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Trade options
Binary Options have gained acceptance among the trading community over time and are lucrative enough for trading due to their predetermined profit and loss. Through this website, I intend to help you understand the concepts of binary trading and make you succeed in your trading journey. The whole purpose is to make you aware of the world of binary trading, including its pros and cons, and guide you through the entire process. So, let us proceed further.
The binary options appealed in 1974 with the Chicago Board Options Exchange (CBOE). Later on, in the year 2008, during the financial crisis, they were made available as tradable assets on CBOE. Investors perceived binary options as a viable option for investment with low risk.
Various trading platforms for binary options appealed to the public trading after the financial crisis in 2008. Yet, there was a “conflict of interest” between brokers and traders. Northern American Derivatives Exchange (NADEX) decided this conflict by sorting out the first exchange for binary trading in 2009.
The year 2012 saw binary options as tradable assets by Cyprus Security and Exchange Commission (CySec). During the same time, many binary trading-related scams came into the limelight. The regulators such as Commodity Futures Trading Commission (CFTC) and SEC alerted the traders involved in binary options regarding the prevalent fraudulent practices in June 2014. In April 2015, NADEX saw a significant 54% increment in the trading volume of binary options during the last 12-months because the UK government announced treating binary options as a tradable financial instrument.
Binary options are derivatives traded on any available financial instruments such as commodities, currencies, stocks, etc. You can view the outcomes of such options with predetermined profit or loss.
The traders use such financial instruments for speculating the asset price as to whether they will increase or decrease concerning their prevailing price within a stipulated time. The probability of the two possible outcomes is equal to 50 % each. Thus, the payouts are often $ 100 in winning trade, and the loss is limited to the invested amount.
Let us take an example to understand the basics of binary options. For example, you believe that EUR/USD will increase within a day from 1.21080, and you purchase a call binary option EUR/USD > 1.21095. If the price moves above 1.21095 within a day, then you will receive a payout of $100. If it doesn’t, then you lose your entire invested amount. So, there are fixing the payout and the loss of such options. Specialists often call the nature of binary options “all-or-nothing options.”
Before proceeding with the details of binary options trading, let’s dive into the terms associated with binary trading.
Call Option – Such option derives its value with the increase in the price of the underlying. Therefore, such opportunities can be purchased when you believe the cost of the underlying asset to go up.
Put Option – It derives its value with the decrease in the price of the underlying. Such options can be purchased when you believe the underlying asset’s worth will go down and benefit from the increase in the put option price.
In-the-Money (ITM) – The options expiring above the underlying price for call options and below in case of put options are called “In- the money” options.
Out of the Money (OTM) – The options that expire below the underlying price for call options and above the underlying cost for put options are called “Out-of-the-money” options.
Strike Price – The price determining the binary trade outcome concerning the underlying is called the strike price.
Underlying – The asset from which the binary options derive their value is called the underlying. For example, for binary option EUR/USD > 1.21095, the underlying is EUR/USD.
Expiry Date – The options traded in binary carry an expiry date. It is the date that determines the option price concerning the underlying. The In-the-money options provide payouts to the buyers, and the OTM options expire worthlessly, and the buyers lose their invested amount. The expiry duration ranges from a few minutes to a week or even a month.
There are different types of binary options available for trading. You can choose one or the other depending upon your view about the price change in the financial instrument within the stipulated time.
Call (Up/High) and Put (Down/Low) is the most basic traded binary option. You buy a Call or Up option when you think that the underlying instrument’s price rises above a specific price. Similarly, you can buy a Put or Down option when you feel that the underlying prices will remain below a particular price.
In/Out (Range or Boundary) – The price determines the range in such types of options. You can buy such options by speculating whether the underlying price will close within or outside the set range at the expiration time.
Touch or No Touch – A price is set higher or lower than the prevailing price in such options. You can buy such options by predicting whether the price will touch or will not touch the set prices. It is just sufficient for the cost to handle the targeted higher or lower price. It will yield you a profit payout even the price moves away afterward.
Ladder – The options available with preset prices and channeled progressively up or down are called ladder options. The payouts can also go beyond 100% due to some of the out-of-the-money strikes. Its nature is similar to Up or Down options, but it exists with a series of prices.
Binary Options are available for different assets for you to trade, ranging from currency pairs, commodities like gold, silver, crude oil, stocks like Apple and Google to indices such as Dow Jones, S&P 500, etc. The trading platforms list the list of the assets traded on the broker’s respective terminals.
The outcome of the binary options depends upon the price of the underlying asset. Furthermore, the traded assets are subject to various external factors as the company’s financial earnings influence stocks, and currency pairs are subject to different economic and governmental policies. In addition, commodities such as crude oil are often subject to import and export regulations between countries, significantly impacting the commodity’s demand and supply. Hence, while trading in binary options of such assets, you should exercise excellent judgmental skills as a negative outcome results in 100% investment loss.
You need to understand that to start trading in binary options requires a step-by-step process to make your trading process smooth and straightforward. You can follow the below process for binary trading.
Choosing the best binary broker – Numerous brokers offer binary trading services, but not all are regulated. Often, many claim to provide the best services but later on fail with their commitments. Choosing a broker is the primary decision you need to make, and it should be wise based on your analysis of different brokers.
It would be best if you chose a broker depending upon its history, deposit & withdrawals process, and trading platforms provided, such as Meta Trader 4 & Meta Trader 5, the regulator controlling it, and payouts on the trades. This decision should be rational as your trading journey mostly depends upon your comfort with the broker.
Selection of asset class – There are different asset classes available in the market to trade. The various asset classes are subject to the influence of external factors. You should choose the asset class in which you are most comfortable trading, and you should know the ins and outs of the external factors influencing them.
Form a market view – Before initiating the trade, it is vital that you form a market view as to whether the underlying price will rise, fall, or remain within the range. Market view formation is essential because based on that, you will be trading in the binary options.
You initiate a call option when you predict the price to rise and take a put option when you view that the underlying price will fall. In scenarios where you feel that the price will remain within the range until the expiration, you can initiate a straddle strategy or a hedging strategy to benefit.
Set the trade position with your desired expiry time – The expiry time ranges from seconds to minutes to even longer times such as day and week for different binary options. It would be wise if you initiated the trade keeping your market view concerning the time duration.
Suppose the hourly trend is bullish, and there is a minor downside pullback on a 5 min timeframe. In such a scenario, it will not be beneficial for you to take a call option with 5 min expiry as you can find yourself on a losing end despite catching the market trend correctly. Hence, the time duration of the market view and the expiry time for trade taken should co-exist so that you get your desired return.
Trading in binary options requires you to have desired skillsets of technical and fundamental analysis. We will look at both to understand what they mean and how they can be helpful while trading in binary options.
Technical Analysis is a vast subject in itself. It involves understanding the price actions of the financial instruments as demonstrated in the charts.
Understanding the different prices involves understanding the various cited prices used in the charts: Open, High, Low, and close, which depicts the price action of the asset.
Identifying patterns to predict the price movements of the instruments – You need to identify the different pattern formations in the charts of the various asset classes, such as ascending triangle pattern, descending triangle pattern, flag pattern, etc.
These patterns help in identifying the price movements of the assets. For example, an ascending triangle price breakout indicates the continuation of price movement in the uptrend. Conversely, a descending triangle price breakdown states the price is going to fall.
Developing an understanding of the indicators – The traders formulate their trading strategies using different indicators such as Relative Strength Index (RSI), Moving Averages, Volume Weighted Average Prices, etc.
Each indicator has got its unique feature and reveals a lot about the prices of the traded assets. For example, the RSI indicator with 80 and 20 signals an overbought and oversold scenario, respectively, and alerts the traders for a possible reversal.
The USDJPY currently quotes at 109.656. On March 31st, 2021, the USDJPY formed a high of 110.960, and the RSI on the daily chart was above 80 at around 81.6. Therefore, it indicated a possible reversal from the high. The chart below reveals the price, which fell from 110.960 to 107.442 in April 2021 to its 50-day moving average.
You can take advantage of such an opportunity to buy Put or down option in USDJPY with the next week/month expiry. You would have gained a good payout as all the Put options would have rewarded well in such situations.
Professional skills help in reading the charts to form a view about the price movement. A thorough understanding of technical analysis determines the underlying action—the combination of price action, patterns, and indicators together h in predicting the price movement correctly.
Technical Analysis alone is not enough to trade in different assets that are subject to market volatility. Often, the fundamentals drive the asset prices in the markets, and technical analysis is just the picture of the trading price actions in the market. Different fundamentals control asset classes, such as quarterly earnings and corporate activities, which influence stock prices. In addition, the country’s fiscal deficits, monetary policies, inflation, GDP, etc., affect the prices of its currency against the quoted currency.
The year 2008 saw the major financial crises leading to worldwide recession and economic collapse of the countries, and its’ impact was very much visible in the nations’ currencies. The value of EUR/USD dipped from 1.60000 to 1.23319 (as seen in the chart below) levels, and its impact is still felt in the euro’s value today.
Another classic example can be traced back to the Asian Financial Crisis in 1997. The financial-economic collapses of the South Asian countries saw massive devaluation in their currencies, with the Indonesian rupiah falling around 83 % and Malaysian ringgit about 49 % within one year. Such currency devaluation was attributed to their fall in Gross National Product (GNP) from $ 205 billion to $ 34 billion for Indonesia, and for Malaysia, the GNP fell from $ 90 billion to $ 55 billion. Other countries like Thailand, the Philippines, and South Korea also faced the heat of the financial crises. The respective countries’ currencies fell 40%, 37%, and 34%, respectively, in light of the fall in their economy.
Thus, the economic factors, interest rates, inflation numbers, etc., contribute to the country’s currency value. As inflation rises, the interest rates also increase, which in turn affects the traded currency pairs. Hence, you should be well aware of the scenarios controlling the asset’s value and be prepared in advance to tackle the volatile moves in the markets while trading in binary options of the assets. The country’s central bank is responsible for keeping its currency within control. It often raises or decreases the interest rates keeping the inflation numbers in mind, dramatically impacting the forex market and the binary options in forex trading.
The knowledge of technical and fundamental analysis is not enough to trade in binary options. You should not be taking random trades thinking that you know the technical analysis as it will end up blowing your account.
The next step is developing a trading strategy and streamlining it to achieve the desired results in the long run. The probability of winning in a binary option is 50 percent as they are only two outcomes. The winning payout is 70-80% compared to 100% loss in a losing trade; hence it becomes imperative for you to have a winning percentage of more than 50% to break even. As the overall percentage increases, the overall profitability increases.
To increase the odds of winning in the long run, you should develop a sound strategy and keep on improving it by streamlining it further with time. There are numerous strategies available for binary trading, but the best strategy is the strategy developed by you that suits your trading style. We will have a look at some of the commonly traded technical ones for binary options:
Trend following strategy – Trend is your best friend in the market is the most famous saying. Hence, this strategy works quite well for those who follow the trend and use it to trade. It is essential to understand the overall trend of the market and place trade in the binary options based on the trend.
Suppose the hourly trend of the asset is bullish, then you can call an option with hourly expiration, and suppose the trend is bearish, then you can very well buy a put option. Therefore, it is essential to understand the market trend concerning different timeframes.
For example, in the 5-min timeframe, there could be a minor downtrend correction for the primary uptrend, but the hourly bullish trend remains intact. In such cases, buying a call option with hourly expiry will fetch a reward rather than a call option with a 5-min expiry. Such a strategy requires the traders to capture and ride with the market momentum. Such trend following strategy fetches outstanding rewards with great payouts when initiated at the proper time. The call and the put options are the best binary options for trading such a strategy, as you can benefit primarily from it in a one-sided market trend.
The chart below of EURUSD reflected an hourly bearish trend, and the price fell from 1.21900 to around 1.21000 level within the next couple of days starting from June 11th,2021. Therefore, to benefit from a handsome payout, you can use such hourly trends to initiate a put option trade with hourly expiry or even day expiry.
Pinocchio Strategy – Formation of reverse pin bar candle in an uptrend triggers such a strategy. It signals a selling pressure at the higher levels as revealed by the small body and longer shadow in an inverted manner.
When such a scenario happens, you can use this strategy to initiate reverse trade in the market, i.e., going for a put option at the top when such a pattern appears. The formation of such a pattern in the charts signals rejection at a higher level. Such pattern formation in a higher timeframe reveals that the trend will likely reverse, and the underlying price is likely to fall in the coming time. Therefore, it becomes imperative to trade binary options with hourly or even day expiry as such a pattern appears in a longer timeframe.
The chart below is of USDCAD. There was a reverse pin bar in an hourly timeframe on May 26th, 2021, and after that, the price followed the downtrend. It is a classic example where you can use the Pinocchio strategy for going bearish in a bullish market when you see the exhaustion in the uptrend and predict the prices to reverse. In the chart below, after forming such a pattern in an hourly timeframe, the price fell from 1.21420 to 1.20562. Thus, you can buy a put option with hourly expiry and receive a good payout by being profitable.
Double Red Strategy – Such strategy is used to spot the scenario where there is a price rejection at higher levels with two bearish candles forming. The second red candle closes below the first red candle; then, it is possible to be followed by a third red candle with a close below the second red candle. You can go for a put option with a 5 to 15 minutes expiry in such a scenario.
The chart below of USDCAD reveals a double red formation on June 10th, 2021, followed by a third red candle on a 5-min timeframe. You can initiate a put option with 5-10 minutes expiry in such a scenario. However, such patterns appear on a lower timeframe, say 5-min, and you can create a trade with a 5 to 15 min expiry.
Straddle Strategy – Such a strategy works well in non-directional and volatile markets. The RSI overbought and oversold zones signals to purchase a put and a call option, respectively. You can use such a strategy when your view about the underlying is non-directional, but you expect movement on either side. In such cases, you would benefit from either one of them.
Hedging Strategy – You can use a hedging strategy to cover your losses. Hedging strategy involves different combinations of buy and sell of call and put options depending upon the view of the market.
Let us see an example. The USDCAD quoted at 1.20562 prompts you to form a view about the price that it will move above 1.20750 but will remain below 1.20760 by the end of the day. In such a scenario, you can buy the call option USDCAD > 1.20750 and sell the call option USDCAD > 1.20760. If. Compensation by day end, the price remains above 1.20750, and below 1.20760, you would benefit from the buy call option and sell a call option. But if the price moves above 1.20760, you would gain from the buy call option and lose on the sell call option due to your hedged position. Overall, there will be a decent payout on such a strategy. Though such a hedging strategy decreases the profit potential, it reduces the risk significantly to provide a cushion against the losses.
Rainbow Strategy – You can use the rainbow strategy by combining different moving averages denoted by different colors to initiate a long or short trade in the binary options.
The shortest moving averages react fast in comparison to the longer-term moving averages. The moving averages used for such strategy are 5, 10, and 20 MA on a 5 min timeframe. The trade can be taken for the expiry duration of 5 to 10 minutes, and going by this logic; the trade initiation happens in the following ways:
You can initiate the trade immediately or wait for a period or even two or more periods after noticing the same scenario in the chart below. However, waiting for a more extended period is not recommended as the setup can become invalid, and the price may reverse.
The chart below is of USDCAD where three moving averages such as 5 MA, 10 MA, and 20 MA as denoted by blue, red, and yellow color respectively are in an order with 5 MA below the 10 MA and the former below the 20 MA. Such a setup calls for a rainbow strategy trade, and the price fell after the formation of the said structure.
Different strategies work at various points of time in the markets. You should know the pros and cons of any trading strategy that you use, as it will help you initiate trades based on your plan only at the desired point in time. No system works all the time, and this is the inherent limitation of every strategy. Hence, it would be best to use the respective techniques when they deem fit in the situation.
Every strategy demands risk management, and managing the risk is an integral part of the strategy. Risking more than you can afford to lose can put you in trouble, and you will not be left with any other option apart from quitting the game. No strategy can be 100 % efficient, but trading according to the system increases the odds of winning. Risk management should also be a part of the strategy so that you stay in the game even when the odds are not in your favor.
While trading in binary options, the traders need to manage their risk carefully and focus more on money management. Different traders have their own money management rules based on their personal experiences. Being a binary options trader, you should look for the best money management strategy that helps you be in the game for the long run and manage your risk correctly.
Often, the Martingale strategy is used by the traders while trading. But does the same approach apply to binary options? The Martingale strategy requires you to increase the invested amount in case of losses. Therefore, the amount to be traded on the next trade should be in multiple of the loss amount in the first trade, and the process continues until you get a win, and after that, you start over again with the initial amount.
As far as trading psychology is concerned, the martingale strategy is not a good money management strategy for binary options traders. The probability of an outcome for such options is 50:50. A series of losses on a consecutive basis can wipe off the entire capital, and you will very soon find yourself out of the game.
It is recommended for the newbie traders in binary option to allocate a fixed percentage of the total capital per binary trade, say 4% per trade. For example, suppose you have $ 1,000, and you invest 4%, i.e., $ 40 per trade. It would mean risking a 4% for a 3.2 % return with an 80% payout. Moreover, following such a strategy would require you to lose 25 consecutive trades to wipe off your entire capital, whose probability does not seem high to happen. While trading in binary options, this simple money management strategy can help you function well and increase your capital. The creation of wealth should be the ultimate objective of the traders as opposed to earning huge returns on every trade. Risk management helps in reducing the risk to your advantage and acts as a proper methodology for trading binary options.
Trading via mobile apps has been gaining momentum due to the fast-changing world. Brokers are now too keen on focusing on their mobile apps, allowing their clients to trade through their applications. Many prefer trading via mobile apps due to their simplified nature. While choosing the mobile apps for trading, you should focus on the following elements:
Deposits and withdrawal facilities – The deposit and withdrawals facilities via mobile apps of the brokers should be simple and allow the users with a quick facility for deposits and withdrawals.
Different classes of assets available for trading – You should check whether all the asset classes are available via mobile apps. It sometimes may happen that certain asset classes will be restricted, and it will not be a good scenario for you when you want to trade in such assets.
Payouts – The payouts on winning trades should be fast on the mobile trading apps to use the funds from winning payouts on the following ones.
Execution speed and usage ease – The mobile apps should have an excellent execution speed and easy to use. The traders initiate trades in binary options with short expiry duration ranging to even a few minutes. The perfect execution of such transactions in the mobile trading apps requires lightning-speed execution of trades so that you do not find yourself on a losing end due to no fault of yours.
The demo account facility for trading – The brokers usually providing the demo facilities may not offer the same in their mobile apps, discouraging traders like you from using such apps. You must ensure that the broker’s mobile application offers such a demo facility. Before diving into the real world of trading, you can very well practice the art of binary trading through virtual funds in your leisure time via mobile trading apps.
The reviews of the mobile trading apps on the Play Store help select the best broker and go for its mobile trading services. It can also help you understand the different features of the trading apps from other users who will give unbiased opinions. Your requirements should align with the features provided in the mobile trading apps of the broker.
With the advancement of Binary Options, the trading of binary options has come under the purview of the regulators. The different regulators such as Financial Conduct Authority in the UK, CySec in Cyprus, Commodity Futures Trading Commission (CFTC) in the US, and the Australian Securities and Investments Commission (ASIC) in Australia have been regulating the brokers offering binary options trading in their respective locations. Many unregulated brokers offer trading in binary options, but they pose a potential danger due to non-regulation under any authority.
There are several brokers in the markets offering trading-related services, but not all of them are regulated. Therefore, it becomes quite imperative for you to know that regulated brokers are much safer to trade. Any disputes resolve amicably through the legal route as they are subject to various laws and regulations. Regulated brokers are subject to various obligations under the law to keep the investors’ funds safe and secure. Let us look at some of the differences between the regulated and non-regulated brokers to ascertain the plus points of a regulated broker.
Scams have been a part of every business, and binary options trading is no exception. A scam is an unauthorized or illegal way of obtaining money from others. The binary trading business is also full of fraudsters, and you need to aware of the fraudulent practices if your broker engages in them. You should immediately close your account in it and move to a more reliable and regulated broker. The below scenarios can raise an alert on your broker’s integrity:
Regular Blockage – There are instances where the broker blocks the payouts, and sometimes the reasons are genuine on the part of the broker. If it happens regularly, it is the first alert that something is wrong with the broker as it seems inefficient to pay its clients on time. It will not be far enough when your money is subject to exploitation, and you will not be in a position to claim your money back.
Trading Bonus Scams – Sometimes, the broker provides bonuses to its traders, and both of them benefit out of it. Often, the broker poses a condition of putting extra capital to get such rewards. The traders put on the additional money in its greed and are exposed to a higher risk of capital, and often withdrawing becomes impossible. Such scenarios become subject to utmost suspicion.
Closing of the Accounts for No Valid Reason – The non-regulated brokers often frequently change the terms and conditions. They close the clients’ accounts for no valid reason and make lame excuses for not returning the traders’ invested amount.
Display of False Regulatory Statements – The non-regulated brokers tend to display various regulatory notices and regulations to make themselves appear regulated. You need to check such facts and verify the company’s background, and if there is no clarity about its history, you must change your broker immediately.
A skillful approach can only help you find a trusted broker and avoid the brokers claiming to offer outstanding services to defraud.
Realistic Approach – You should have a practical approach to avoid brokers, promising that making money through binary trading is simple and easy, and you will be able to earn higher returns every month.
Avoiding unrealistic return claims by the brokers – You need to understand that binary options trading is a game of probability where the odds of winning and losing are equal. You should avoid falling prey to the brokers’ claims that you will be able to make money day in and day out with a fixed payout of $ 3,000 or more. Such a return can be possible, but it also requires huge capital and outstanding analytical skills to succeed in binary trading. You should also need to understand that there is an equal chance of winning and losing. The profitable trades yield 70-80% compared to 100% loss in losing one, which compels you to have a winning record of more than 55-60% to reach breakeven and be profitable.
Avoid brokers with patchy records – The trading business is developed based on the trust of the broker and the clients. You share your all-basic details with the broker, and in return, it is your right to know the broker’s history in and out to ensure its integrity. You should avoid the ones with no apparent historical records.
Eliminating brokers claiming “no risk” and guaranteed return in binary trading – Any broker who claims that binary trading can give you a guaranteed return is outrightly making a false claim. Such brokers are not trustworthy as their first primary duty is to inform the traders about the risks involved in trading such options as is required by the regulated brokers to do so as a part of the warnings.
Traders often receive fraudulent practices and have been making complaints to the regulators:
Broker’s refusal to clients to get their funds – Such complaints are made by the traders to the regulators about withdrawing the funds where their broker denied their requests. The traders put in the additional funds with a promise by the broker to receive huge returns. When the same does not happen, and they try to withdraw their funds, the brokers often reject their requests.
Theft of Personal Details by brokers – Often, the brokers collect the personal details of the traders, and the same is subject to unauthorized purposes. You should only provide such personal information after knowing the purpose of the same.
Manipulation of trading terminals by brokers – The traders also make complaints regarding manipulating prices by the brokers at their trading terminals. They tend to make the winning trade of the customers turn to loss by arbitrarily increasing its expiration time.
Different brokers provide different features for trading in binary options. Some are subject to regulation under the country’s regulator, and some are not. Many provide bonuses after deposits, and others allow the traders to practice through the demo account. Below is the comparison of different brokers, which will help you decide to go for the best broker as per your requirements.
Binary options trading has evolved, leading to the emergence of many brokers in the markets. Such options may seem lucrative enough concerning the return expectancy, but it has also got its downside. There are only two possible outcomes in a binary trade, and this significantly reduces the profit probability. The winning payouts turn out to be 70 to 80 % instead of the loss where there is a risk of losing the entire 100 % invested funds. It leaves the traders to develop an excellent risk management system to survive in the world of the uncertainty of binary trading.
The binary trading world is also full of fraudsters ready to catch hold of you and pounce on your funds. Therefore, it requires significant knowledge about the binary world to avoid falling prey to such fraudsters. Hence, it would be best if you were extra careful while transacting with the brokers by ascertaining the broker’s integrity so that you can feel safe and secure about your invested funds. Therefore, the brighter side of binary options should be focused on while keeping the opposing side in mind to increase your odds of winning and be a master of the game.