How to Do Binary Options Trading for Beginners
Binary Options Give You Two Choices
Binary Options Can Be Used To Trade
- Foreign Exchange
- Bond Rates
- Other Assets as permitted by your broker and your countries laws
Binary Options Are Great For Beginning Traders
Binary options are a great place for beginning traders to start. In fact, many experienced stock and options traders are switching to binary trading. This is because of their ease compared to trading standard, futures and commodities. Binary options have been around since the earliest days of trading but have only recently gained mainstream acceptance, if not use.
The rise of the internet has made binary options an attractive trading vehicle for many people. The industry does not have the same regulation as other financial industries. It does not require margin accounts and the pattern day trader rule does not apply. These two reasons alone make binary options attractive. Most traders do not have the capital required to open a margin account and are therefore excluded from trading futures, commodities and forex. Not to mention the fact that trading futures, commodities and forex carries the risk of losing much more than your original investment.
- Binary options have two outcomes, hence the name Binary Option. If the market moves in your predicted direction you win, if not you lose.
The number one reason that binary options are attracting more and more traders is the simplified risk/reward structure. Binary options have two possible outcomes and two possible outcomes only. If the asset moves in your predicted direction you win, if it moves the other way you lose. With other forms of trading factors such as Black-Scholes, volatility, time decay and delta all weigh on the outcome. I can't count the number of times my analysis was correct but my trade failed to profit because of one or more of these factors. If I had been trading binary at the time it would not have mattered.
Binary Options Order Screen
Binary Options Settlement Screen
How Binary Options Trading Works
For this example I will use the S&P 500 and assume it is going to move up from the 1425 level. I will also assume that the index will do this by the end of the month, closing well above 1425. Because of this I will buy a call. If I thought the index was going to move down I would buy a put; those are the only two options.
Next you will have to choose what expiration time you want. Most platforms have several different types of expiration ranging from 60 seconds to end of the month. It is important that the broker you choose offer expirations that match your trading style.
Now that I have chosen direction and type (call or put) and expiration (monthly) it is time to choose an amount. Binary options allows you to trade as much or as little as you want, providing you are not under the minimum or over the maximum your account allows. There is only one contract and you pick the value, if you want to trade $100 enter that amount or if you want to trade more or less enter that amount.
Once you have entered the amount review the trade. If everything matches your intent it is time to press enter. At this time you will get a confirmation of the trade. European style options are an all or nothing proposition and are only paid out at expiration. You must hold your option until the expiration to receive a pay. In some cases there are platforms that allow early out on your options. You will have to investigate that on a platform to platform basis.
Binary Options Are Not An Investment
One big risk of binary options is that they are a trading vehicle and not an investment. As such they are purely speculative. Binary options are short term positions meant to help traders capture profits from short term market movements. Investing is a long term and disciplined approach to finance and should not be confused with trading and market speculation. Trading and market speculation, especially binary options, carries risk. You should only use money you can afford to lose when trading binary options or any other form of market speculation.
How To Get Started Trading Binary Options
There are two things you need to do to get started trading binary options; learn how to trade and open a binary options account. Learning how to trade can take time and can be very complicated. Binary options simplifies this to some extent but you will still need to understand the basics of technical analysis and market speculation.
- Technical Analysis - Is the scientific study of financial markets. It utilizes trend lines, moving averages, technical indicators and chart patterns to measure strength and market direction. There are dozens, if not hundreds, of ways to use technical analysis. I recommend learning to use 4-6 different techniques together to create a system that reliably predicts market direction with limited false signals and whiplashes. I use trendlines, moving averages, Fibonacci Retracement, MACD and Stochastic.
- Speculation - is the practice of capitalizing, or trying to capitalize, on short term market movements. Speculations are considered to be risky and are based on fluctuations in price movement and not on the fundamental characteristics of the underlying financial instrument. Binary options trading is pure speculation. The trades range from 60 seconds to end of the month and have no underlying value. If the market moves the way you predict you win, if not you lose.
Binary Options Trading Education
There are numerous free websites geared toward binary options and binary options trading. These websites offer everything from basic education and platform reviews all the way through advance techniques and community forums. One that I like is the forum at BinaryOptionsThatSuck.com
Regulated Binary Options Platforms
All binary options platforms based in Cyprus are regulated by the CySEC. Many other platforms have followed suit in order to gain credibility in the eyes of regulators and traders alike. Leading the charge at this time is Banc de Binary, a New York based binary options bank and trading platform. Banc de Binary is also seeking approval from the CFTC and licensing as a U.S. binary options exchange. Another great platform is AnyOption.com. This platform is one of the oldest and most respected sites. They are well known for their platforms ease of use, great payouts, customer service and reliability. Anyoption.com is currently in the final phases of gaining CySEC approval.
How To Choose A Binary Options Trading Platform
Choosing a good binary options platform is crucial to your success as a binary trader. The industry carries a stigma that is unfortunately well earned. There are a lot of scams out there and until recently they were hard to distinguish from good platforms. Although largely unregulated the industry is gaining the support of the international community through the efforts of organizations like the Cyprus Securities and Exchange Commission. The CySEC has enacted a regulatory system for binary platforms and has certified dozens to date. The U.S. Commodity Futures Trading Commission also does some policing of the industry in the effort of protecting U.S. citizens and others from unscrupulous and unfair trading platforms.
- Regulation - Make sure that the platform is CySEC certified or in the process of compliance. You should also make sure that the platform is available to U.S. citizens, if applicable. Some types of binary options are not except from the ban on non-exchange listed options and therefore not available to U.S. based traders.
- Minimum deposits - Check the minimum deposit requirements. Some platforms also offer a signing bonus but this by itself is not a good reason to choose one platform over another.
- Withdrawals- Check the withdrawal requirements and limitations. Some platforms have complicated processes or monthly limits that make them poor choices. The best platforms (the regulated ones) make withdrawal simple and easy.
- Check The Reviews- Always check the reviews. See what others have to say about the platforms you are looking at. They may offer new insights that could change your opinion.
- Demo Account - The best brokers and platforms will have a demo account available. I highly recommend using it. It is a great place to practice placing trades and to experiment with the tools offered by each platform. Some platforms require you to open account in order to access the demo.
U.S. Listed Binary Options
Binary options are listed on at least two of the major U.S. exchanges. The Chicago Board Of Options Exchange and The American Exchange both have limited binary options offerings. The CBOE offers options on theS&P 500 and the VIX. These options do not trade in the same way as European style binary options. On the CBOE, only calls are listed and they expire the same day as standard options. Value ranges from $0.01- $0.99, depending on the price of the underlying. Payouts are all or nothing, with no rebates on losing trades. Your payout would be $1.00 minus the amount paid. Options can be bought or sold to open, if you sell to open you will have to maintain a cash balance equal to the amount you would lose if called out. If you want to trade more than the price of the contract you must purchase more than one contract.
The Cyprus Securities And Exchange Commision
the Cyprus Securities and Exchange Commission was formed in 2001 to oversee the regulation of securities exchanges operating in the country. When Cyprus was admitted to the European Union it was also admitted to the MiFID regulatory body. The MiFID and its amendments are the governing body for the investment community in the 27(+3) Eurozone region. The combination of Cyprus' banking laws and access to the European markets made the country an attractive base of operations for binary options brokers. The proliferation of binary options has since caused the CySec to recognize binary options as an investment vehicle and impose regulations on the industry. All Cyprus based binary options platforms must comply with CySEC regulation and many other platforms are following suit. The recognition of and regulation of the industry has gone a long way toward legitimize it in the eyes of traders and world regulatory bodies.