A binary options trading allows investors to profit from correctly predicting whether an asset will appreciate or depreciate. The asset can be a stock, a cryptocurrency, a currency pair, or any other security. This type of trade is time-flexible and can be executed on durations ranging from one minute to a day. This, therefore, creates almost limitless opportunities for trading.
Binary options come with a catch that you can either make the maximum possible profit from the capital invested or incur the maximum possible loss, which means losing all the money out in a trade. It is, therefore, important to assess the market and evaluate the risk to help you decide how much capital you are willing to invest.
The higher the risk, the less money you should invest. However, options with higher risk often offer larger returns. With binary options, traders can tell the exact amount of profit they stand to generate if the market goes in their favor.
Types of options
There are four main types of binary options, as discussed below:
- Up/Down options – This type of option is also known as the high/low option and is the most popular one. It involves placing your capital in favor of either a price appreciation or depreciation from the current price.
- In range/Out of range options – With these options, traders place their money based on an upper limit and a lower limit set by the broker. The traders must, therefore, make a decision based on their assessment of the potential price oscillation patterns and predict whether the price will be within or outside the defined boundary at expiry.
- Touch/No touch options – These options involve predicting whether the price will reach a set level below or above the current price. It is an open-ended form of option in that you can cash out your profit before expiry as long as the price “touched” the set level. Therefore, the trader will still profit even if the price moves away from the target level thereafter.
- Ladder options: This is whereby the target level is set relative to a dynamic “current” price and not a fixed current price. Since the current price is dynamic and will keep being readjusted, the target level will be preset as the current price keeps being readjusted.
The process of executing a binary trade
#1: Select your Forex Broker
There are several online brokers to choose from, but you will need to ensure that the broker offers binary options. You will also need to compare different brokers based on how many currency pairs they offer, the minimum deposits accepted, etc.
#2: Choose an appropriate currency pair
Most brokers offer the seven major pairs and several cross pairs. However, you should know that majors may have high liquidity, but their profit margins may be comparatively lower, considering that these pairs have low volatility.
Therefore, you should carefully analyze a pair and study its recent price movements to help you understand the risks involved. In addition, you should understand that currencies are tied to the performance of the economies of the issuing countries. Therefore, you should pay keen attention to macroeconomic data and relevant geopolitical developments coming out of news feeds.
#3: Pick a binary option
Once you have settled on a currency pair, you should then go ahead and look at the binary options offered by your broker. Your binary option should be guided by the level of risk exposure involved and the potential profit. For example, a touch/no-touch option may be more rewarding than a range/out-of-range option during volatile market conditions.
Similarly, a touch/no-touch option may have a lower risk than an up/down option during a consolidation period. The payout percentages often vary depending on the option chosen.
#4: Select either a call or put option
This is the step where you make your prediction by choosing one of the two choices available for the option chosen. Having analyzed the market and assessed the likelihood of the currency pair appreciating or depreciating, you will then have to execute the trade.
This is done by buying a call option if you think that the pair will appreciate it and a put option if you think that it will depreciate. However, this step does not apply to the touch/no touch option.
#5: Select the option expiry date
As mentioned earlier, binary options are very flexible in terms of the duration of the trade. You can set up a trade that lasts for only 60 seconds or one that goes for hours, days, or a week. This means that you can execute several trades each day. The period you choose should be guided by your assessment of the probability of the market moving in your favor within the selected period.
#6: Wait for the outcome
At the start of each binary options trade, traders know exactly how much money they stand to generate or lose. Once you have everything set up, you then have to wait for the set period of trade to elapse. You may know the outcome almost instantaneously if you selected a few seconds/minutes or wait for some days if you selected a longer time.
Payouts for this type of trade are usually calculated as a percentage of the capital invested. For instance, if a broker offers a 70% payout rate on a touch/no-touch trade with USDJPY targeting 110.3521, and the price touches that level, it means that you will receive $170 if you invest $100.
However, you should also be aware that most brokers will charge you a commission, and this varies from one broker to another.
You can profitably and legally use binary options trading as an investment strategy. However, it comes with a relatively high risk because it does not offer an “in-between” choice. You are only limited to one of two choices.