A binary option, for those of you who don’t know, is basically a trading option in which the pay-off is either a fixed monetary sum or nothing at all. The ‘cash or nothing’ option will pay you a fixed amount of money if the option ends ‘in the money’. The ‘asset or nothing’ option will pay the value of the underlying security. They are sometimes called fixed return options or digital options.
When you are starting out (or even when you are more experienced) in trading using binary options it is worth keeping a few things in mind. Let’s run them through here:
- You will be dealing with stocks and commodities that are traded liberally across the world.
You cannot trade penny stocks using binary options platforms but most currencies as well as commodities such as gold, oil and corn, and stocks of companies such as Google, can all be traded using binary options.
- All binary options have an expiry time
In binary options you, the trader, will pick a particular commodity and an expiry time, choosing whether the commodity will go up or down in price. You will be paid after this amount of time has finished and your success will be based on your judgement. This means that you can just as easily earn money if a stock loses value as if it gains in value.
- You will never lose more money than you paid for your initial investment
This is a great point about binary options. In margin trading, you can lose your initial investment as it is more like gambling. However, in binary options trading, you have greater protections. Usually, you will win about 75% of the trade value of a stock.
- You will need to be good at risking money
Despite not being able to lose more than you originally invested, you must be aware that it is still a very risky business. Risk management is absolutely critical and you should be clear that you need to understand the way that risk works in order to do well in this business and actually make money. Generally speaking, as a beginner, you should never invest more than 2% of your account in a single trade. Any more than this and the risk probably outweighs the potential gain. Of course, everybody is going to risk more or less than other people. This is the whole point about trading. However, if you are risking your own money, and certainly if you are risking the money of other people, you shouldn’t be overly blasé.
- This is not a get rich quick scheme
There are some forms of trading that will make you a lot of money in not a very long amount of time, although they usually involve excessive risk. Binary options is not that kind of trading! Trading binary options is challenging and there is also the potential (quite high potential) that you will lose your deposit fairly early on in trading. It takes the experience to know what to trade, how much and when. Once you get used to it, you will start making money.
You should of course always read the terms and conditions of your broker and make sure you stick to the rules. Be professional and willing to learn and you will soon be thriving in binary options trading.