Are you looking for a relatively simple manner in which to invest and trade in financial assets? A good way to start is through binary options. Although binary options are quite risky you can keep the risk level low by selecting the right broker. Buisness24-7 just recently declared IQ Option as one of the most safe and easy to use brokers of 2020. You can read the full IQ Option review here.
Binary options are not hard to understand and are the preferred way to trade among newcomers. So, stepping into this stream already puts you way ahead into a perfect trading direction.
Explanation of Binary Options Trading
Just like any other trading system, when trading binary options your profit comes from price fluctuations. The difference lies in the fact that with binary options you state before the time whether the price will rise or whether it will fall. There are many different strategies you can follow with options trading but only a few normally have success.
This is why this system or type of contract is referred to as the “binary” options, because you have to choose between one of two possible outcomes. You either suffer a loss or gain a profit.
As said previously, with binary trading you place a bet on whether the price will rise or fall after a particular period of time, called the expiration. If you are right, and the price does go as you predicted, you win. If not, you lose.
If you win, you will win around 80% of the betted amount, depending on the broker of course. If you lose, you will lose the amount you’ve betted. As an example, if you believe that the USD/JPY will go higher in the next minute and you bet $20, and you win, then you will profit around $16, all depending on the broker. Whereas if you lose, you lose it all, the total $20.
Binary options have its own set of jargon, like for instance: Do you sell an option? No, you don’t, but you do buy a “put” option.
Let’s look at how it works:
When you expect a price to increase you buy a “call option”. It means that you will enter a trade when you feel that there will be an increase in price.
When you expect a price to decrease you buy a “put option”. It means that you will enter a trade when you feel that there will be a decrease in price.
Calls and Puts
When talking about the trading terms buy and sell, it is easy to remember them as they correspond to the bullish (buy) and bearish (sell) markets. Although it is easy to remember buy and sell it might not be that easy to remember calls and puts.
Here is how to easily do so.
Imagine you have a loudspeaker on a table. If you’d like to “call” someone over the loudspeaker, you have to pick it “up”, which indicates an increase. After calling someone, you’d want to “put” the loudspeaker “down”, which indicates a decrease.
How To Start Trading Binary Options
Step 1: Build A Strategy
In order to build a strategy that will work for you, you have to take the time to test different strategies to see which one will be profitable for you. What has also worked for others was to combine different indicators to build a strategy. Some of the indicators that could be included are:
- Fibonacci levels
- Price levels
- Moving average indicators
- Candle patterns
- Chart patterns
- On-chart indicators
- Area indicators
These are but just a tip of the iceberg in the number of indicators available on the market. Each one of the indicators work in a different and unique way. When you match signals from different indicators, you stand a better chance to diminish the chances of getting a bad signal, and in so doing you tip the scales in your favor.
Step 2: Calculate Your Returns
If your broker promises to give you 80% in return, for guessing the right price direction, you would be risking 100% of the investment amount, which could yield a return of 8:10. The question to ask is, how successful should the strategy you come up with be, and where should your break-even point be?
Say for instance you go into 100 different trades, and you invest $20 into each trade. This would mean that your total investment amounted to $1,000. If your strategy has a 49% success rate, it simply means that out of 100 trades, 49 will be successful.
If your guess was right, you would win $8, but if your guess was wrong you would lose $10. Taking the 49% success rate as a guideline, it would mean that you will make 49 x $8 = $392. If you would have lost on this deal you would have lost 51 x $10 = $510.
A profit of $392 – $510(loss) = -$128 per 100 trades with this strategy. Which is not an ideal strategy.
Now, let’s look at another test, using the same conditions, however, this time we have a 80% success rate. We will have 80 wins and 20 losses after 100 trades:
80 x $8 = $640 in profit
20 x $10 = $200 in losses
Our net profit would be $440
That is a great strategy.
Step 3: Money Management Strategy
You have to make sure that you deposit enough money for about 100 trades. If you only deposit $150 into your account, and invest $15 in each trade, you will definitely fail.
That is because you will only be able to take on 10 losing trades in a row, which could happen very easily. There is a lesser chance of getting 100 losing trades in a row.
Step 4: Choose A Binary Options Broker
When choosing a binary options broker, you must pay attention to a few important rules. Research all of them in advance because there are a few broker companies that are scammers and will not allow you to withdraw your profits.
Here are a couple of pointers for good brokers:
- Their interface is easy to navigate, and things seem transparent. They try their best to be helpful.
- When researching them, you will find many good reviews of their platform and their service in general. You will be able to withdraw your profits.
- They are normally not fly-by-night’s and have been in existence for quite a while.
- They are regulated by both local and international regulators and they conform to their country’s laws.
- They have quite a number of trading indicators, which will help you create a successful strategy and help you in your analysis.
- They offer a diversity of trading assets and you can trade a variety of financial instruments on their platform.
Step 5: Create And Fund Your Trading Account
Creating your trading account and funding it is the easiest step in trading binary options. Just follow the directions of your broker to create an account. It is in most cases and with most brokers a requirement that you submit identification documents and confirm your account.
Afterwards, you will log into your newly formed account and deposit funds. Please bear in mind that apart from the minimal amount that your broker requires, nobody can force you to deposit more than you are willing to or are able to.
Remembering what we’ve discussed earlier, make one hundred percent sure that you follow proper money management rules. When investing $10 in one trade, you would need to deposit at least $1,000.
Investing so much will allow you to have enough money to enter into multiple trades and be able to handle a downswing, without blowing your account.
Step 6: Execute Your First Trade
Now that you’ve deposited your trading funds, you are ready to start. Remember that if you’ve invested $1,000 then it is safest to enter each trade with only 1% of the invested amount, ie. with $10.
Here are a few simple rules to follow:
- Change the investment amount for each trade to $10
- Choose the time of expiration for the binary option
- Perform your technical analysis and apply the strategy
- Click “call” if you’ve concluded from your analysis that the price will go up, and click “put” if it will go down
- Wait till the binary option expires
- Track your results
Trading with binary options is a very unique and easy manner in which to invest in financial markets. The rules are very simple, and that is why many prefer this way of trading. There is also a limited risk with each trade, as it is all based on the amount of money you invest.
This doesn’t mean that you can just start placing bets. You still have to adhere to the rules of trading if you want to be successful with this. First, build a strong strategy, then calculate the amounts as per your strategy.
Trade well, and manage your bank account very well, excluding any emotional trading.
Also importantly, never trade when you are experiencing some type of emotional draining. When you’re tired or have heard something bad or good that might alter of heighten your emotional well-being. Many have lost dearly by trading emotionally.
A demo account is very helpful, in order to prepare yourself and expose you to your shortcomings before going live. One of the most recommended brokers who does not hide any trading fees also offers a demo account option is IQ Option. Most importantly, trade smart. Doing so will increase your chances of gaining success exponentially.
If you liked this article then you might also be interested in reading more about forex trading.