Binary Options Trading
What are Binary Options?
Binary Options are a tool that can be used by both experienced and inexperienced investors to grow their portfolios in a short period of time. Traditional stock market or foreign exchange trading offers slow growth over an extended period of time. Investors wanting to see quick profits then look to options-trading to increase profit-making potential for the short term. Traditional options trading, like all stock-market investing, is a complicated process and is best handled by brokers with years of experience. With binary options the learning curve is reduced which can be a benefit to new investors.
How do Binary Options work?
Binary Options are purchased by the investor with a pre-determined risk and reward. The buyer can purchase either a buy or sell order depending if they believe that the market will satisfy the criteria of the contract or not. If the buyer believes that the criteria will be met, they buy the contract. If they believe it will not be met they choose the sell option. This simple calculation, combined with the fact that the risk and reward is known at the beginning of the transaction makes this type of trading attractive to new investors.
What are Contracts?
The contracts are what they buyer actually purchases. The exchange charges a small amount for each contract. The buyer will thus pay the amount of the contract plus a small fee with the expectancy that the contract will pay out more money at the end of the contract. Each contract has an expiration time. NADEX or the North American Derivatives Exchange offers multiple contract periods each day depending on which type of trading the buyer prefers. Some contracts expire at the end of the week, some at the end of the day, some are only for short 2-hour windows.
How to get started
Before purchasing a contract with any exchange it is recomended that the investor should research and find a company that is reputable and that is subject to governmental oversight. After finding a suitable exchange the creation of an account with the exchange is a quick, painless process. Be prepared to provide personal information since this is a financial transaction subject to taxation. Funding your account is in most cases processed electronically, most exchanges thus allow trading within minutes of account creation.
Use Practice Accounts
The prospect of fast money is very attractive, but the need for a practice account cannot be expressed enough. Practice accounts are not only necessary to understand the trading platform, but also to demonstrate how quickly one can get into trouble by purchasing poor contracts. It is recommended that you use the practice accounts for an extended period of time before even funding your account so that the urge to jump in to actual trading can be avoided.
Start with Long-Term Contracts
As mentioned above contracts are offered in short or long terms. It is recommended that longer term contracts be used at first until the trader understands the process more fully. Longer term contracts allow more time for the market to recover if a large change occurs. That being said the longer contracts do not experience as much movement, thus the ability to make a quick profit is lessened.
Sell Early if Possible - Don't Be Greedy
The contract can be sold early to take an early profit. This is often helpful as it can guarantee a profit. Oftentimes investors give up on a good profit in hopes for more only for the market to fall. With binary options a market fall results in a complete loss as there are only two possible payouts. It should be mentioned that small profits could be negated by contract fees. Selling early costs an additional contract fee, so that should be taken into account when calculating when to sell.
Consider it to be Active-Trading
When purchasing short contracts it is best not to buy it and forget it. The tight windows of short contracts and the volatility of certain markets (especially FOREX) requires that the accounts be watched closely so that a potential loss can be minimized. Contracts can be sold at any time up until expiration to cut losses or to capitalize on gains and reinvest quickly.
Which Contracts to Pick - Risk Management
The volatility of the markets makes picking contracts somewhat difficult. High priced contracts can seem like sure bets, but they result in low profitability and can risk large amounts of money in the case of a market shift. Low-priced contracts are inherently risky but provide the biggest gains. For a new investor it is probably best to purchase mid-priced, longer term contracts.
The minimum deposit is low for many of the Binary Options trading sites. Low buy-in is attractive to many first-time investors, but the investor must realize that losses will happen and that buying in with the minimum amount can be frustrating and demoralizing because the entire account may be drained quickly. Investors should only risk money that they are willing to throw away.