If you’re exploring the world of trading there’s a chance you’ve already looked into stocks and currency trading, and possibly even trading commodities such as gold. But there’s another way to trade the financial markets that allows you access to OTC derivatives and that is through binary options. Binary option trading is a trade type that continues to gain popularity across the world because traders see it as a conceptually simple way to gain access to global financial markets.
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In case you’re unfamiliar with binary options here is a quick explanation of how they work:
- First you choose an underlying asset that you wish to trade. This could be an individual stock, an equity index, a currency pair, or a commodity. Binary brokers do have a limit on which underlying assets are available to trade, but there are still more than 100 to choose from, and all the most popular are represented.
- Once you know which underlying asset you’ll be trading you decide if you think the price of that asset will be going higher or lower
- Decide on a time frame for the price move of the asset. This could be as short as 60 seconds, or as long as a month in some cases (although binary option trades longer than the daily time frame aren’t the norm).
- Place your trade and wait for the expiration of the option. If the price moved as you predicted you could win as much as an 86% return on your initial investment. But if your prediction was wrong you lose the entire investment amount.
Binary Options trading carries high risk and is not suitable for all investors. You can lose your entire invested capital. Please ensure you understand all associated risks.
As you can see, binary options can offer rewards when your trade is a winner, but there are certainly risks to consider as well. Many traders have come to appreciate the binary nature of the options however, as they can more easily manage their risks by knowing the potential gain or loss coming from each trade. Others appreciate the fast paced nature of binary option trades, where you know the results of your investment in as little as 60 seconds.
While there are certainly risks associated with trading binary options, it also offers some unique features that you won’t find when trading in traditional financial markets. I’ve outlined those 4 features of binary option trading in greater detail below:
Variety of Assets Types
If you want to trade multiple assets in the traditional manner it can be quite complex, especially if you are trying to hedge by trading related assets. You can’t simply trade currencies from the same account as stocks, and the same goes for commodity trading. With high capital requirements for each asset type in traditional brokerage accounts you would need multiple tens of thousands of dollars if you want to trade stocks, currencies and commodities.
Binary options trading does away with all that by offering all the different underlying asset types all in one account. You are able to trade binary options on major global stocks such as Facebook and Deutsche Bank, global equity indices like the FTSE 100 or the Nasdaq, major currency pairs (and some exotic pairs as well), and commodities like gold, oil and even corn, all in the same platform, without taking ownership and with significantly lower capital requirements. This can make it potentially easier to diversify risk across asset types as well as managing risk due to the predetermined calculations of profits/losses.
Choose An Asset and Trade
User Friendly Trading
Because you have few decisions to make when placing a binary options trade they can be a conceptually simpler way to trade. The trading interface, or platform, used in binary options can be less complex than the traditional trading platforms. In many cases all you need to do is click a higher or lower button on your underlying asset of choice, fill in the investment amount, and place the trade.
Binary option brokers have spent countless hours aiming to develop and create platforms that even those who are not technologically savvy can understand. There is no need to worry about margin or leverage, no considering stop loss and take profit levels, and in most cases no confusion. Simply choose an underlying asset, make your analysis, decide on the direction of price, set an expiry and investment amount, and place your trade. And since everything is decided before placing the trade there is no need to worry about the complexities of managing open trades, which can become quite hectic for the traditional trader.
One feature of binary options that is especially favored is the quick results. With expiries on binary options as short as 60 seconds traders find that they can complement their long term trades and take advantage of trending markets with binaries in a way that simply isn’t possible using traditional trading methods. Using binary options a trader can be in and out of a trade in just 60 seconds, and while this may not be suitable for everyone it does provide a welcome flexibility and an excitement to the traders’ activities.
Well Defined Risks
There’s no denying that trading binary options is a risky venture as you can lose your entire investment with each trade. However, this also makes it attractive because your risks are well known on each trade. There is no question of how much you could lose, or how much you can win on each trade. Both are clearly defined, which actually makes binary options good from a risk management perspective. It can also make binary options less stressful because there is no second guessing as you watch price move back and forth. Binary options do away with the need to constantly re-evaluate your risks as you try to decide when to sell an asset.
When it comes to trading it makes sense to understand the features of your selected investment instrument as much as possible, and that’s exactly what the four features of binary option trading aim to do. By offering a broad variety of underlying assets, user-friendly platform with flexible expiries, and well predetermined risk, binary options have added to the experience for traders all across the globe.
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Trading binary options involves substantial risk and may lead to loss of all invested capital