When it comes to trading, there are many asset classes to trade. These include stocks, bonds, options, futures, commodities, foreign exchange (forex), and others. There are also many ways to enter trades. You can buy or sell stocks, or call and put options on them. With foreign exchange trading, you can buy it at spot, get a futures contract, or an option on futures.
Doing it all from a single account is not that common. For example, a typical online broker will offer its clients an opportunity to trade stocks and options. But not foreign exchange and commodities. On the other hand, a forex broker will not offer stock trading.
In addition, applying various ways to enter trades (such as options, spot trades, futures) can be complicated. But, What if traders were able to only concentrate on guessing the direction of a trend (either up or down)?
And what if they could trade many kinds of financial assets from a single account? Wouldn’t that be simpler? Of course it would. This is where the binary options brokers such as TorOption enter the picture.
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Introduction to Binary Options
There are only two ways to bet on binary options. You can either Buy (Call option) or Sell (Put option). If the option closes above a pre-specified level, and you placed a Buy order, you win. Otherwise you lose.
On the other hand, if you placed a Sell order and the option closes below a pre-specified level, you win. Or lose if the opposite happens. (When you actually sell, you don’t need to own an asset. It is simply a short sale without the need to borrow that asset as with short selling stocks. )
The payout with the binary options is set before you place a trade so you know how much you can gain. The amount you lose is what you bet. The more you bet, the more you can win or lose. Also, the less likely the outcome you bet on, the smaller the payout, and vice versa. (There are some options that you can close before expiration and the payout fluctuates as the price of the underlying asset changes.)
Binary options are also entered for various periods of time. There are options for one minute, five minutes, fifteen minutes, an hour, and longer.
Advantages and Disadvantages of Trading Binary Options
One of the benefits of trading binary options is their simplicity. It’s either Call or Put. Another advantage is that there are fast payouts on most of them. If you place a five minute trade, and are right, you’ll get paid in five minutes. There are also no commissions to enter and exit a trade.
Moreover, you are able to limit your risk to your bet. With many binary options online brokers, you can bet as little as $5 or $10 at a time. What’s more, you can easily move from trading stocks to commodities to indices to forex. You can go wherever the opportunities are. With an online broker such as TorOption you can access multiple markets.
When it comes to disadvantages of trading binary options, one issue is that payouts are not symmetric. For instance, if you bet $10, the payoff may be only $7, while you stand to lose $10. (But, that could also go in the other direction.)
Another issue is that you trade against the odds. If there’s a 50/50 chance the asset will close above certain level at a specific time, then even odds would mean $10 payoff for $10 bet. But, with many trades your payoff may be only $9.
Also, you could be right about trend’s direction, but miss it by few seconds or minutes. Let’s say you bet that Euro will rise in the next 10 minutes. But, Euro rises after 11 minutes. You missed it by one minute and lost your whole bet.
How to Trade Binary Options
Most binary options traders utilize technical analysis tools including charts, moving averages, oscillators (i.e. Relative Strength Index, MACD), and others (such as Bollinger Bands and Japanese Candlesticks) to determine the trends and make high probability guesses as to where the assets will be within certain periods of time.
For short-term trading, the traders will look at short-term charts (one-minute or five-minute charts), while keeping in mind where the overall longer term trend is going. Usually, it’s not a good idea to bet against the trend unless a trader sees an imminent turnaround.
It’s also important to look into news and upcoming events as these are likely to move financial assets.
Binary Options for Beginner Traders
Beginner traders should study binary options and technical analysis before attempting to trade. Some brokers offer binary options practice accounts for beginners. After practice, it is advisable to make small bets and only increase bet sizes after streaks of success.
Binary options trading is exciting and can bring quick profits. It is also a simple way to bet on many different assets from a single binary options online account. But, remember the disadvantages as well.
Trade carefully and find the way of trading that works for you. You may be better with stocks than forex, or perhaps commodities are something for you. The best way to find out is to try.