10 Things You Must Know About Binary Options
It can be quite exciting to make your first deposit and start trading options online, especially with a tempting bonus received from your trading provider. However, without proper understanding of binary options and the trading platforms, one can quickly lose the initial deposit with the bonus money and turn away from options trading forever. I’ve seen this happen in the past and I’m sure I will see it again and again. So here is a simple to follow crash course of the most important points that will assist any beginner trader wanting to trade binary options and make money from forex or the stock market.
1. Binary options trading involves PUBLICLY traded stocks and commodities.
Most currencies in Forex, indicies such as the S&P 500, commodities like oil, gold, or silver, company stocks such as Facebook or Google can all be traded on binary options. Penny stocks cannot be traded using binary platforms.
2. Binary options are a fixed return options
In binary options the trader always knows EXACTLY how much he/she can win or lose on a given trade. The trader is always paid a fixed return regardless whether the market has shifted 10 or 200 pips.
3. All binary options have an expiry time and a strike price.
The trader chooses an instrument, for example oil, EUR/USD, or a Facebook stock and picks its market direction (UP or DOWN) and its expiry time (ie. 15 min, 1 hour, 5 hours). When the price of the instrument at the time of expiry is on the chosen direction at the time of entry, the trader is paid a fixed return. Unlike normal stock trading, in binary options you can just as easily profit from the market going down as it going up.
4. You can never lose more money than your initial investment.
Binary options are quite unique in that you cannot lose more than what you have traded. There are no margins or losses that can surpass your initial investment as in the case of margin trading. In most cases you lose 100% and win about 75% of your trade value.
5. Risk management is one of the key aspects of trading.
This statement is true for all traders and all types of trading, not only binary options. Risk management is money management and all traders must understand it well if they want to succeed and make money trading. One of the main rules of thumb of risk management is that if you are a beginner trader you should never invest in a single trade more than 2% of your account. If you have $1000 in your account your single trade should not exceed $20.
6. Binary options will not make you rich quickly.
Despite of what broker ads and videos on YouTube may promise you, trading binary options is a challenging and demanding task. If you’re not an experienced and knowledgeable trader you will most likely lose your deposit. (Unless you use a signal service, see below)
7. Winning payout is less than the loss on losing trades.
In most cases when you win a trade you receive about 70%-80% of your trade amount but when you lose, you usually lose 100%. So if you traded $100 for example, you would receive $180 in a win and $0 in a loss. It should be noted, however, that it is still possible to earn money trading binary options.
8. ALWAYS read the terms and conditions of your broker.
Before you sign up and deposit any of your hard earned money make sure that you understand your broker’s terms and conditions. This is especially important when you are accepting a bonus offer. All bonus offers from brokers will have some sort of limitations imposed on your account. For example if you are offered 100% bonus for your initial deposit it is very likely that you will need to have about 40 times the amount of your deposit in your account before you will be allowed to make any withdrawals. Please read the terms and conditions of each bonus offer separately.
9. Always use professional charts to trade binary options.
I’ve met some enthusiastic people starting out to trade on binary platforms using the provided tick charts. If you want to trade by using charts and following price action you should use dedicated software, such as MetaTrader. If you are new to trading and meta trader than you will need to use indicators that will help you find good trades. Here is a link to free binary options indicators for Meta Trader 4.
10. Use professional signal service to optimize your trades.
If you aren’t a professional trader or simply don’t have enough time to learn about the markets there is a simple solution. You can use a signal service where you will be informed of new trades which have a very high winning probability. One of the best signals services we’ve tested were Franco’s binary signals – read full review.Published in Education