Binary options offer a trading style that combines high potential with simplicity and a quick learning curve. To help you understand whether binary options are the right trading tool for you, this article explains the basics of binary options, their advantages and disadvantages.
In detail, you will learn:
- What Are Binary Options?
- A History Of Binary Options
- Why Are Binary Options Popular?
- What Else Do I Have To Know?
- How To Get Started With Binary Options
With this information, you will immediately be able to decide whether binary options are right for you. If they are, you will also know how to get started.
What Are Binary Options?
Binary options are a new form of investing. The name binary options implies the most important characteristic of the asset: the result is binary. You are either paid a fixed payout when you are correct, or lose the entire investment when you are wrong. It is a high risk / high reward form of investment. With binary options, you make a prediction about the price movement of an asset.
- If your prediction comes true, you win your option and get a predefined payout.
- If your prediction is wrong, you lose your option and the money you invested in it.
The system is similar to sports betting. In sports betting, too, you make a prediction, and if the prediction comes true, you get a predefined payout. If the prediction is wrong, you lose your investment. The only difference is that the basis for sports bets is sports events – which are difficult to predict.
Binary options are based on financial assets such as stocks, indices, currencies, and commodities, which makes predictions easier. Just like sports bets, binary options offer a wealth of possible predictions.
Over time, binary options brokers have developed many different binary options types that allow you to make different predictions about the market. Each of these binary options types is defined by three all-important values:
- The payout. They payout defines the profit that you make if your prediction is true. If you get a payout of 90 percent, for example, you would make a profit of £90 on an investment of £100. You know the payout you can get before you invest. Your broker constantly updates the options it offers and the payouts you would get if you invest in them.
- The expiry. The expiry defines when your broker measures whether your prediction came true or not. With an expiry of one hour, for example, your broker will compare your prediction to the actual market movements in exactly one hour. The special characteristic of binary options is that they use very short expiries of only a few minutes to a few hours.
- The target price. The target price defines the price to which your prediction is compared. Some option types use the current market price as the target price, some define the target price based on the expiry you use (longer expiries will lead to target prices that are further from the current market price), and some allow you to use the target price.
The most popular binary options types are:
- High/low options. High/low options are the classic binary options type. You predict whether the market will trade above or below the current market price when your option expires. If you are right, you get a payout of 70 to 85 percent. Expiries range from 5 minutes to a few hours.
- One touch options. One touch options define a target price, and if the market reaches the target price, you win the option. They are also referred to as “Touch / No Touch” as it is also possible to open a trade hoping the target price will not be reached (or ‘touched’).
In contrast to high/low option, the market does not have to remain at the target price level. You already win your option if the market touches the target price for a split second. Most brokers offer one touch options as a standard version with a target price close to the current market price and a payout similar to high/low options and a high-yield version with a faraway target price and a payout of up to 300 percent.
Touch options do not have to wait until expiry before they settle. If the touch price is reached, the trade ends immediately, paying out on ‘touch’ trades, and closing ‘no touch’ trades as a loss.
- Short term options. Short term options cover any expiry of less than 5 minutes. The most popular are 60-second options. Some brokers also label them turbo options. They work just like high/low options but use shorter expiries of only 30 seconds to 240 or 300 seconds. Their payouts are similar to high/low options, too.
- Long-term options. Long-term options are high/low options with of expiries of a few days to weeks, months, and even years. If you like to make long-term predictions with binary options, long-term options are the ideal tool for you. Popular longer term expiries are ‘end of day’ (which expire when the markets for that asset close) and ‘end of week’. The exact expiry time will be clearly stated, but when trading assets like foreign exchange, there is no central market – so it is worth checking what the broker considers as ‘close of business’ for end of day, or end of week trades.
- Boundary options. Boundary options define a price channel around the current market price. When the market leaves this price channel (goes above or below the high and low limits), you win your option. Boundary options are the only binary options type that uses two target prices, both equal in distance from the current market price, one above it and one below it. Just like one touch options, most brokers offer boundary options in a normal and a high-yield version, with the high-yield version being ideal for strong movements. Boundary options are also the only binary options type you can win without predicting the market’s direction – a strong movement is enough, regardless of its direction.
Boundaries can also be used in flat markets, where traders can predict the prices remain within the boundary range. These trades offer the choice of backing “In” or “Out” as opposed to the high and low of standard binaries.
- Ladder options. Ladder options define five or six target prices. For each of these target prices, you can predict whether the market will trade above or below it once your option expires. Ladder options allow both for the highest payouts and the safest predictions, depending on how you use them.
When you predict that the market will trade above a target price that is far above than the current market price, you can get a payout of up to 1,500 percent – but you also need to find a very strong movement. When you predict that the market will trade below a target price that is far above the current market price, you are making a very safe prediction – but you only get a payout of around 20 percent.
Each ‘rung’ of the ladder behaves just like a standard High/Low option – but the target price is further away. They offer traders a good way to exploit volatile markets.
With this wealth of available option types and trading styles, binary options offer every trader the right tool to trade the financial markets. You can execute every type of strategy that you want, and you make any prediction.
From high-risk to low-risk, from short-term-to long-term, whichever trading style suits your character best, binary options have the right trade type for you.
A History Of Binary Options
The basic idea of binary options is not that new. It has its origins in classical options. For decades, professional traders used to invest in future contracts with fixed expiration dates that predicted whether an asset would trade above or below a certain price.
Unfortunately, these futures were complicated – and also generally not available to retail investors. It took newcomers months and years to just master the basic terminology, and the way was paved with many expensive rookie mistakes. Many people lacked the time and the money to go on such a long journey.
Binary options were developed to help these traders. Binary options still allow you to predict the price for which an asset will trade at a specific time, but they do so in a simple way.
- Simple platforms. Instead of having to work through complex lists of assets containing complex values, binary options brokers offer simple trading platforms that everyone can use. You can even download these platforms as apps to your mobile phone. Learning them requires little more time than learning a new mobile game.
- Quick risk/reward calculations. The price worth of a classic futures contract depends on many complicated factors – remaining time, current market price in relation to strike price, etc. For newcomers, it is almost impossible correctly to understand and predict the development of these prices. Binary options have simplified the pricing. They tell you in advance which payout you can get if you win your trade. Knowing what you sign up for will make it easier for you to predict whether this is a trade you should make.
- Unmatched profitability. Binary options allow you to make a profit of 75 to 90 percent within a few minutes, some binary options types even offer you payouts of up to 1,500 percent. When you buy and sell a stock over the same period of time, you will make around 0.01 percent of profit – in the best case.
By enabling traders to make large profits with small movements, binary options enable you to make shorter trades. Shorter trades mean more trades, and more trades with a higher profitability per trade mean more profits. The new thing about binary options is the simplicity, the clarity, and profitability that make it easy for newcomers to learn the trading style.
Why Are Binary Options Popular
Binary options are so popular because they combine three of the most important aspects of trading: simplicity, no fees, and a quick learning curve. Let’s take a closer look at each of these advantages:
Advantage 1: Simplicity
We have already touched on this point a few times, but we can’t stress it enough. If you like to keep things simple, you should give binary options a try. Sophisticated simplicity is generally considered the holy grail of financial investing. By keeping things simple, you reduce mistakes and increase the number of trades you can make, which in turn increases your earnings potential. Binary options can help many traders achieve this goal.
Advantage 2: No Fees / Trading Costs
When you trade a binary option, there are no fees. When you win an option with a payout of 75 percent and an investment of £100, you get a total return of £175 and make a profit of £75. There is no hidden money drain, and you always know exactly what you signed up for. This simplicity is a great help to traders, especially to newcomers. You can be completely sure that all the money you make will end up in your account, and that there will be no surprises. With stocks and other classic assets, however, you might find that the fees will eat up all your profit. This advantage especially benefits traders with little money. When you get started with £100, you can still effectively trade binary options. With stocks, where you would pay at least £10 per trade in broker fees, this would be much more difficult. Every trade would eat up 10 percent of your account balance in fees – hardly a profitable setup.
Advantage 3: Quick Learning Curve
Most of us have at some point tried to trade stocks. But how far did we come? Would you say that you really know what you are doing? Despite many years of experience, most stock traders still guess which stock will rise and which will fall. These problems are only natural because stocks have a few major disadvantages that make mastering their trading difficult. Luckily, binary options offer a much better, quicker learning curve.
Binary options allow you to make more trades. The only way to learn how to invest is by doing it. With stocks and other conventional assets, it often takes months or years before you know whether you made a good or a bad investment. Over the course of a year, stock traders might only make two or three trades. With so few lessons, it is impossible to learn. Binary options use expiries of a few minutes to a few hours, which is why binary options traders can easily make 10 or more trades a day. With so much feedback, you learn much faster and more easily.
Binary options offer demo accounts. Most binary options traders offer free demo accounts that provide the same functionality as a regular trading account but allow you to trade with play money instead of real money. In this risk-free environment, you can make as many trades as you want and learn the basic of binary options trading.
When you know what you are doing, you switch to real money trading and turn a profit from the start. While some stock brokers also offer demo accounts, these accounts only make sense if you start using them by age 10. Otherwise, you would spend your life mastering a technique that you will never be able to use.
By allowing traders to make many trades per day in a risk-free environment, binary options offer the ideal environment to learn how the market works. Even if you find out that binary options are not the right investment tool for you or plan eventually to trade stocks anyway, you can immensely profit from starting your trading career with a binary options demo account. There is no better boot camp to learn how the market works. In a few weeks, you can learn more about yourself, the market, and your talents than with other types of investments in a few years.
What Else Do I Have To Know?
One of the most important aspects of binary options that new traders overlook is that binary options are solely between you and your broker. This means, there is no market on which binary options are traded and to which your broker helps you to get access. Your broker directly creates its binary options and offers them to you.
- With stocks, for example, there is a central stock market. A stock broker helps you access this market. When you buy a stock, the price you pay depends on the price that the market dictates. Different brokers might vary slightly in the fees they apply, but you will pay the same price for a stock, regardless of which broker you use.
- There is no central binary options market. Each binary options broker creates its own binary options, payouts, and expiries. This is why different brokers will offer different expiries, payouts, and binary options types. Even when you make the exact same prediction with three different brokers, you are likely to get three different payouts.
While some brokers do offer openly traded binary markets – the broker has created these – it is not a public market.
This difference is why finding the right broker is much more important with binary options than with stocks. Stock traders who know what they are doing can make money with any broker, but for binary options traders, picking the right broker might be the difference between turning a profit and losing money.
To help you find the right broker, we have reviewed all binary options brokers and created a top list. Take a look at the list and pick the broker that suits your style. Remember that demo accounts give you the chance to try them all out and decide what works for you personally.
How To Get Started With Binary Options
To get started with binary options, here’s what you have to do
- Find the right broker. To start your career, you need a broker. Brokers also provide you with the demo account that you need to learn trading binary options risk-free, so finding a broker you like is your first step. Take a look at our top list, compare and review the broker you like best.
- Open a demo account. Once you have found the right broker, open a demo account. Some brokers offer demo accounts as stand-alone accounts, which means that you can sign up directly for the demo. Other brokers offer their demos as features of their regular accounts, which means that you have to register for a regular account and then use the demo. Both options work, but those that offer a demo account with ‘no strings’ clearly have more confidence in their platform.
- Find the right strategy. To make money with binary options, you need a solid strategy. Random investing is the number one reason why people lose money. Your strategy defines when you invest, how much you invest, and how you monitor your success.
- Perfect your strategy with your demo account. Try your strategy with your demo and trade as long as you need until you can guarantee that you will make a profit by the end of the month. As long as you keep losing money, try new strategies and different improvements until you find what works for you.
- Switch to real money trading. Once you know that your strategy works, it is time to trade for real. Switch to real-money trading, and you should be able to get good results from the start.
Binary options offer a trading style that combines high potential with simplicity and a quick learning curve. For newcomers, binary options are a great way of learning the basic ways in which the market operates, and if you use a demo account, you can get your crash course completely risk-free. To become a successful binary options trader, the most important step you can take right now is choosing the right broker for your career. Take a look at our top list, and you will get a great start.
Although binary options have existed for some time, they were not commonly known until a few years ago, and were often part of a more complex ‘exotic’ trade. However, after the global crash of 2008, many investors wanted a simpler way to trade. In 2008, the American Stock Exchange opened the way for exchange-traded European options (trades which either return cash or nothing at a set expiry date). This new trading format paved the way for a whole wave of binary options online trading sites.
Top UK Binary Options Brokers
If you are interested in trading binary options, then there are few things to consider before picking one of the binary options brokers. When trading with a new broker, we highly recommend that you make sure it’s regulated by a financial authority, such as the FCA here in the UK, or the European CySec in Cyprus. We have created a top list of the most trusted binary options brokers, alongside in-depth reviews of each brand and its strengths and weaknesses.
When reviewing a binary options broker, the team has looked at the following items: software, customer support, deposit methods, available assets, withdrawal time, licensing and security. Based on the reviews our editor team has created top list. Furthermore, for more information about each brand, kindly have a look at the in-depth reviews for each brand.
5 Tips for Successful Binary Trading
Binary options trading has become one of the most popular methods of trading financial assets for profit. Its easy trading style and accessibility to investors without large amounts of capital have allowed it to very quickly come to the forefront of the online investing world. However, even though it is a very simple method of executing trades, there is still a great deal of analysis and strategy involved in trading for the highest possible return rate. Here are 5 easy to implement tips and strategies for trading binary options successfully.
Specialize in a Handful of Assets
This piece of advice is most relevant in the beginning of a binary options trader’s career. Some binary brokers offer dozens or even hundreds of assets that may be traded as binary options. While this diversity plays well to more experienced traders, it is best for those who are just starting out to focus on just 4 or 5 assets. This is because every asset will have its own set of trends and factors that affect its value. Learning a few assets inside and out will allow traders to be more profitable than trying to trade every asset immediately. Of course, it is beneficial to branch out once you have become good at trading your selected assets, but it is best to start off with just a few.
Keep up to Date on Market News
While binary options do not involve the actual ownership of an asset, they are affected by the real world marketplace just as much as traditional assets. For this reason, it is important that binary options traders keep abreast of current financial news and events. For example, an astute trader seeing a potential for the euro to weaken against the dollar when the Federal Reserve raises interest rates can use that information to trade the EUR/USD currency pair profitably in that time frame. Knowing what the market is doing and why is critical to success in any trading medium.
Keep Your Trades Low
This may seem counterintuitive when it comes to making larger profits, but keeping your trade amounts low will help you to manage your risk level, resulting in less loss on options that finish out of the money. No trader, no matter how experienced, can trade to finish in the money 100% of the time. With that said, it is important to make sure that no one loss can seriously impact the amount of capital available in your trading account. A good rule of thumb is never to risk more than 10% of your capital investment on any single trade.
Learn to Trade Turbo Binary Options
Many binary brokers now offer what are commonly referred to as turbo binary options. These are options with expiry times between 60 seconds and five minutes. Analysing price trends in such a small time window is, of course, much more difficult than finding long term trends. However, traders who are willing to learn the analytical techniques that apply to turbo options stand to make substantially greater profits by doing so. The reason is that trading in short expiry windows allows a much greater volume of trades to be placed in a given time frame. For example, if a trader is executing turbo trades times at five minutes, he or she can execute six trades for every one that would be executed using a 30 minute expiry time. Traders who successfully trade turbo options can therefore greatly increase their returns in a given time frame.
Take Advantage of the Resources Your Broker Offers
Nearly all binary brokers provide a good deal of free market analysis, learning resources and even trading recommendations to their customers. Many binary traders are missing out on these valuable resources by overlooking them, instead using the broker’s website only to execute trades. This is a mistake, as binary brokers employ highly experienced traders to do their educational analysis. In additional to weekly or daily analysis and tips, many brokers offer periodic webinars or other learning events designed to help traders learn and become more successful. Take advantage of free education whenever it is available.
How to Find the Best Binary Broker
Identifying the best UK binary options broker will depend entirely on the needs of the specific investor. When selecting a regulated broker, an investor needs to consider a whole range of things, including the asset class, or market, they want to invest in and the size of their average investment, to name but two.
We have collated all the useful facts that will help an individual to select which trading broker they would like to open an account with. We have also checked our most frequently asked questions, and know that the following features are important when traders are deciding on a broker;
- What is the Minimum Deposit?
- What is the Minimum trade?
- Does the broker offer a Demo Account?
- Does the broker offer a Signals service?
- Does the broker provide trading via a Mobile app?
- Is there a Bonus available for new trader accounts? (Terms and conditions are equally important)
- Who has the best binary Trading Platform?
- Which broker has the best Asset lists and markets?
- Which broker has the largest range of Expiry times?
- Who are the Regulated binary options brokers?
- What types of options are available? (Touch, Ladder, Range, Pairs etc)
- Software Integration (MetaTrader 4 or 5 for example)
- Which Deposit options are available?
- How quick are Withdrawals, and which method can be used?
We try and answer as many of these questions as possible in our broker summary table, but we cover them in much more depth within each review.
For example, regulation is a key issue. Our comparison table will show if a broker is regulated, and our broker reviews will be specific about which regulator is responsible. In the UK, the Financial Conduct Authority (FCA) regulate a number of brands already – not because they trade binary options – but because they also allow clients to trade Contracts for Difference. Some binary options brokers have chosen to to register with the FCA – but this is not the same as being regulated by them. It is a key point if UK traders in particular want the piece of mind that FCA regulation gives.
Binary Trading Demo Accounts
Two factors that are designed to entice new account holders, are sign up bonuses and demo accounts. Both are extremely effective at attracting new customers and it is easy to see why.
Bonuses are generally paid as a deposit match, or sometimes once a set number of trades have been settled, for a set amount. Either way, there are generally restrictions, or terms and conditions that need to be met before the funds are available to be withdrawn.
It is worth spending some time understanding those terms before signing up. If the terms are not likely to be met (for example a volume of trades within the first few weeks) then the bonus loses any appeal and that broker may no longer be the best choice. There are also some terms which restrict even the the withdrawal of the initial deposit – not just bonus funds. These are thankfully rare – but highlight the need for checking.
Binary options demo accounts are a great way to get introduced to binary trading without needing to risk any funds. Investors looking longer term will ensure that the broker is the right one for them once they are trading for real money. Not simply the first to offer a demo account with a huge starting balance.
For those investors looking to get involved with binary options for the first time, minimum deposit requirements may be of interest. Some looking purely to experiment, and only risk small amounts, will find a broker with a smaller minimum deposit restriction more appropriate. Likewise, all brokers will have a minimum trade requirement too.
These can vary significantly. There will be some investors for whom neither of these are a consideration and if so, these factors do not need to form part of their selection criteria. Minimum trade figures range from £1 to £25 – which is a very sizeable difference if a trader plans to trade frequently. Our comparison tables highlight the trade sizes for every broker, so these can be compared easily.
Both minimum trade, and minimum deposit figures are shown in the comparison list. We also list whether a firm accept either Paypal or Skrill for deposits or withdrawals.
When first learning about trading binary options, it is easy to be confused by the terminology that is sometimes employed. Like most specific areas of finance, there are terms found in regards to binary options that are not commonly used anywhere else. To help those who are trying to learn their way around the world of binary options trading, here is a list of some of the more common pieces of binary jargon and what they mean.
Binary Option: A type of trade that involves predicting whether the value of a given asset will go up or down. This type of trade, which has only two possible outcomes, is the basis of binary trading.
Call Option: A call option is essentially a prediction that the value of a particular asset will go up. When a trader believes that the value of an asset will increase, a call option is placed that will profit the trader if and only if the value of the asset does, in fact, increase.
Put Option: A put option is the exact opposite of a call option. It is the choice that is selected in binary options trading if the trader believes that the value of the asset in question is likely to decrease rather than increase.
Expiry Time: The expiry time of a binary option trade is the amount of time that will pass before the trade is completed and profit or loss is determined. Different brokers will have different options available for expiry times, but as a general rule they will range between five minutes and 24 hours. The expiry time is selected by the trader at the time that a trade is placed.
Open Position: Any binary options trade that has not yet reached its expiry time. An open position is a trade that is active.
Broker: A binary options broker is any company or website that provides a platform on which binary options trades may be executed. Different brokers will offer different platforms and options for traders.
In the Money: A binary options trade that finishes in the money is one that, at the time of expiry, has moved according to the trader’s prediction. When an option finishes in the money, a trader makes a return on his or her investment.
Out of the Money: The opposite of a trade that finishes in the money. A trade which finishes out of the money is one that moves against the prediction made by the trader by the time of expiry. When a trade finishes out of the money, the trader will lose part or all of the money that he or she has invested.
Turbo Binary Options: Turbo binary options, sometimes referred to simply as turbo options, are binary options with extremely short expiry times. These options will have an expiry time ranging from 60 seconds to five minutes. They are preferred by some binary traders as a way to execute more trades in a given space of time, but are also more difficult to predict according to the analysis of larger trends.
Underlying Asset: An underlying asset is any individual asset that may be traded as a binary option. Underlying assets fall under different asset categories such as commodities, stocks, indices and Forex. For example, the AUD/JPY currency pair is an underlying asset of the Forex market.
Social Trading: Social trading is a type of trading that relies on the wisdom of the crowd to make trading decisions. It is not unique to binary options, but is widely used by some binary options brokers. Social trading also commonly offers traders the option of automatically copying the trades of already successful individual traders.
Hedging: A trading strategy that involves playing off two opposing positions on a binary trade that are calculated to ensure a profit in the case of either outcome. This strategy is used to reduce risk and to turn small profits on trades that otherwise would result in a complete loss.
One Touch Option: Like turbo options, one touch options are a specialized type of binary options. One touch options require the value of an asset to reach a selected point at least once before the hour of expiry. So long as this occurs, the trade finishes in the money. Much like turbo options, not all binary brokers offer one touch options to their traders.
These are the major and common terms that are used in binary options trading. There are, of course,others which are used less frequently, but this list will help those new to the binary options world get a grasp of what is being said and taught to them. If you are looking for a binary options brokers, then we advice you take look at our list of regulated binary options brokers.