Brokersignals.com May Not Even Know How To Trade Binary

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A Guide to Trading Binary Options in the U.S.

Binary options are financial options that come with one of two payoff options: a fixed amount or nothing at all. That’s why they’re called binary options—because there is no other settlement possible. The premise behind a binary option is a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time?

Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

Binary options traded outside the U.S. are typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative—but only if the trader fully understands the two potential outcomes of these exotic options.

Now that you know some of the basics, read on to find out more about binary options, how they operate, and how you can trade them in the United States.

U.S. Binary Options Explained

Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.

Let’s take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?

If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.

The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you’ll sell at $42.50.

Let’s assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money. But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss, compared to letting it expire out of the money.

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A Zero-Sum Game

Eventually, every option settles at $100 or $0—$100 if the binary option proposition is true and $0 if it turns out to be false. Thus, each binary option has a total value potential of $100, and it is a zero-sum game—what you make, someone else loses, and what you lose, someone else makes.

Each trader must put up the capital for their side of the trade. In the examples above, you purchased an option at $44.50, and someone sold you that option. Your maximum risk is $44.50 if the option settles at $0, and so the trade costs you $44.50. The person who sold to you has a maximum risk of $55.50 if the option settles at $100—$100 – $44.50 = $55.50.

A trader may purchase multiple contracts if desired. Here’s another example:

  • NASDAQ US Tech 100 index > $3,784 (11 a.m.).

The current bid and offer are $74.00 and $80.00, respectively. If you think the index will be above $3,784 at 11 a.m., you buy the binary option at $80, or place a bid at a lower price and hope someone sells to you at that price. If you think the index will be below $3,784 at that time, you sell at $74.00, or place an offer above that price and hope someone buys it from you.

You decide to sell at $74.00, believing the index is going to fall below $3,784 (called the strike price) by 11 a.m. And if you really like the trade, you can sell (or buy) multiple contracts.

Figure 1 shows a trade to sell five contracts (size) at $74.00. The Nadex platform automatically calculates your maximum loss and gain when you create an order, called a ticket.

Nadex Trade Ticket with Max Profit and Max Loss (Figure 1)

How to Trade Binary Options

Updated: September 13, 2020 | References

This article was co-authored by our trained team of editors and researchers who validated it for accuracy and comprehensiveness. Together, they cited information from 26 references.

wikiHow’s Content Management Team carefully monitors the work from our editorial staff to ensure that each article meets our high quality standards. Learn more.

Binary options trading has become increasingly popular over the last decade. Day traders in particular access these markets with ease from their computers. Another draw is that entrance requires relatively little capital. This article will delve into the basic rules of the game, how market exchanges work, and several ways to strategize for the greatest profit potential. Along the way, you’ll also learn the jargon used in binary options trading that you need to understand to be successful.

How to Trade Binary Options Around News Events

A short guide for trading binary options before, during and after economic announcements, IPO’s and company news as we understand

Economic and business events are where the action takes place, whether in forex or binary options. Volumes, emotions and tempers all rise together before rate decisions or a new company product is being unveiled. The main reason for this is that everyone gets a point of reference about the financial instrument involved. This causes a surge in confidence and in decision-making. The so-called “risk-on.”

With binary options there are several points to take into consideration before trading an event. First is the magnitude of the event – will it move the price enough to give a clear indication for the duration of your preferred option and will it give enough information about its direction? Second is the duration of the option that should be chosen – is this event going to have a long-lasting effect or will it cause short-term volatility before it simmers down?

Choosing between high/low and touch options is the next step. The former are the most popular in such cases, but this would definitely be the best time to use the touch (or one-touch depending on their availability with your preferred broker) options. Bare in mind that the levels for touch options usually vary for the times when there is an event.

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The difference a piece of important news makes to the price is that it gives it momentum. The ripples are stronger right after the splash. With the binary options for five, 15, 30 and 60 minutes (not to mention the ones that last less than a minute) you can capture these waves right after they happen. This is among the strong points for such options, as well as the fact that events can give a strong indication of future movement which can also be taken advantage of with longer binary options.

There are also cons for trading these options. Even after a clear direction is established, there might be occasional deviations from the straightforward movement and some trades might fall within them with a duration that is too short. So selecting the entry point and length of the options is crucial, as well as good risk-reward ratio calculations.

Of course you can choose to go with a more proactive approach – trying to guess in advance if the event or announcement go your way and choose long-term options – daily, weekly and monthly – to be in line with research that you have made. There might be indications that a rate hike is imminent, or some leaked data shows a big change in the demand for oil, so you can trade on them if you believe the data or analyses. Only here, unlike forex, your possible gains and losses are predetermined.

Events offer rich possibilities to trade in binaries and the more available instruments there are, the more opportunities there will be. It is the simplest way of trading and can be done by simply looking at the price changing after the news breaks, but with some technical analyses it can have a higher success rate.

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  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
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    Free Demo Account!
    Free Trading Education!

  • Binomo
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    Good choice for experienced traders!

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