What is Binary Trading?
Binary Trading is a type of trading which relies on a “zero” or “sum” game and “All” or “Nothing” (“Win” or “Lose” / 1 or 0) principal. The payoff from the trading is either “Zero” or “All”. Binary means 0 or 1, hence the term binary trading. The financial instrument is essentially an Option where the trader has to decide whether underlying instrument will rise above the current price (fixed price) or fall below the current price (fixed price) level, at the end of specified amount of time. This fixed price is called as the Strike Price. The specified amount of time is called the Expiry.
If the trader believes that price will go beyond Strike Price at the time of expiry and they enter a binary trade. Trader will win their bet if price is higher that Strike at Expiry and will get their payoff in full. However if the price remains below Strike price at the time of expiry, trader will not get any payoff and lose all the invested money. Trader can also bet the other way round, that the price of underlying instrument will remain below the Strike Price or not.
Binary Options are a subset of normal Options. Normal Options offer an option but no obligation to buy or sell underlying instrument at the time of maturity and the payoff depends on the market price of instrument and the Premium paid at the time of trade entry. This is unlike the case of Binary Options where full or nothing gains principal holds good. Binary Options are classified as exotic derivatives despite remaining extremely easy to understand and make money. Binary Trading is betting whether the market price of the instrument will be above or below the Strike Price and gaining or losing if the bet is met or not at the time of Expiry. If the bet is won then Binary Option is said to be IN the money. If the bet is lost, then the Binary Option is said to be OUT of the money. Expiry time of a binary option can be anywhere between 30 seconds to 1 year. Trader can trade and know their results in a short span of time (say 1 minute). Given tremendous flexibility of this financial instrument, it is gaining huge popularity in recent times in comparison to other forms of trading including Options Trading.
More often or not, BINARY OPTIONS TRADING and BINARY TRADING are used synonymously. In comparison to normal options trading, binary trading is a recent phenomenon. Binary Trading in the US is more regulated than that in other regions.
Can I make money from Binary Trading
Let’s see how to trade binary options, that explains whether it is possible to make money from binary trading or not.
Example 1: Market Price of Apple is $168. Will Apple trade above $168 at 2:00pm today? Option for Apple for 2:00 pm is trading at $40. The Bid and Offer price for the binary option is at $38 and $42 respectively. You believe that Apple will trade above $168 and decide to buy the binary option at $42. If at expiry that is at 2:00pm, Apple is more than $169 (any number > $168) then you make $100(Premium paid to the broker). Thus your profit is $100 – $42 = $58. If however, your belief goes wrong and Apple is less than $168 (say $165) at expiry then you lose $42 invested! Thus you gain $58 or lose all your money i.e. $42 from the trade. A profit of $58 on initial investment of $42 is thus achieved. In this case the profit from the trade is more than 100%.
There is always a gain between $0 and $100 or a loss between $0 and $100 on a trade of binary option. Thus your gains or losses are capped.
In other words, (the following is mostly true with OTC – Over The Counter trading of Binay Options via brokerages and not traditional exchange trade Binary Options as is mostly the case in the US).
If the apple stock is at $165, in 5 minutes you need to predict if it will go up or down. Say you predicted it will go up and after 5 minutes if it becomes $165.01 (just 1 cent more) then your original bet, say you invested $100 (Premium), you will make a 70-90% return (depending on platform payout). So you just made $90. But imagine of it became $164.99 (just 1 cent less) now you will lose your entire initial investment. You will lose your $100. Trader needs to make majority of predictions right to make money in binary. Unlike FOREX, either you will make a 70-90% return or 0% return (win or lose, yes or no, 1 or 0)
Example 2: Let’s take another example with Gold. Current market price of Gold is $1277. Will it trade less than $1277 in 1 minute time? Binary Option is trading with bid and offer price at $54 and $58 respectively. You believe that Gold will fall soon and reach $1270 in next few minutes, so you will sell Binary Option at $54 (find another trader who will buy it this price from you). If Gold falls indeed, you gain $100 (net profit $100-$54 = $46) else you lose complete $54. The other trader on the contrary will lose or gain if his/her bet goes right or wrong respectively. This also illustrates how binary trading is a “Zero – Sum” Game. In total trading partners either gains all ($100) and the other loses all or vice versa.
A profit of $46 on initial investment of $54 is possible if the bet is won. Thus nearly 85% is reached in this case.
We have thus seen through examples how enormous profits are feasible with binary trading. No wonder it is gaining so much popularity. However, a note of caution: if the bets go wrong, all your invested money will be lost.
Is Binary Trading a Scam?
Conceptually Binary Trading is a type of exotic derivative, with a simple Yes – No decision requirement from the trader. Because of its simplicity, its appeal is increasing more recently amongst the trading community. In addition the time horizon for consideration is as low as 30 seconds giving rapid trading opportunities to traders, making it more addictive. Binary trading can lead to huge gains or also huge losses if traded rapidly in multiples (block trading) with increased adrenaline based decisions vs thoughtful educated decision making. Hence this can appear as a scam.
A number of brokers exist that offer binary trading options for different underlying assets (FOREX (major currency pairs), CFD (contract for difference), Commodities (like Gold, Silver, Oil), Indices (like FTSE, DAX, S&P etc) and even the more recent Cryptocurrencies like Bitcoins). But not all brokers are regulated by the regulatory bodies and can offer incorrect data to the trading community. These brokers should be strictly blacklisted while one decides to binary trade options. However, over the counter (OTC) are not all scams, and good brokers offer genuine trade data for binary trading. In the US and many other nations there are regulatory bodies that regulate binary trading.
Another question that rises is the payout paid by the broker to the trader for the winning trade, from where does broker arrange for the huge payouts on winning bets? This is usually from the Premium (say $100) that the trader pays while entering the trade initially. This can be a point of contention usually as some brokers have been blacklisted or else pointed as fraud by regulatory bodies. This leads to generalization of binary trading being a scam, which is not the case in reality with majority good brokers, whether in the US or more recent those outside the US.
How to choose the right broker?
Selection of the right broker is by far the most important step in the entire process a trader adheres to while trading binaries. Binary options are not traded on exchanges and are scarcely regulated. As a result it is vital that an individual invests with the correct broker right from Day 1 of trading. Naïve traders may fall for attractive deals/bonuses/incentives that are offered by some brokers to lure customers. A methodical approach to picking the right broker to trade binaries is important. Here is a step-wise guide to follow while opening an account with the broker:
- Prepare a list of all brokers and try and compare characteristics of each
- Understand which brokers are regulated and the associated regulatory body
- Understand the minimum deposit requirement with each broker and commission / transaction charges on each trade executed with the broker.
- Any incentives / joining bonuses offered in case you are looking for good deals
- Availability of demo accounts: you can define some initial strategies on the demo account before delving into trading with real money. This will specifically help beginners in understanding the trading market and the broker tools better.
- On final selection proceed to open live accounts and deposit funds to begin with trading.
The main criterion is to be able to differentiate real brokers from scam brokers and thus ensuring that you put your money in the right hands/at the right place.
Who regulates the brokers? What is the difference between a regulated and non-regulated broker?
Forex, CFD and Binary Option brokers are monitored, licensed and regulated by the regional financial services regulatory authorities. Some of the regulatory authorities that regulate brokers of that specific region include:
– CFTC in the United States,
– ASIC in Australia,
– FCA in United Kingdom,
– FSB in South Africa,
– AFM in Netherlands,
– CONSOB in Italy,
– BaFin Germany,
– Finanstilsynet Denmark,
– CNMV Spain,
– CNB in the European Union,
– CySEC Cyprus.
NADEX is the first exchange that allowed trading Binary Options in the US. CBOE (Chicago Board Options Exchange) also offers trading US binary options. Not all binary options are traded on exchanges. Binary Options trading in majority cases (non-US binary trading) is Over-The-Counter (OTC). Not all exchanges / brokers allow trading binary options in the US or other regions. Any broker soliciting traders to trade cross-region binary options are doing it generally illegally.
While a subset of brokers have approached their regional regulatory body and authorized themselves as legal and authorized binary trading brokers there are many fraud brokers in the market. The later should be identified and avoided in any case.
Best approach would be to first trade on a demo account on a regulated brokers trading platform (either mobile or on the desktop) for a period of time and then open a live account if all goes well. This time should be used to achieve expertise as well as identify any pitfalls with the brokerage. Brokerage costs (opening, minimum balance/deposit, transaction or else any other commission charges) should be studied thoroughly while analyzing and finalizing the right broker.
Are All Brokers a Scam?
As explained above not all brokers are a scam. Those that are regulated by the appropriate regulatory bodies are generally meant to be the right ones, while those that are not could be scam. There are FOREX scam brokers as there are CFD scam brokers and commodities scam brokers and so on. A scam broker operates illegally and is likely to provide inappropriate data, stale data or else false illusion to the underlying asset price that might be lucrative at one instance while lead to heavy loss of money at other times. Lack of control means errand trading that leads to heavy losses in vast majority of instances or almost 100% cases of binary trading.
Scam brokers might also conduct fraud in following ways:
– Hold credit / debit card details and charge larger sums from it directly. It is always better to use credit cards to fund a brokerage account so as to have control on the money flow.
– Offer false signals leading to more losses on execution, in reality
– Restrict withdrawal of funds from the brokerage account citing varied reasons like references to fine-prints in initial contract, or else receipt of bonus and so on.
Just to re-iterate, not all brokers are scam and proper comparison and thorough study of a range of recommended brokers can result in good results overall.
Why Investors Trade Binary Options?
Following are some reasons why investors trade binary options (this section holds good for normal Options as an investment vehicle rather than purely a trading vehicle):
Available capital: Binary option of a stock / FOREX / commodity etc can be purchased at a fraction of its price. (say for e.g. $10 for two options, vs. $250 for the same stock). If available capital is limited obviously the derivative form gets priority allowing ownership of trade.
Portfolio: With same amount of available capital an investor can consider purchasing Calls / Puts of multiple companies rather than putting all funds in single company stocks. Thus Options can be used well to distribute allocation and thus hedge risk.
Risk: Options act as a strong hedge in usual scenarios. However, they can also get riskier in comparison to stocks, based on how they are used.
Strategy: For experienced traders, Options act as a tool to define smart strategies of investment and portfolio construction. This is clearly more advanced and should be dealt with only after years of trading experience and positive returns. Stop Loss and Take Profit margins act as intermediate strategies for investing in stocks and limiting loss.
Returns: The percentage return is sometimes more for the same (sum total) stocks owned as Options vs that of Stocks.
Learn to trade at BinaryScamCheck.com
Following are the steps to trade Binary Options using a reliable broker and its reliable trading platform:
- Select a broker for binary trading
- Open an account (first demo and then live) with the brokerage
- Once the account is setup, the brokerage will allow trading on its trading platform
- Decide on the type of binary option:
- Touch/No Touch
- Target Bet
- Ladder Bet
- Tunnel Bet
- Decide various parameters for the selected specific trade type like Strike Price, Expiry Time etc
- Brokerage will provide Bid and Offer price
- Take a call whether to Buy or the Sell the trade and accordingly execute the trade in the market
- At Expiry the Option is either In the Market (so you make money) or else Out of the market (so you lose money)
- Final settlement will be accordingly made by the brokerage after subtracting any transaction/commission costs
- Trade is thus executed successfully.
Trading on mobile apps
Some or all brokerages have trading mobile apps analogous to their corresponding desktop version. Trading mobile app might not be as full proof in terms of functionalities as are available on the more elaborate desktop version. All the core/basic/required functionalities are provided on the mobile version to allow traders to enter a trade and execute. Thus a trader never loses touch with the trade even when he/she is away from their desktop. Trader can also place trades instantly based on news or else any fundamental event via mobile app in case the desktop is unreachable. With advances in technology humans are now adept with trading facilities round the clock via their mobile devices and that is exactly the advantage with mobile trading apps as well. These apps are made available on IOS as well as Android based mobile technology.
Advantages of Binary Trading
Variety / Flexibility: Binary trading is available for a variety of underlying asset class/instruments. For instance, traders can trade binary options on stocks, commodities, FOREX pairs thus providing a range of options and range of market entry points. Brokers create these opportunities for different expiry date/times giving a further dimension to binary trading. This binary trading acts as a ‘one-stop-shop’ for all asset classes.
Affordability: The amount required to trade binary options is nominal in comparison to the actual market price of the underlying instrument, making binary trading affordable. Thus in our examples above, binary option can be purchased or sold for <$50 amount even if Apple is trading at $170. Also Gold binary can be traded at $58 even if the price of the commodity is $1300 and so on.
Better control /risk management: Both upside and downside payoffs at the time of Expiry are known at the onset for binary trades. Once the expiry is reached the trade closes completely with a binary result so all gain or all loss. Thus this form of trading is expected to have better control over trading rather than rampant losses or gains with unlimited downside or upside at the time of expiry in normal options, foreign exchange, normal stock, commodities or trading of other asset classes. Risk management is considered to be simpler in binary trading with known payoffs at the onset.
Simplicity: As explained above binary trades are very simple to understand, make decision and get into with known outcome (0 or 1) at the time of Expiry. Although an exotic derivative this simplicity has attracted many to this form of trading in comparison to complicated derivatives or normal direct asset class trading. Also, there are many regulated brokers available in the market with state-of-art trading platforms (both desktop and mobile) that further facilitate ease in the binary trading, round the clock.
Disadvantages of Binary Trading
Restricted payoff / Limited payoff: Given the binary or zero sum game nature of this type of trading the upside is limited at the time of expiry. This in our examples the gains are nearly $50 per trade, whereas if it were a normal trade / option the payoff at expiry is unlimited because the trade can be in the money for the time we decide it to be and exit. Appropriate stop losses and take profits can be put in place to restrict any rampant / errand behavior of the trade and make unmanageable losses, in case of normal options or direct asset class trading.
Less regulation: Binary trading is relatively newer form of trading attracting traders for its simplicity in a very short period of time. Each instance of it is not regulated by the regulatory authorities. Numerous brokers exist but not all are right and there is a likelihood of fraud / scam trading in such case. Many naïve traders have lost and are likely to lose money for lesser regulation in binary trading. Individuals need to be extra careful while locking their money with the brokers.
Lack of sophisticated tools: Not many sophisticated tools / trading platforms are available to trade binary options due to its newness and a sense of fraud perception attached to the related market. Lack of technical charts to analyze trades better as well as support of incorporation of news / fundamental analysis into the trading decision within trading platform is something too much to expect for binary trading. The scenario might change once institutionalized and more budget available to allow this form of trading by wider audience (institutional along with the retail players).
Using Binary Option Robots
If you are just starting out with binary options trading, the best way to start making money is using binary options robot. Those new traders who haven’t got any monetary luck with binary options yet can start gaining profits with binary options signal or robot. Binary option robot is usually available for free. The robot provides you with 70-80% accurate predictions about the prices. Given below are 3 crucial steps to use a binary options robot to make money:
- Create an account to use binary options robot.
- Choose the trader and make deposit
- Use the robot for auto trading.
To maintain profitability, you need to keep your winning percentage higher than the losing percentage. Once you are able to maintain profitability, you can increase the number of trades and size of trades.
Forex vs Binary Trading
Binary Trading is seen more commonly on Currency pairs hence they can be closely seen related. However there are many differences in between FOREX trading and Binary Trading.
While trading FOREX, trader selects the currency pair and based on the strategy decides stop loss and take profit targets on the technical chart. The price of the currency pair fluctuates and when the specified price reaches either take profit target, the trade gets automatically executed with profit in the kitty; or else if the price hits stop loss target, the trade exits automatically with the loss(acceptable as set in the strategy). On the contrary, trading binary options is relatively different wherein explained earlier, trader decides whether the price will go above or fall below the current price of underlying asset at a specific time and places a call or a put trade. At maturity trade exits automatically, with a gain or loss, if what trader had decided and placed trade on, actually happens with the asset price.
Profit with FOREX trading is decided by pre-decided by the trader as indicated by ‘Take Profit’ limit. Similarly the loss gets pre-decided by the trader as indicated by ‘Stop Loss’ limit. Profit with Binary trading is anywhere between 70-95% of the placed bet if the bet is won. Similarly the loss is 100% of the placed bet if the bet is lost and asset price moves in opposite direction of what is stipulated by the trader while placing the trade.
Spot FOREX is a vanilla trading type, while trading Binaries on FOREX are considered as exotic derivatives inspite of the simplicity involved. While many platforms for trading might be available for FOREX same is not the case with binaries. FOREX is one of the most popular forms of instruments traded by institutional as well as retail traders. Binaries are more popular with retail traders and relatively new in terms of popularity. While regulation for binaries is a questionable topic, FOREX are well under the regulatory limit and hence constituent of many portfolios, which is not the case with binary trading allocation within a portfolio. In other words, while FOREX can act as an investment vehicle, usage of binary options for asset allocation investment is lesser known. Later is more of a trading vehicle than an investment vehicle.