Binary Options Explained

Binary options are a new form of investment recently made available to the public. You can see a lot of advertisement about them on the Internet, but for most people it is still unclear what they really are.

In a nutshell a binary option is a product where you trade your view of the market. There are different variations of binary options, so let’s take the example of the most common format, the up/down option, also known as high/low. If you think the market will go up, buy the up option. If you think it will head south, buy the down option. If you are correct you will make a nice return, usually around 80%.

To better understand how this works, let’s discuss the benefits of trading binary options. There are many advantages to trade binaries versus more traditional financial instruments.

First of all such trade are more simple than buying or selling regular assets. As you do not need to carry a position for an undetermined length of time with all the ups and downs of a portfolio, such trades are easier to handle. Here a position is either right or wrong, hence the name binary. There are only two possibilities and there will be not swings in value, except if the position turns from wrong to right or vice versa.

As these trades which are short-term in nature have a known expiry time, you do not have to worry of carrying losses with the psychological uncertainty of not knowing the best time to exit the trade, and the worries that go with it. With binary options the exit strategy is all taken care of for you from the moment you enter the trade, so this is something that does not interfere with your well-being.

Another interesting benefit is that binary options brokers offer the ability to trade a large choice of asset classes that are not normally available under the same roof when you deal though a more traditional broker. Indeed you can trade major international stocks, but also stock indexes, currencies and commodities. Note that not all regular brokers will let you trade international stocks like Italian stocks or Japanese stocks. Plus if you want to trade stock indexes these are normally traded as futures with many constraints, or ETFs. Likewise currency pairs are not normally traded at the same location, and commodities are a completely different market. But not so with binary options as you can trade all of them from the same interface.

Finally the other benefits are that the potential returns can be very high, like 80% of even much more for very specific options with a low chance of occurrence. But to be honest there is no return without risk. These instruments offer good return with a large element of risk, so buyer beware. In order to be successful trading these novel financial tools, you must know the markets well. You need to follow news closely and be able to anticipate when the markets will be quiet or when a new trend is likely to develop. And you need to master the technical aspects, such as purchasing the options with the best ROI and understanding support, resistance, breakouts and other chartist techniques.

Safe rules for trading

Let’s be honest here. We see a lot of advertisement for binary options all over the Internet and they are certainly the most popular new trading product in recent history. But you need to be realistic for trading these instruments. Do not believe brokers telling you that it is easy to make a profit, that you can make thousands of dollars of extra income every month by trading binaries. Of course some traders do, but they are a minority, probably less than 4% of all binary options traders.

So the first rule for trading these novel trading tools is to have realistic expectations. It is certainly wrong to believe that they are the solution to your financial difficulties if you have any. Only transfer to a broker the money that you can afford to lose. Let’s say you have $25,000 in savings invested in the stock market, in long-term bonds and in CDs. Then taking $1000 or 4% of your savings to trade the binary options market is a reasonable idea. But if you are already heavily indebted with a mortgage and credit cards debt, then it is recommended to pass on this opportunity.

The second element is to select the best brokers. First you determine your bankroll ($1000 in our previous example), then you need to chose one or more binary brokers. With a $1000 bankroll you can pick two brokers so that you can try two platforms and measure the pros and cons of each while doing your first trades. So when you choose a broker it is best to first try their demo accounts so you do not have to send any money to test their software. Then look at the bonus they offer, how easy it is to withdraw money, how large is their asset list, are they licensed, etc. This is an important step to select the best dealer for your future trading.

The next important rule is to have a trading plan. For instance you need to establish money management rules such as the size of your trade. With the $1000 bankroll you may want to risk a few percent only at each trade, like 2% or $20. The percentage you choose relates to the so-called risk of ruin, which is a basic tenet of money management. What this means is that you need to invest such a small chunk of your bankroll so that you can survive if you are very unfortunate with a long series of losing trades.

Finally and this could be the hardest part of trading binaries or any financial assets for that matter, you need to learn how to control your emotions. In particular in your suffer losses it is incorrect yo change your trading plan. This reaction is a consequence of emotions, but you should only change the plan after some analytical thinking, not when you are all excited about getting many trades wrong.

Choosing The Right Forex Signal Service

If you dig for only a short period online you’ll quickly find that there are a lot of Forex signal service providers online, both regular forex brokers and binary options brokers.  Like many things, a large portion of them can be written off to hype and scams as they tend to promise the world and vast riches through the use of consistently profitable signals that they dole out to subscribers.

It’s important that when you’re considering the use of any Forex signal service that you do your research before hand, on your own, and don’t rely heavily on the internal hype being given out.  While there are plenty of reputable services on the net, there are just too many that have unsavory methods to rely on trust alone.  Research will always give you a solid answer.

A trader should remain skeptical about any Forex signal provider that guarantees profitability – that simply can’t be obtained due to the fluctuation of the Forex market on a minute by minute basis.  A good portion of signal providers aren’t as profitable as they set themselves up to be and performance figures being published on their sites are hypothetical – often inflated and artificial for sales purposed.

You can benefit more as a Forex trader by aligning yourself with systems that actually utilize the trading Forex signal themselves.  This way, the performance figures that are being presented to you are realistic and represent real entries and exits made by that specific signal provider.  When you know that the signals are actually being utilized you can feel safer and have more confidence that the money you invest in Forex trading won’t take on the first move.

There’s no better benefit as a new trader than learning from a professional system that supplies a quality Forex signal. Those professional signal companies that offer live trading rooms will not only put you in a better position but you’ll garner regular skills, information and experiences that will make you a better trader.

Another item to note is that you should look for a signal provider that offers a trial period for their services and/or a demo account.  It’s not an easy (or intelligent) decision to part with hundreds of dollars to utilize a signal service that you haven’t tested and have no idea how to use.  With free trials and demo accounts you can actually handle the Forex signal service tools and start off with some experience on how to use it if you opt to stay beyond the trial.

When you consider all of the above information carefully, you’ll be able to take the time to make an informed decision on which Forex signal service is going to best suit your skills and experience.  Likewise, you’ll know the ones to avoid as their hype will stand out like a sore thumb.  As a new trader, carefully protect the service you chose as much as you would carefully select your Forex investments.

Buying stocks on margin

In the financial sector, the term “margin” refers to a form of collateral that the holder of futures contracts, options, or other securities is responsible for depositing in order to cover the counteract party’s credit risk.  In most instances, that counter party is either a broker or financial advisor.  That risk is incurred by a securities holder that has:

  • borrowed cash from a another party in order to purchase options or other securities
  • got involved in a futures contract
  • sold options or securities short (i.e. a short sale or short selling)

Additionally, that collateral can take the form of either cash or other securities.  This is usually deposited into what is called a “margin account” that you establish when going through a brokerage in order to purchase stocks.  The terminology “margin” used to be referred to as a “performance bond.”

WHAT IS MARGIN BUYING?

Margin buying refers to the practice of purchasing securities with the funds that were loaned to you by your broker/ brokerage account while putting up collateral by using another form of security.  This method does have the tendency to magnify any losses or profits that are realized on these types of securities.  The net value is defined as and determined by the difference between the value of the loan and the particular security in question.

It is normally equal to the investment that was placed up front but is required to remain above a minimum margin amount established by that particular broker.  This insures that the broker is protected against a decrease in value of those securities to the extent that the person investing the money cannot cover the loan.  Additionally, there are 4 different forms of margin requirements as follows:

  • additional margin
  • current liquidating margin
  • premium margin
  • variation margin

THE ADVANTAGES OF PURCHASING ON MARGIN

The key advantage to making margin buys is the fact that you can leverage the amount you invest in larger, more substantial yields.  Just like businesses or corporations borrow money in order to in projects that have potentially profitable returns, the same holds true when you are borrowing and leveraging that cash that you are investing.  When you practice leveraging your investment, this amplifies every aspect when a stock increases in value.  If you are careful, and you invest wisely you can increase the size of your gain substantially.