2022’s Detailed Guide to Binary Options Basics

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If you want to get into trading and you’re looking for simple financial instruments to get started, learning binary options basics is a great choice!

We covered all you need to know about binary options, including a step-by-step guide on trading, tips on how to spot a fraud, and the pros and cons you should consider before you start placing trades.

Dive into the simple explanations followed by examples to get you completely cleared up on what to expect and how to prepare to get the most out of your investments.

Binary Options Basics

Binary options come with a yes or no proposition, meaning they only have two possible outcomes—you can either win or lose. That’s what “binary” basically means—one or the other, and that’s part of their simplicity.

Therefore, binary options are simple financial instruments and a great way to make an entrance into the financial markets by predicting the price movements of an underlying asset. The process is pretty straightforward, but it’s also often used as a part of more experienced investors’ strategies.

To start trading on the financial markets using this option, it’s important to answer the question of what are binary options, but also to understand how they work.

Several assets can be used for binary trading, including commodities, the price of gold, natural gas, oil, cryptocurrency, stocks, index, forex pairs, or even events.

However, note that you’re not purchasing the underlying asset, but only predicting how it will behave in a certain timeframe. This means you’re not investing in stocks and don’t have the rights or obligations of a stakeholder.

Depending on the outcome you need to predict, there are different types of binary options trading, and we’ll explain some of the most common:

  • “Up/Down” Trade

Also known as the High/Low trade, this type is one of the most commonly used. You need to predict whether the price of an underlying asset will go up or down compared to the strike price before the time of expiry.

  • In/Out

This type of trade requires you to bid on whether the price will be in or out of the set range after the expiry time.

  • Touch/No Touch

Here, you need to estimate whether the price will reach a certain point, high or low. What’s specific with this type of binary options online trading is that it’s enough that the price reaches the set point at any moment before the expiry time. In this case, traders who called the touch option get paid immediately, regardless of how the price moves after that.

There are some additional types, with different expiry time ranges vary from as short as 60 seconds up to a few weeks.

Binary Options Examples

Let’s take the price of gold as an example to give you a short overview of the trading binary options process. You need to predict whether the price of gold will go higher or lower than the strike price, which is the price at the moment you enter the binary option.

If the strike price of gold is $1.678 and the question is if it will be higher within the next 4 hours, you can buy the binary option and put your money on the outcome you see fit.

To get binary options explained, it’s important to note that they always settle between $0 and $100, and they can have different bids and offer prices. For example, let’s say the bid price (the price you buy the option for) for the binary option on the price of gold is $42 and the offer price (the price you sell the option by) is $44.

You can buy the option for $42, or place a bid for a lower price in case someone wants to sell under those conditions.

If you buy and your assessment turns out correct, after the expiry time, the price of gold is higher—let’s say you’ll get paid $100. To put it in terms of binary options for beginners, it means you’ve recovered your investment and made an additional $58. In this case, you’ll end up being “In the money”.

On the other hand, If the price is lower, you’ll end up “out of the money” and will receive $0. Before the option expires, the bid and offer price may fluctuate, but you can lock in your position to secure your gain or reduce a loss.

Zero-Sum Game

If you end up being in the money, you can get up to $100, and if you miss the prediction, you’ll get $0 and lose your investment. The binary options definition thus implies that it’s a zero-sum game, meaning that what some investors lose, other investors gain.

To explain, if you buy an option for $30 from someone and end up being in the money with a sum of $90, the investor who sold you the option effectively loses the $60 you gained. But, in case you lost your $30, that would be his gain because he sold you the option for the money he would end up losing.

However, despite their simplicity, binary options require caution, especially when it comes to choosing brokers and a trading platform.

Binary Options Scams – How to Spot One?

Before you start making money with binary options, you need to make sure you take all the necessary steps to protect your financial assets.

For this reason, it’s important to be able to recognize binary options scams and avoid them.

Here are the signs to look out for when placing trades:

  • Unrealistic Returns in a Very Short Amount of Time

When it sounds too good to be true, sadly, it probably is. Don’t get greedy and become easy prey for trading platforms that over promise the money you can make—that should be one of the binary options signals telling you to stay away.

  • Unlicensed and Unregistered Brokers

It’s legal to trade binary options only on trading platforms that comply with US regulations under the Commodity Futures Trading Commission (CFTC), a governmental agency that regulates and monitors trading platforms.

To make sure you’re choosing a legit trading platform or a broker, make a thorough check, and see whether they’re registered—you can use the National Futures Association database.

  • Broker Doesn’t Reveal Their Location or Identity

If the person you’re trading binary options with doesn’t reveal their identity or the data of the company, your red light should be blinking and you should refrain from any transaction.

To be on the safe side, make sure to choose from some of the excellent binary options brokers.

  • You Can’t Withdraw Your Money

Once you try to withdraw your deposit or money you won, you may be denied or faced with some additional requests. To prevent serious damage, make sure to follow one of the basics of binary options trading and trade with funds you can afford, especially regarding keeping them on the platform.

If you face any of the situations mentioned above, you should contact the authorities and make sure to point out possible fraudulent activity.

DID YOU KNOW? There are many ways for fraudulent activity to take place on trading platforms. In addition to keeping the investors’ money, there are cases of identity theft and generate losing trades. These are not limited to these specific trading platforms, so if trading with stocks, make sure to choose the top stock trading app and identity theft protection.

How to Trade Binary Options

If you want to invest in the financial market using these simple financial instruments, read the following steps to make the most out of your trade:

  • Basic Knowledge of Market Trends

You must do your research. Make sure to follow the news and trends regarding the prices of the underlying assets so you can make informed decisions about the call and put options.

Changes in one market can follow or trigger changes in another one, so knowing these connections will help you find your binary options winning strategies.

  • Choosing the Right Market

After your research, choose the market you find most appealing or you’re most familiar with to reduce a loss with accurate predictions.

You can pick stocks, an index, events, forex pairs to place trades, and more.

  • Pick the Time Frame

After choosing your market, decide on the expiry time of the binary option you want. You can choose the ones that expire daily, weekly, or even longer, but there are also the ones with only 60 seconds expiration time, which can be very exciting.

  • Determine the Budget

Regardless of your binary options trading strategy, be careful not to invest more than you can afford to lose.

If you determine the budget for trading and stick to it, the process will be a lot less stressful and you’ll be able to stay in control over your financial assets.

  • Consider Trading Volatility

Note that any volatility in the market of underlying assets affects the bid and ask prices in binary options.

For example, if the market of the asset in question is experiencing a lot of movement and instability, making it harder to predict whether the price will go up or down, the bid price for the option can be relatively low, and the chances of gain uncertain.

Pros and Cons of Binary Options

When researching how to invest in binary options, it’s important to consider the pros and cons and make an informed decision on whether these financial instruments are right for you.

Pros

Here are some of the pros:

  • Trading Is Simple and With a Limited Risk

The process is simple and anyone can try out trading in a demo account available with most of the trading platforms. Most of them have real-time charts, bid price, and your maximum loss and gain displayed as you decide to call or put the option.

To start making money with binary options, you need to look at the big picture, but also be able to spot specific signals of the market and make the right transaction.

  • Loss and Gain Amounts Are Known in Advance

You can lose the amount you invested, not including the fees, and that’s all there is to it. Also, you know from the start how much money you’ll get if you end up being in the money.

The binary option low deposit makes it accessible for more investors who don’t have big budgets or simply want to reduce a loss in case they didn’t predict correctly.

  • Gains Can Be Significant Compared to the Investment

You can gain more than triple the money you invested, and if you choose an option with a quick expiry time, you’ll get the money fast. If you learn how to trade binary options properly and make informed decisions, you can enjoy nice profits.

Cons

And the cons include:

  • Gaines Is Capped

The same way you know how much you’re risking, you also know how much you gain when placing trades—and it can’t be over $100.

  • You’re Not Buying Stocks or Any Underlying Asset

For the money invested, you’re only predicting the price of an asset—you’re not buying stocks that can pay up dividends, you don’t get voting rights, etc. If you end up out of the money, you lose all of your investment, and that’s one of the binary options trading basics.

Pros
Simple process
Limited risk
Known payout amount

 

Cons
Gains are capped
You don’t get any stocks or options

Key Takeaways

Binary options are simple financial instruments with a yes or no proposition which can have only two outcomes.
They’re used for predicting the price of a certain asset until expiry time and deciding on call and put options.
Binary options trading always settles between $0 and $100, so you either get $0 if your prediction wasn’t correct or up to $100 if it was.
This is a zero-sum game, meaning that one person’s losses are another person’s gains.

Wrap Up

Binary options are a great way to get into trading. Simple to use and pretty straightforward, with capped wins and losses, they do require extensive research and knowing the market’s trends to make the right calls.

After this article, you have all it takes to start trading in a demo account on the chosen trading platform and try to see whether this form of trading is for you.

FAQ

How to make money with binary options?

Trading with binary options is investing money in predicting price movements of the underlying assets. If your prediction is correct, you’ll end the trade being in the money and get paid depending on what the option was worth. Binary options always settle up to $100, but you can buy multiple options.

Is binary options gambling?

Due to its nature, this type of trading is sometimes considered a form of gambling, although most governments don’t perceive it as such. If you do thorough research, your binary option outcome is less dependent on luck, and more on your capability to spot the specific signals of the market.

Where to trade binary options?

A part of binary options basics is to be careful and trade only on legit platforms. Some of them are Nadex, or the North American Derivatives Exchange, with its dedicated online binary trading platform, as well as Chicago Board Options Exchange (CBOE), where you can trade using a traditional account.

Sources

ABOUT AUTHOR

I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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