Binary options trading is incredibly straightforward, operating on a simple premise with a yes/no result: will an underlying asset be above a certain value at a specified point in time? An affirmative outcome allows the trader to make a significant return, but is it that simple? It’s important to fully understand what we mean by binary options and to acknowledge their advantages and disadvantages.
Read on for a simple breakdown of the benefits and drawbacks to binary trading, as well as a detailed step-by-step guide, insightful strategies and useful tips to inform your trading. Then, compare the best binary brokers for day trading in the UK for 2020, using the list of top brokers.
Binary Options – What are They?
Binary options are attractive because of their speed and simplicity, but how do they work? A binary option is a financial instrument that can be traded on any given market, without the need for complicated calculations. When you deal with binary options there are just two, clearly identified possible outcomes. This offers you full visibility of the potential risks and rewards before the trade is made.
In essence, trading binary options works almost like a prediction. Keeping up to date with news, current trends and statistics, among other factors, may allow you to make more accurate predictions on whether the value of the asset will rise or fall at a specific point in the future. This prediction will always have a right or wrong outcome, never anywhere in between, and this is why binary trades are widely known as ‘all or nothing’ trades.
Binary options are a derivative and can be traded on a multitude of markets, providing many options to choose between. You could choose to trade on a stock price, such as Etsy Inc or Vodafone, or commodity value, such as any of the four precious metals or energy. You could also opt to trade on cryptocurrencies or foreign exchange rate.
A Short History
If you really want to reap the full-time benefits of trading binary options, you will need to carry out comprehensive research on its fundamental origin so as to have a vast knowledge and detailed understanding of it; because it will save you a lot of money in the long run. The digital or binary options have been trading for decades now, though it was initially meant for the rich and wealthy group with some other large financial institutions that were able to afford it was giving the privileges to trade the security. However, a historical change took place in 2008 when the United States Security and Exchange Commission granted access to the options exchanges to start trading it to the public.
The arrival of the internet and the advancement of information technology have allowed the world that is now a global community to trade the ‘binary’ Options; With the way it is now, knowing the simplicity and easy method of trade entry for the regular daily traders; added with it easy to understand analysis, will definitely cause an increase in demand for the binary option.
Types of options
There are numerous types of options you can choose from, the groceries below contain some of the most popular types of binary options.
Let’s take a look at the different option types available to you:
Up/Down – As a trader, you simply need to predict if the price will be above or below the current price when the contract comes to a close. Considered to be the simplest option, up/down is also known as high/low, over/under, and above/below.
Range – With ‘in range’ and ‘out of range’ trades, the range is set ahead of the trade. You then need to predict if the market price will fall in or out of this boundary.
Touch – Unlike up/down and range option trades, touch options are not premised on the market price being at a certain level at expiration. Instead, for ‘touch’ trades, you decide if the market will touch a determined price at least once during the contract period. With ‘no-touch’ trades, the market price must not touch the strike price.
Ladder – Whilst similar to up/down trades, ladder trades involve several price levels which are located equidistance from each other and normally are staggered such that they require a significant price move. The percentage payout will be small if the likelihood of the prediction being true is high, but ladder options can also generate returns of over 100%.
If you’re looking to trade binary options, you need to understand what is meant by expiry times. The expiry time is the point at which a trade will end and determines whether your trade has been successful, or not. Expiry times are a hugely important aspect of binary options.
Binary options trading is attractive because its expiry times are shorts, allowing traders to generate a profit quickly and make several trades in one day. Some expiry times range from 30 seconds to 300 seconds, whilst long-term expiry times can last as long as years.
But is it legal?
Put simply, yes. Binary options are legal. The reputation of binary options has been negatively impacted by scams and fraudulent brokers, which can take advantage of uninformed traders looking to make quick money.
In some regions, increasing regulation has led to the withdrawal of binaries from the retail market. The EU, for example, placed a ban on binary options in 2018 to protect consumers. It is still possible to trade if you are a professional trader, and binary options trading remains legal in other regions, such as Australia and India.
To avoid falling prey to illegitimate companies, it’s important to be aware of the risks and to be alert to signs of dodgy brokers. The promise of ‘quick money’ should be viewed with caution, as should brokers who cold call and offer automated trading. As soon as alarm bells begin to ring, you should tread carefully and leave that broker. Especially as there are a huge number of trustworthy brokers available.
Whilst fraud exists, regulators are making efforts to reduce the risk to traders through monitoring and scams have been reducing in recent years.
Binary Options or CFD Trading?
CFD (Contract for Different) trading, though similar to binary options, has one crucial difference – the potential for limitless risk. If the market moves significantly in your favour, this sort of trade can magnify profits. However, if the market moves against you it’s easy to incur huge losses.
With binary options, the potential gain and loss are predetermined and fixed. If prices rise significantly, due to volatile markets, the percentage you retain won’t reflect this margin. In easy terms, the risk is fixed with binary options, but the profit potential is limited.
Why Should you Trade Binary Options?
You need to understand the benefits and drawbacks of trading binary options to assess if this is suitable for you. Read on for the advantages and disadvantages of this style of trading.
The benefits of trading with binary options are vast. Below is a roundup of the top advantages:
- Known risk and reward – Binary options allow you to know exactly how much you will win or lose from the trade upfront, giving you greater control than many other types of trading. The certainty of this makes binary trading both attractive and simple.
- Quick profits – Binary options expiry times are typically extremely fast, meaning you’re looking at a quick payout. Shorter expiry times also mean you have the opportunity to trade more options in a given day.
- Flexible choice of markets – Binary options can be traded on any market, giving you the freedom to trade outside the constraints of a specific market.
- Simplicity – Binary options trading requires you to predict just one factor, making it incredibly straightforward. This simplicity of the trade makes it a low-barrier option for those looking to trade full-time.
- High return potential – The high returns involved in binary options, compared to another trading, are one of the reasons it’s become so popular. When a binary options trade is successful, the trader can earn up to 90% on a single trade.
- Accessible – Looking to trade at night, at the weekend, or at any time for that matter? With binary options, trading happens at all hours across the world, offering you full flexibility.
Like any other trading instrument, binary options do come with some disadvantages:
- Losses – Though there’s the potential to make a high profit from trading binary options, there’s still risk involved. Significantly, for a given trade, potential profit and loss are unequal. This means that while a loss might see you lose your entire stake, a win might give you a profit of only 60%. To break-even, you,