Binary options is a simple and user-friendly financial instrument that allow traders to make huge profits within short periods of time. The basic concepts of digital options trading are covered in this article.
This form of trading allows the trader to invest in a large variety of assets, such as currencies, stocks and commodities. Like the name suggests, the trader has two options in this form of trading. He can choose a call option or a put option.
The call option refers to a predicted increase in the price of the asset from the strike time to the expiry time. The time of buying the asset is the strike time. Expiry of the assets may be within a day or an hour. Thus, this option refers to an appreciation in the value of the asset. Conversely, the put option refers to a predicted decrease or depreciation in the price of the asset within a particular window of time.
Traders who trade in binary options have to consider three important decisions in order to attain success and profits.
They should choose their asset wisely. Digital options allow traders a variety of assets to trade in. They should choose assets for which they can find stock information through websites like CNN Money or Yahoo Finance. Beginners should ideally look at popular assets, as they are easier to predict. However, none of these can guarantee success. Traders have to take calculated risks in this form of trading as well.
Traders are required to choose from an hourly or a daily expiration time for each asset. This is important as volatile assets are likely to change value very fast. They are difficult to predict and traders should take care when choosing an expiration time for these assets.
Traders should also manage their money and choose the investment amount carefully. Binary options gives up to 75% profit in case the asset ends in-the-money, which is more than foreign exchange offers. However, there is always risk involved in trading.
New traders should start with smaller investment amounts to gain confidence and avoid large losses. As they gain experience, they can increase their investments and their profits. The keyword in binary options trading is information. Well informed traders can predict asset directions more successfully than ill-informed traders. Mainly, traders should gain respite in the fact that they do not need to predict the rate or amount of change.
Previously in the article "The Importance of Analyzing Charts in Binary Options Trading" we discussed which type of charts are most practical to use when doing your research. In this article we are going to discuss the effects of volatility on prices and on your analysis of the markets.
What is Market Volatility?
Simply put Market Volatility is a term used to describe the markets or a single Asset whose price is extremely erratic; sharply rising one moment then dramatically dropping the next. Often times, it is hard to identify the Trend Line as the price of the Asset changes so rapidly.
Day Traders love volatile markets as they will buy when the price drops then wait a few minutes and sell when it dramatically swings higher. However, Binary Options traders need to be very cautious during times of a volatile market as these dramatic price swings could swing Out-of-the-Money at the very last second of the Trading Period.
Selecting the Right Asset
Selecting the right Asset during a volatile market is essential to a successful trade. Carefully study the Trend Lines of all of the available Assets and find an Asset that is not affected by the large price swings. The ideal Asset is one where the chart shows the Trend Lines are long and steady and not switching up and down every few minutes.
As of the time of this article Binary Option brokers offer a limited number of Assets for trading. Brokers are continuing to add more Assets each month as they develop their market profiles. As a result it may not be possible to find an Asset which hasn't been affected by the market volatility. If this should happen just sit back, do your research, and do not trade that day.
Ride Out the Storm
Often, traders refer to high volatility as a market storm. It is easy to see why people would feel this way as it is best for the arm chair investor to leave this type of market movement to the professional traders.
Many professional investors have told me that when the market starts to swing wildly and the volatility level rises dramatically trading is being accomplished by automated trading programs that are using preset values to make the instantaneous trades that are needed to keep up with the wildly swinging market prices.
Controlling High Volatility
Fortunately, most market authorities will start to slow down trading by restricting the number of trades allowed in a given time period and by slowing down the data streams of trading results. In rare cases market authorities have halted all trading in their respective trading house.
In most cases, the market authorities will halt trading on one or more Assets that appear to be driving the volatility instead of halting the whole trading house. Halting one or more individual Assets is the most preferred action since it has less of an effect on other global trading houses. When a whole trading house is halted it tends to start a ripple effect throughout the whole global economy.
Watch for the next article in the Binary Options Trading series, "Bollinger Bands and Moving Averages Used In Analysis". We will discuss how to use Bollinger Bands to analyze market volatility.
Many business enterprises have shifted their focus to the web market over the last decade. Today, the Internet serves as an avenue for all sorts of commerce. Binary option trading is one of the newer moneymaking opportunities available online. The number of sites offering this service grows in number daily. Keep in mind that just like any other business venture, this undertaking has its risks and advantages. Before you invest your hard-earned money in this trade, it is important that you learn as much as you can.
Basics of the Trade
The method of practice is what sets binary options apart from other ecommerce opportunities. It is different from ordinary trading in the sense that an investor does not have to own any assets. All you need to get started is an initial investment. The process that goes into it is straightforward - traders have to predict whether a certain asset's value will appreciate or depreciate. For example, when trading for Enterprise 1, you do not have to own any company shares. Instead, you gamble with your initial investment. What happens is that you sign a contract, and then try to forecast whether the shares of Enterprise 1 will increase or decrease. Your ability to determine the result will tell if your investment registers a loss or a profit.
History of the Trade
People who have just stumbled upon it think that the concept is brand new. Contrary to popular belief, however, binary options have been around for several decades. It only seems new because formalization of the trade only took place within recent history. If we were to discuss options trading in general, the practice has been around for thousands of years. On the other hand, the practice, as we see it today, dates back only to the nineteen-seventies.
Formalization of the trade took place in 1973 by the Chicago Board of Exchange (CBOE) and the Options Clearing Corporation (OCC). The process today adheres largely to the regulations set up by the CBOE and OCC.
Risks and Advantages
As with all markets, binary option trading fluctuates. This should be the deciding factor as to how much money you invest. Of course, the general rule is not to invest money you do not have. Some people fall into the trap thinking it is easy money. While it can be, there are still risks involved. Be wary of this fact. Do not throw in all of your money at once. Instead, familiarize yourself with the practice and invest little by little.
Risks aside, the trade also has its advantages. Most binary option trading platforms available are clear-cut and easy to understand. Some platforms, however, are more intuitive than others. Keep this in mind when choosing between options. If the broker offers demo software, give it a shot. See if the program interface works for you.
Additionally, consider a broker's payout percentage. It might take some effort, but finding one that offers maximum payout will be beneficial. Remember that the average rate is seventy to seventy-five percent for successful investments, but there are some that offer ninety percent of the initial investment. For unsuccessful trades, look for brokers offering five percent at the very least.