Jan 17 | Posted by Joe Best

The Different Binary Option Types Explained

As the popularity of binary options has grown, so has the variety of option types that are available to traders.  This provides binary option traders with flexibility, but as will all financial products can be confusing.  Hopefully some of that confusion can be cleared up with this post that will describe the different types of binary options that are commonly available these days.

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Please note that the educational material does not take into consideration investors profile or risk tolerance and hence is intended for information purposes only.
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Common Binary Option Types:

High/Low Options

This was the first type of binary option offered and it is the easiest to explain.  With the high/low option the trader needs to predict if the price of an underlying asset will be higher or lower than the current price of the underlying asset when the option expires.  If you believe price will go higher you choose a high option and if you think price will go lower you choose a low option.  It takes $0.01 or 1 pip, for the trader to win or lose the trade. If the prediction is right, even by 1 pip the investor collects the predetermined payout percentage. If the investor’s prediction was incorrect, the invested capital will be lost.

 

The key is to know when to use this option to have a greater chance of success.  In the case of the high/low option it is mostly used during a trending market. he trend, especially if it is a strong trend, gives a greater probability of the trade going in your direction, assuming you’re trading in the same direction as the trend.  If you have a ranging or choppy market it could be better to choose another type of option.

 

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One Touch/No Touch Options

The one touch and no touch option types are fundamentally different.  With a one touch option you are predicting the price of an underlying asset will reach a certain level at some point during the life of the option.  It doesn’t matter what happens to price after that predetermined level is reached.  As soon as price touches the level your option becomes a winner.  This means that you could actually have a one touch trade that last for just one second if price were to suddenly move strongly in your favor right after you place a trade.  Of course that rarely happens, but there are cases where a trade ends far earlier than the expiry of the option with a one touch trade. Remember that if the price of the underlying asset does not reach the predetermined level within the time frame you lose your invested capital.

 

In the case of a no touch option you need price to stay away from a predetermined level and never touch it during the life of the option.  This means you will need to wait until the expiration of the option to know if it’s a winner.  This can also be a very stressful option type if price gets too close to the no touch level.

 

Like the high/low option the one touch option is popularly utilized during a trending market.  It can also be a good choice if you see certain patterns forming, such as the double top.  You would place the touch level just below or right at the level that would signal the creation of the double top in this case.

 

The no touch option is not suited to trending markets, but it could be considered in a range bound market.  It could also potentially be good to use in a low volatility market, such as those seen during the Asian session.  One thing to be careful about when using the no touch option in a low volatility market is if the market has been quiet for a long period of time.  In that case a breakout could be imminent.  You could also use the no touch option as a counter trade in a trending market, for example placing a long trade in a downtrend.  This may increase the odds of success because it is less likely that price will move higher during a downtrend.  It doesn’t remove risk however, and you could still end up with a losing trade.

 

In/Out Boundary Options

The boundary trades are similar to the touch/no touch trades discussed above, but with a boundary option the trader must set both an upper level or boundary, and a lower boundary.  In the case of an “In” boundary trade the price of the underlying asset must be somewhere between the two boundaries when the option expires.  The price can move outside the boundary during the life of the option and as long as it moves back inside the boundary and remains there at the option expiry it is a winning trade.  If the price says outside the boundary during the expiration it becomes a losing trade.

 

In the case of the “Out” boundary trade we are looking for the price of the underlying asset to finish outside the boundary.  It can be either above the top boundary or below the lower boundary.  Either situation results in a winning trade.  If price finishes within the boundaries in the case of an “Out” option it becomes a losing trade.

 

Other names for the boundary option include range option or zone option, but they are the same thing.  There are also some brokers that offer a hybrid boundary option that is also a touch or no touch option.  These often offer higher payouts, but they also offer greater risk.

 

When deciding if it is appropriate to use a boundary option you again have to consider the market conditions.  A faster moving or trending market could be a better time to use anOut” boundary option.  They can also be useful when placed ahead of important market moving reports, such as the non-farm payrolls, when according to your analysis you believe the market will react strongly, but you aren’t certain in which direction.  An “In” boundary option is more appropriate for range bound or low volatility markets.

 

60 second Binary Options

While the 60 second binary options are more about the expiry than the type of trade, I thought they deserved to be included because of the popularity they have enjoyed since being introduced.

 

In practice a 60 second option is nothing more than a high/low option that has an expiry of 60 seconds.  That’s pretty much all there is to it.

 

Whilst not suitable to all types of traders, the 60 seconds option has become so popular because some traders like to get in and out of the market as quickly as possible.  They don’t have the patience to wait hours to see the results of their trade, and instead crave the almost instant feedback that you get with scalping in traditional markets, or 60 seconds trades in binary options.  They also appreciate the fact that they could literally place hundreds of trades a day, if they had the stamina and capital to do so.  However they do come with one big negative, and that’s the difficulty of using technical analysis on such short time frames.  It’s a well known fact that the shorter the time frame the less useful technical analysis becomes.  This can lead to some traders losing numerous trades using the 60 second options.

 

So, there you have the basic binary option types.  It’s probably best if you focus on each one individually and master the proper times to use them before moving on to the next, but you certainly should learn to use all of these binary option types to give yourself more flexibility in your trades.  It won’t guarantee more winning, but it will allow you to use a trade type that is most suited to the market action at any given time.  Sometimes all you need is the small edge that you might get from using a different trade type.
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Trading binary options involves substantial risk and may lead to loss of all invested capital

Jan 16 | Posted by Joe Best

What are Binary Options?

There’s a popular idea among traders that says you should try to time the market.  But timing markets happens to be one of the best ways to find success in trading.  And many traders have been practicing their market timing skills by getting into the relatively new, but very popular binary option trading vehicle.  If you want to learn more about how binary options work, simply read on.

 

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What are binary options?

Binary options are a conceptually simply a way to trade on the performance (rise or fall) of an underlying asset within a predetermined time frame.  In fact, the most popular type of binary option is known as the high/low option.  Binary options got their name from this option type as it is a binary decision, or one that has just two choices.  You either think the price of an underlying asset will be higher or lower than the current price when a certain amount of time has passed.  That can be as little as 60 seconds or as much as over a month depending on the offerings from your broker  Due to the nature of binary options, they are considered high risk financial instruments and are not suitable to all investors.

 

Binary options also present traders with two possible outcomes at the expiration of the option – a winning trade that pays as much as 86% of the investment, or a losing trade that surrenders all of the initial investment.

 

Many traders have moved to binary options as they are easily accessible with small amounts of starting capital.  In the case of 24option.com you can start trading with as little as $250 and each trade can be for just $24.  That’s a level that is affordable for most, and you can try out binary options without a huge commitment of capital that might otherwise stress your investment capital.

 

Some traders are also attracted to the excitement posed by binary options.  As mentioned above the potential winnings and losses are huge on a percentage basis, and some traders find the excitement generated by these possibilities as a big draw.  And because your loss is limited to the amount invested your risk exposure is also limited, making binary options attractive to those looking to manage their risks.

 

What Assets are Available as Binary Options

This is determined by the broker you use, but is pretty consistent across the binary options industry.  Almost every broker will offer binary options on currency pairs, commodities, stock indices, and individual stocks.  The differences come from which of these are offered.

 

In general you’ll find at least these major offerings:

  • The major currency pairs such as the EUR/USD, USD/JPY, GBP/USD will almost always be available as binary options.
  • Major commodities such as gold and crude, as well as some others such as silver, coffee or corn.
  • Top global stock indices such as the S&P 500, the FTSE 100, and the Nikkei 225 are commonly offered as binary options.
  • Individual stocks can vary greatly, but some common names offered are Microsoft, Facebook, Deutsche Bank, Sony and others.
  • Some brokers will offer binary options tied to the outcome of economic reports, but this isn’t so common.

 

Binary options are a type of derivative options where investors trade on the value of the underlying assets and as such do not physically purchase or own any shares of the assets they trade on.

 

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A Basic Binary Options Trade

A Binary options position can be opened with four steps:

  1. Decide which asset you wish to trade.
  2. Decide on the expiration time of your binary option.
  3. Decide if you think the underlying asset price will be higher or lower than the current price when the option expiration occurs.
  4. Place your trade and wait to see if you win or lose the trade.

 

As an example, say you are interested in trading binary options on forex, specifically the USD/JPY.  The market is moving fairly fast today and you think it will continue to do so, so you decide to trade with a 60 second expiry.  The pair is currently trading at 115.00 so you need to decide if it will be higher or lower than this when your option expires in 60 seconds.

 

Once you make these decisions and add them to the trading interface you’ll see what the predetermined loss/ return on the option is.  In this case the payout is 77%.  You place the trade for $100 as a higher option and wait to see if the price goes higher or lower.

 

If the price is above 115.00 at the end of 60 seconds you’ll get $177 for the trade (your initial $100 investment plus the $77 payout).  You won because the price was higher as you predicted.  If the price is below 115.00 at the end of 60 seconds you lose your $100 investment since your trade specified a higher price and the price was lower when the option expired.  It’s important to note that with a high/low option it doesn’t matter what price does during the time the option is still active.  In fact, you could choose a higher option, watch price move significantly higher only to retreat and end lower and you would have a losing option.

 

With 24option.com you also have the choice to close your position early to potentially get a percentage of your initial investment back (terms and conditions apply).  This can be useful if it becomes obvious that you have clearly made a wrong prediction as it saves some of your capital.  Note that the early closure feature is not available with 60 second options, and it is also not available with some other option types depending on the parameters of the option.

 

How to Improve in Binary Options Trading

As with any type of trading success is never guaranteed and it is almost certain you’ll engage in losing trades.  There are some steps you can take to help minimize losses or in general improve your strategies and techniques:

  • Focus on a single market to trade and be sure you understand what is happening with that market and why.  You might have less opportunities to trade, but you’ll also have better information about what you’re trading and why.
  • Become familiar with technical trading tools and learn how to use them intelligently.  These technical indicators can be helpful in identifying patterns that you may be able to take advantage of when they repeat themselves.
  • Take time to educate yourself, invest in knowledge and build a solid foundation prior to trading.
  • Use a trading journal to keep detailed notes of all your trades.  Note why you took a trade, what went right, and what went wrong.  Review your journal regularly to avoid repeating the same mistakes.

 

Now you have the answer to the question what are binary options.  You also have a basic idea of how to trade them, and how to prepare to trade them.  So what are you waiting for?  Go take advantage of your new knowledge, but remember that while you can see success with binary options you could also have a disappointing outcome.  Get ready to embark on your trading journey.

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Trading binary options involves substantial risk and may lead to loss of all invested capital