In recent years, binary options have become a very popular investment method because they are easy to understand. But a beginner should know how to trade these options and how they work.
Binary options are financial instruments that give you either a profit or a loss depending on how the price of an underlying asset moves. These options are called “binary” because you either win or lose. For instance, say you select gold as the asset and trade in gold binary options. These options necessitate an initial investment. One option is to bet that the gold price will touch a specific price in the market. If the price goes to that point, you get a fixed return in addition to your initial investment. Otherwise, you lose your money. You can go through the trading glossary for a complete overview of trading options.
Let us now go over some basic and important things you must know before entering binary options trading.
Research and Select a Market
Before you buy any option, you must first decide on an asset for the option, often called the underlying asset. Since you are betting on the asset’s price movements, it is necessary to understand the asset’s market. Only then can you better predict whether the price will go up or down.
This involves reading newspapers, following trends in that asset, and following news events in the country. All these factors affect price movements.
Understand the Specifications of Options
Although binary options are pretty simple, there are some essential points you must know about them. First, the expiry date is the date the option will expire, and this is the date you bet the price movement will touch the strike price. Expiry timelines can be within the day, daily, weekly, or monthly.
Next is the strike price. This is the price you bet the asset will hit, go below, or go above. Choose a strike price based on your market research. For instance, say you predict that gold will touch $1650 when its current price is $1640. 1650 is the strike price, and if it is reached, your option is successful.
Have a Strategy in Mind
Don’t just trade to get maximum profit. Continuously develop a proper strategy. For this, you must plan a budget for the investment and determine how much return is acceptable to you and how much risk you are willing to take. Start with simple strategies instead of going straight for the complicated ones used by professionals. You must know the pros and cons of each strategy before following it. For instance, Straddle is a common strategy used in options.
Choose a Good Broker
You must first open a trading account with a broker to begin trading options. Brokers are like middlemen in options trading. They just trade on your behalf and maintain your account. All the control and strategy are yours.
In the US, brokers are highly regulated, so most are fine. But be very careful of them outside the US, as there’s less regulation. Do not fall prey to the marketing tactics of any broker ensuring high returns or bonuses. Research well and choose an appropriate broker.
Control Your Emotions
Trading can be an emotionally draining experience. You will likely become greedy and enter a hasty trade for quick profits. In fact, most investors who suffer a loss do so because emotions influence their decisions.
No matter how volatile the market gets, you must always tread carefully and execute trades with proper research. Don’t fall prey to any buy or sell suggestions on the internet. Trust your research.
Understand What You’re Getting Into
Binary options have both a high risk and a high return. In fact, returns can reach up to 80%. However, these options are different from most financial derivatives. You’re not entitled to own any assets, even at expiry. You’re simply betting on the price movement of the underlying asset.
Follow Events and News
No matter what asset you’re trading or what type of financial instrument you use, you need to be aware of important news and events in the country. Interest rate changes, tax law changes, and political stability are some important macroeconomic factors.
Then, each asset has several important events that affect its price. For example, the Fed’s control over the money supply, the state of the global economy, and many other things affect USD rates worldwide. Trading in financial instruments is more than just doing the math. It also means making the right trade based on what is happening in the economy.
Start First with a Demo Account
Almost all brokers allow a demo account. A demo account allows you to practice real-time trading using virtual money. You get to practice and master trading with all the real conditions without using actual money.
No matter how good your research is, it is always best to understand the market through a demo account. Once you are comfortable with a strategy and can predict how prices will move, you can open an account with a broker and start trading. But since that involves real money, it will still be different from the demo account, as now you’re emotionally charged.
So now you have a basic understanding of binary options. They are simply a bet on an asset’s price movement. They are both risky and simple. This guide is not financial advice; rather, it just educates you on a few things about binary options. We recommend intensive research and education before starting any trading.
Research is necessary first to select the appropriate underlying asset. Having a proper strategy, controlling your emotions, and following the news are some of the important things you need to consider. Lastly, starting with a demo account is a much better practice before trading.