Like any other kind of business, trading comes with inherent risk. You stand to lose a portion or all of your capital if approached carelessly. So why do thousands of people from all across the globe flock to trading in spite of this ever-present risk?
Here’s some of the reasons why you’d want to trade binary options.
Simple and Easy to Understand
Unlike stocks where you have to plan entries, exits, and the in-betweens, binary options come as a straightforward means to either grow or dent your capital.
Since it is binary, you only have two possible choices – Call or Put.
If you buy a Call option, you expect the underlying asset to increase in value.
If you anticipate a decrease in the underlying asset’s value, you buy a Put option.
That’s the fundamental principle of trading binary options. The rest of its components, such as strike price and expiry date, are fairly simple to understand as well.
Capped Risk and Return
This reason may work as a double edged sword for inexperienced traders who fail to keep their winning percentage higher than their losing percentage. Stocks, commodities, currencies, and other financial instruments can lose or make limitless amounts of capital, considering that the account is well-funded and has not yet been margin called. Both the loss and profit potential are predefined before the transaction even happens hence a trader is able to plan ahead and adjust accordingly.
Broader Range of Tradable Assets
Trading binary options doesn’t actually involve any product, tangible or otherwise. The artificial market is derived from other assets like indices and currencies. Trading through a well-designed platform like TorOption opens your portfolio to a variety of assets, ranging from precious metals to European indices.
Of course, it’s best to limit capital exposure by trading smaller position sizes across multiple instruments or by sticking to one asset until you actually gain the experience and added capital necessary to expand.
Other Advantages to Binary Trading
While binary options trading is pitched by brokers as a no-fees or no-commissions transaction, it’s not entirely free to take roundtrip trades. Brokers have to get paid for their services and most do this by leaving an advantageous margin between the payout and the out-of-cash percentage. The payouts average at 75 percent while most out-of-cash rewards range between 0 to 15 percent. Relative to fees charged for roundtrip trades on stocks or currencies, binary options is actually a cheaper transaction.
Tons Of Educational Material
You have an array of resources to self-study binary options trading. While this can be said with almost any other financial instrument, binary options is the only market where a trader only needs to decide between two choices, which makes the educational materials more powerful in effect.
Examples of a Binary Option Trade
The easiest way to understand binary options trading is with an example.
Basically, every trade is based on a “Yes” or “No” proposition. Will the price of oil be above $50 at 2:00 PM today?
If your answer is Yes, then you buy a Call option. If the answer is No, you buy a Put option.
The cost of a binary option always ranges between $0 and $100. Alongside the price is its Bid and Asking prices.If you bought a Put option for oil, and it indeed expired below the $50 price level, your trade is deemed “in the money” and you earn $100 minus the initial cost of the option.
Where to Trade Binary
Trading binary can be done on the Nadex exchange, which is the first legitimate American-based exchange that is geared towards binary options transactions. Having a regulatory body ensures fair trading and prevents fraudulent acts committed either by your broker or influential market players. A platform like TorOption can make trading easier and more profitable, with offerings including demo accounts, real-time price charts, and technical indicators that not only help you make sound investment decisions but help you become a professional trader as well.
What Not To Do
Trading is a business concerning risk. Avoid putting in money that you cannot afford to lose, such as college funds or mortgage payments. Moreover, being undercapitalized forces you to take low-quality trades for the sake of possibly making money. At the very least, you should have $1,000 for your first trading account. This will give enough room to trade mini lots without risking a margin call.
The Secret to Success
Contrary to most traders’ beliefs, trading isn’t about being the smartest guy or gal in the market. It’s about managing risk and protecting your capital at all times. Capital preservation allows you to operate longer without having to replenish funds every few months or so.
Proper risk management coupled with the right trading system will create the most conducive scenario for trading success.