Intro to binary options
Binary Options Trading – A General Introduction
Many, if not most of us, grew up hearing our parents lament how different things were for them than for us (as a general rule, it was always harder "back then"), and – chances are – most of us are guilty of repeating this mantra to our children as well. And let's be honest – times certainly are constantly changing, and usually getting easier for newer generations.
For example, it wasn't so long ago that men were usually the ones who went out to work while the women stayed at home raising the kids and "keeping the house." While there are still families who find that this model works for them, an increasingly number of families are seeing women work outside of the homes, either instead of, or in addition to the men.
Ever-developing technology has led to another significant change in recent years. With the development, growth and global accessibility of the internet and the World Wide Web, many people, both men and women alike, are finding that they can earn a respectable living working from home through the computer.
There are several ways that this can be done – internet telecommunications allow many people to reach an arrangement with their employers to work from home for some, if not most of the week. Others choose to be independent and establish their own internet companies, marketing their own skills and experience to find clients around the world and provide website and other technical services.
With the emergence of binary options trading over the last few years, many people have discovered a new, and in many ways, easier way to earn at least as much money as they once did in traditional occupations.
What exactly is binary options trading, and how does it work?
Binary options trading is a method of investing in asset prices without actually purchasing the asset. Assets are defined as tradeable products – currency pairs, commodities, stocks and indices. The word "binary" means "two." Binary options are called such because there are only two possible outcomes for any transaction – either an asset price will rise, or it will fall. "trading" on the asset price means investing a sum of money based on your prediction as to whether the price will rise or fall in a pre-set amount of time. This preset period can be as little as 30 seconds, or several months in advance – you, as the trader, decide.
If a trader believes that the asset price will rise before the expiry time, he places a Call option (some brokers use the term "High option"). If he believes the price will fall before the expiry time, he places a Put (or "Low") option.
One thing that many traders particularly like about binary options is that they know exactly how much they can earn before they place the trade, and they know exactly when they will know if the trade was profitable or not. The brokers' websites display exactly what the ROI (return on investment) is on each trade, as well as how much of their investment is protected, in the event that the trade is not successful. They also know exactly when the trade expires.
The most common types of trades available are the standard binary trades, in which expiry times are usually every quarter or half hour, short-term trades, that have expiry times between 30 seconds and 5 minutes from the time the transaction is confirmed, and long-term trades, where the expiry times can be days, weeks, or even months in the future.
Why has trading binary options become so popular in recent years?
There are several reasons that we can specifically point to:
- It is much less complex than traditional stocks and currencies trading
The obvious beauty of this is that pretty much anyone can trade binary options, and earn money in doing so. Traders need not have a degree, or even a background in finance in order to trade successfully.
Unlike traditional stock market trading, it is not relevant how high or low an asset price goes, so timing is not "of the essence." Once you have placed either a Call or Put option, your profit (or loss) is the same whether the asset closes one pip above or below the target rate, or 1,000 pips. This also means that you do not need to stay glued to ticker tape, deciding when exactly to buy or sell in order to maximize your earnings (or to minimize your risk). You place your option, and when the time expires, the trade is closed, ideally with your account being a bit richer than it was before the trade.
To be sure, as a trader learns more about financial markets and market trends, he is likely to have much more success in trading binary options, and the best online brokers offer plenty of online educational opportunities to enhance your trading experience.
- Trading binary options can be done from anywhere in the world, and any time around the clock
The majority of online binary options brokers provide access from any computer, wherever you are, with no need to download any special software. So, whether you are at home, in a coffee shop, on a train or at the beach – you have full access to your trading account and the binary options markets. All you need is a computer and an internet connection.
Binary options deals with assets from around the world. Therefore, pretty much at any time – day or night – markets somewhere are open. Are you a night owl living in on the west coast, United States? When it is 2:00 in the morning for you, it is 10:00 a.m. in London, 11:00 a.m in Berlin and 12:00 noon in Moscow. A lot of trading is going on at that time. Likewise, if you are an early riser in New Zealand and wish to trade at 5:00 a.m., at that moment it is 1:00 p.m. in New York, the height of trading hours.
In short, no matter where you are, and what time of day you want to trade binary options, some assets, somewhere, are available.
- When trading binary options, you do not purchase or own any shares of the assets you trade
One of the biggest differences between binary options trading and traditional stock market trading is that with binary options you are investing on trends that you observe as an "outsider." Traditional stock markets work on the principle of "supply and demand" - which is to say that the more shares of an asset that are purchased, the less the supply of those shares, and the more valuable the price of the shares. In other words, the very act of buying asset shares can drive the price higher, and selling shares off will often result in the share prices dropping.
Not so with binary options. When you place a transaction on an asset, you are not purchasing any actual shares of that asset, so your investment does not affect the asset price in any way. This makes it much easier for you, as a trader, to look at the various fundamental and technical analysis and determine how the asset price will move, without throwing a wrench into the prediction simply by your own actions.
- The results – and the profits – are immediate and consistently higher
Most online binary options brokers offer returns of as high as 80-85% of your investments. Compare this to traditional stock market trading, where the best traders see profits of closer to 5-10%. As mentioned above, the potential profit will remains the same as when you placed the transaction, and every trader knows exactly what he stands to earn (or lose) before he commits any funds. Best of all, when a trade closes, if it is successful, the funds appear automatically in your trading account. You can then invest in additional trades, or (assuming you have met the requirements of the broker), withdraw funds.
How do traders find the right broker for their own needs?
There is no question that one of the most important factors contributing to successful binary options trading is finding the right online broker (or brokers – traders are not limited in how many they can use). The good news is that there are hundreds, if not thousands of brokers out there. The bad news is that not all of them are as honest or as reputable as they might have you believe.
Fortunately, there are plenty of online brokers who are reliable, and with whom traders can truly earn excellent profits. More importantly, it is not difficult to differentiate between the good brokers and the ones to avoid.
First of all, many independently-run websites are dedicated to reviewing the brokers, and seasoned traders share their experience and their recommendations as to which brokers are worthwhile, and which ones are to be avoided.
It is important to be aware of which brokers are regulated by an overseeing government authority, and which ones are not. There are non-regulated brokers with very good reputations, but this is something to be aware of before you begin depositing funds and placing trades. Not all brokers can provide to service to all countries, so will also want to make sure that a particularly broker is available to you in your country of residence.
One of the biggest advantages of government regulated brokers is that all money deposited by traders must be kept in protected trust accounts, and transactions are ensured fair play because they are monitored by a third party. This is not to say that non-regulated brokers are inherently less reliable, but it is harder to know who can be trusted when brokers are unregulated.
Traders in the United States can only trade with non-regulated brokers, and there are many US traders who do very well trading binary options, so it is important to remember that there are certainly reputable and honest non-regulated brokers.
The most important thing in choosing a broker is to recognize what your personal goals and needs are in trading. If your primary interest lies in commodities, then some brokers are better than others in terms of the number of commodities available on their platform, and the possible payouts. Also, if you are a beginning trader, finding a trader with a more developed education program will help you develop the most effective trade strategies.
Over the course of time, as you learn the markets and develop your own strengths and skills, you will also be able to determine if you wish to switch brokers, or add brokers. Each broker has its own advantages and disadvantages, and the more the know, the better you are able to trade intelligently, and of course, profitably.