re not prevented from trading unnecessarily and aren’t kept waiting for your money. Look for a broker that offers multiple methods of depositing and withdrawing money and where the process isn’t over-complicated.

Some brokers will offer bonuses. These may be initial bonuses when you first sign up so you can make more trades to get started quickly or can be additions to every deposit you make. You may also receive bonuses to take advantage of particular financial events or rebate bonuses that depend on the amount you’ve traded over a period. Whatever the reason for the bonuses, they provide additional funds and offer further trading opportunities.

However experienced you are as a trader, you’re likely to want a degree of support at some time. As a new trader, you’ll want information about binary options and how to trade them as well as the assurance of help and advice being readily available. As an experienced trader, you’ll need up-to-date information, prices, analysis and reviews.

Brokers offer different levels of service that are designed to meet the needs of different types of traders,depending on the type of account that is selected. Make sure there’s a help line, an email address and a live chat facility in case you get into trouble. Look at the type and extent of the information that’s provided and how often it’s updated. Most importantly ensure the information provided is accurate and of the highest quality.

Some brokers offer different accounts with varying features aimed at different levels of trader from the novice, to the seasoned professional. You may be able to start with a practice account where you can trade without risking any money (although without making any either). Some brokers, however, will require a deposit even for a practice account. After that, there could be a basic account with a low deposit requirement right up to a top of the range account that requires a much higher deposit but provides a more personal and comprehensive service. Check the accounts that are available and make sure there’s one that meets your needs now and in the future.

Most importantly look at a number of brokers, compare what they offer,then choose the one that’s best for you.

Trading strategies you can use

Trading binary options is a simple process and each trade is a separate contract, however by combining options and looking at several assets together you can increase your success rate. There are various strategies you can adopt in different situations.

A reversal may apply when a price chart indicates a trend is about to reverse. In this case, you will forecast a price change that is the opposite of the direction it’s been moving previously.

A straddle involves purchasing both a put and a call option on the same asset at a different price level. You will finish in the money on both if the price is in between the levels at expiry. Otherwise, you should have at least one success and so will minimize your losses.

A knock-on effect occurs when the change in the price of one asset affects the price of another. This may occur, for example, when a rising commodity price causes a company’s profits to fall and its share price also. Purchasing a call option on the former and a put option on the latter will leave you in the money on both.

Other strategies are possible and will, if correctly used, increase your profits or minimize your losses.

options trading binary options strategies

Why binary options trading is growing in popularity

The increasing popularity of binary options trading is due to a number of factors. One of the main ones is that binary options traders can be successful in any market conditions. You don’t need a rising market to make money from binary options trading. Since you’re forecasting the way prices will move, it doesn’t matter if a bull or a bear market is underway as long as your forecast is correct. In fact market volatility often increases the opportunities to make money.

Trading foreign exchange means you can finish in the money by forecasting either a fall or a rise in the value of one currency against another. With the constant changes to rates and the number of available combinations, this gives almost limitless opportunities to achieve a significant return.

All markets follow trends and you can make money on an up trend by buying call options as well as buying put options when a downward trend is underway. It’s simply a matter of forecasting the direction a market will move. Instability brings uncertainty but it can also provide opportunities for you to make money as a binary options trader. The key to doing this is to be alert to what’s going on, follow the signs and then profit through forecasting correctly.

Another significant factor is availability since the marketopened up, more brokerages provide trading platforms and anyone with a PC can trade binary options.

A major attraction of binary options trading is its simplicity since each trade requires only a small number of simple steps. You select the asset you want to trade, forecast whether its price will rise or fall by a set time and enter the amount you want to invest. After that, you just wait for the expiration time to see if your forecast is correct.

Above all, binary options’ trading is low risk because each trade can be for a relatively low stake that you specify at the outset. This is generally $25 with a maximum trade of $2,500 on each option, although this may be increased for certain types of account. You therefore know the maximum you can possibly lose and can limit this to an amount you can afford.

Despite the low risk, you can often make high returns quickly. A binary options trade will typically expire in only a few hours or even a few minutes and pay a 70-81% return on your investment for a correct forecast. This means that high returns can result from a number of successful trades over a short period of time.

For forex traders, an attractive aspect of binary options trading is that the taxes on profits you make are less onerous. As a currency trader, you can choose to be taxed under the same tax rules as regular commodities (Internal Revenue Code Section 1256 contracts) or under the special rules of Internal Revenue Code Section 988 (Treatment of Certain Foreign Currency Transactions). The profits from binary options trading, however, are considered short-term capital gains, which are taxed at your ordinary income rate. You may offset any losses against your gains for tax purposes but must report to the IRS any overall profit.

The future of binary options

Binary options’ trading has come a long way in a relatively short time. As more brokers enter the market and traders realize the opportunities that are available, it seems likely that expansion will continue. Trading will become more flexible, with increased mobile platforms allowing anywhere, any time trading. The range of tradable assets will also grow, with rainfall index binary options already on offer. Whatever the future, it seems unlikely it will involve anything but continued growth.

Oren Laurent