What are binary options?
Binary options trading is a new way people are trading online. They are a financial instrument whereby you invest in an asset (e.g. AUD/USD, USD/JPY, Gold, Nikkei etc.) and receive a fixed payout upon the expiry time if you predicted correctly. Sometimes up to 200%.
To trade binary options, we only need to understand two potential outcomes: will the asset go up or will it go down in value?
Source: Zentrader Binary Options
Will the price be higher or lower when the trade timeframe ends?
Binary options have become increasingly popular in recent years with new traders due to their simplicity and high profit potential. Many experienced traders will also use binary options in conjunction with their other trading platforms.
Below we will take a look at all the key components of placing a binary options trade: asset selection, payout rates and timeframes. We will also go through an example trade and touch on the importance of choosing the right broker.
Assets are all the financial instruments which are available to trade in the market. For example, currency pairs, commodities, stocks and stock indices. Here are some examples of each asset class:
Currency Pairs: AUD/USD, EUR/USD, GBP/USD, USDSGD
Commodities: Gold, Oil, Copper, Wheat, Coffee
Stocks: Google, Microsoft, Alibaba, Facebook, Citibank, Boeing
Stock Indices: Dow Jones (US), Nikkei (Japan), Hang Seng (Hong Kong), Shanghai Comp (China), ASX (Australia), FTSE (UK), DAX (Germany)
Trade world markets from one platform!
The assets offered on your trading platform will depend on your broker. Whilst many binary option brokers will offer many assets, it is also important to note the returns offered for each asset. Also known as the payout rate.
The return you make on a binary options trade is called a payout and is typically expressed as a percentage. Payout rates depend on your broker and usually range from 160-200%.
For example, if I make an investment of Rp100,000 and receive Rp200,000 when the trade closes, the payout rate is 2.0 or 200%.
The fixed payout nature of binary options means the trader knows the potential return and amount they are risking on each trade in advance. It also means that no leverage or borrowing is used.
Now that we have discussed asset selection and payout rates, we move on to another improtant concept – trade time frames.
Trading Time Frames
Time is one of the main components when trading binary options. You not only need to choose the correct direction (higher or lower) of the asset, but you must also select the time frame for your trade in advance.
Choosing the right time frame is one of the most difficult aspects of trading binary options (and trading in general)! Typical time frames offered are: 30 sec, 60 sec, 3 min, 5 min, 15 min, 1 hour and 1 day.
There is no need to close binary option trades like a regular forex trade. At the end of the chosen time frame the trade will be automatically closed by the broker and any payout credited to your account balance.
Some brokers will also allow you to close your binary option trades early for a reduced payout rate.
Binary Option Trade Example
Below we have a simple example of investing in the AUD/USD currency pair with a 5 minute option. The time is currently 12:30pm and the option expiry time is 12:35pm. We only need to select “HIGH” or “LOW” and if we have chosen the correct direction at the expiry time 12:35pm we receive 185% of our invested capital.
For example, if we invest $50 when the AUD/USD currency pair is trading at 0.71870 and select “HIGH” we will receive a payout of $92.50 if the price is 0.71871 or higher at expiry. We only need the very smallest movement (e.g. 0.1 pip) in price to be profitable.
The AUD/USD currency pair will typically move 50-80 pips a day, and on particularly volatile days (political events, data releases etc.) can easily move 200-300 pips.
For a detailed binary options trade example, please see this step by step walkthrough on the Zentrader platform.
Binary Option Brokers
Choosing the right broker is one of the most important aspects of trading binary options. Below are some responsibilities of your broker:
- Providing trading software and platform
- Streaming live price quotes
- Processing deposits and withdrawals
Many binary option brokers offer services around the world but not all offer convenient payment methods or local language support. It is worth checking on these aspects before registering for an account.
Below are the current top binary option brokers:
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Below are some additional binary options resources from our site and around the web.