Binary Options Trading

 

Binary options, once considered an exotic type of options contract, have gained wide acceptance since their listing on major exchanges since 2007. Often referred to as “all-or-nothing” options, they get their binary nature from the fact that they either pay off as set amount of a given asset or pay nothing; there is no sliding scale of value as there is with more traditional options. Because of this payoff structure, they have a different pricing structure than traditional options, giving traders an additional tool with which to approach the market.

What Are Binary Options

A binary option , as the name suggests, is an option that expires in only one of two possible states: the payoff state or the zero state. In the payoff state, the options pays out the full value of the contract in whatever the specified asset may be. If the option expires in the zero state, it means that the payoff condition has not been met and there is no payment made at all.

It is important to understand how this is distinguished from a traditional option contract. With a traditional option (use a call option for this example), if the price of the underlying security is above the option’s strike price, the option will be worth the difference between those two prices – this applies to cash settled options, but it simplifies the example. With a binary option , if the underlying is above the specified price by even a small amount, the contract pays off the full amount specified in the contract.

On the face this simplified structure seems appealing, but it is important to remember that it is easy to lose one’s entire investment if the option expires in the zero state. Because of this risk, the payoff on these types of instruments may exceed that which is available on a traditional investment. Understanding the investment is critical before one puts any capital to work.

Binary Options 101

When trying to understand how to trade binary options , it is important to understand a few critical points. First, because of the all-or-nothing nature of this type of investment, it is considered by most to be somewhat simplistic. This means that there is less to understand, but also, that the research that must be done is of even higher importance. Making a mistake in this case means that one’s entire investment will be lost.

Secondly, while there has long been an over-the-counter (OTC) market for binary options , it was not until 2007 that they were approved for listing by the SEC on major exchanges. Currently, they tend to be limited to highly liquid assets like a few stocks, certain ETFs, and currencies. They serve a very targeted market because of their unique nature, and are typically reserved for professionals. Because of the players in this market, it is even more important to understand what one is getting into before risking capital.

Third, because they trade more like European options, analysis using the Greeks is more straightforward. While this will not apply to any but the most sophisticated investors, it is worth noting. The Greeks are a series of mathematical measurements that describe the behavior of an option. They make certain assumptions that are more manageable with a binary option because of the simplified possibilities of results.

Finally, despite their availability in other markets, binary options are most common in the currency markets. This means that when entering, a new investor is not only tackling the complex world of options trading, but the global macroeconomic forces that drive the currency market. These may be a very lucrative instrument to trade, but they carry very real risk and should be thoroughly understood.

Forex Trader Beginner Tips

Are you intending to start a career as a Forex trader? As a matter of fact, you should learn a lot concerning the trade so that you never get disappointed in the end. You need to be fully prepared for any eventuality such that your trading will be a success. Here are some of the tips that are crucial for you to have a smooth trading in the Forex;

Be Ready For Any Eventuality

Forex-sm

Forex-sm (Photo credit: Wikipedia)

Most of the Forex traders start this type of trade thinking they are going to get an instant success and profits start trickling in immediately. The truth however is far from that unless you are super lucky in your trading. As you plan to enter into Forex trading, be aware that it is not that easy and that you should work very hard and be realistic as possible without hoping for much immediately at the start. Your expectations should also be realistic and achievable. Despite that Forex trade has been termed as the fastest way to get better returns, you must understand very well how to go about the trade.

Be Cautious With The Big Promises You Get

There are many Forex brokers in the market today and each offers something different from the rest. Some might even go to an extent of telling you that you can become successful in your trade overnight just to convince you. This is however far from the truth and will never happen. In reality, it is going to take some time, even years before you consider yourself successful. Being cautious is necessary so that you never lose a lot of your investment.  Make it a rule that you never lose more than 2% of your trading account.

Learn The Language Of The Forex Market

Forex trade is very technical and not anybody can make money out of it unless you understand perfectly the language used. With several technologies and concepts in play, you need to learn each and comprehend them perfectly so that you can operate in the market without any problem.

Use Demo Accounts

As a beginner, demo accounts will help you learn the basics and concepts that are applicable in forex trade. Most of the brokers offer demo accounts for you to try their platforms before depositing real money for the trade.  The use of virtual money is actually the smartest ways to learn more about forex trading.

Be Ready To Learn From Other Traders

This does not mean you listen to every other trader you come across but those that have emerged successful in Forex trading. While searching for such traders, the internet can be a very good source of such information but be careful not to follow the advice of just any trader without any success record. Check out for such traders in forums, blogs and even take classes to enhance your trading skills and knowledge. Willingness to learn is crucial for you to become successful in Forex trading. The point here is simple; taking advice from the people who know very well what they are talking about.

Learn About Forex Trading Skills

Just like any other career, to become the best, you should learn the basics and even more concerning that career.  This is an unwritten principle that every Forex trader should keep in heart yet others risk investing thousands of dollars without first learning how to trade!

As a beginner in Forex trading, it is important that you take your time to learn about the trade and more importantly practice patience as you get your way to the top. Always take your time and learn before jumping blindly into any deal in this risky business.

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