When the term strategy is mentioned in business, many people think of a pre-requisite for great expertise and experience. However, this is not particularly the case when it comes to binary trading. A serious investor can make a lot of money trading in binary options, without the advantage of expertise in the financial market. It is a big misconception to impute that there is some specific training or some specific duration of on-the-job experience required in order to be comfortable engaging in binary options trading. However, it is important to pick up the basics of binary trading, which are very easy to understand and implement.
How does binary trading work?
Binary trading is some form of investment that deals with predictions. What makes it very attractive is that there are only two options to work with – either a price goes up or down as you predicted, or it goes up or down and proves you wrong. The beauty of predictions in binary trading is that when the trader’s prediction is right, the binary options earn the investor predictable profits; and whenever the prediction is not exact, the trader loses an amount that is also predictable. Hence, the trader has a lot of control in the whole trading experience.
Technical terms for binary options predictions
- Call options: When a trader pays a premium to cover a prediction that the price of the asset involved will increase, the investment is referred to as a Call option.
- Put options: When a trader pays a premium to cover a prediction that the price of the asset involved will fall, the investment is referred to as a Put option.
What are the assets underlying a binary option?
For every binary option traded in the financial market, there is an underlying asset. And it is the price movement of that particular asset that a trader in binary trading predicts.
Here are the assets commonly traded as binary options:
- Stocks: These are stocks of companies that are listed on the stock exchange. What makes such binary options among the most attractive assets is that they are mostly from very stable companies; some of them multinationals. As such, it is easy for the investor to read their stable price trend and make an accurate prediction.
- Indices: There is room too to trade in binary options based on the indices of the various stock exchanges, including the Dow Jones; NASDAQ; Nikkei; FTSE; and others.
- Commodities: Commodities in the arena of the financial markets include assets like gold; coffee; silver; oil; corn; and many others.
- Forex: When forex is the underlying asset, traders pair up different currencies, like the Euro against the Australian dollar, and predict if the ratio is going to rise or fall.
To succeed in the business of binary trading, the trader needs to apply some known simple strategies as those shown here below. Nevertheless, one can also invest from behind the scenes, by engaging the services of a reliable binary options broker.
Basic Binary Trading Strategies
- Learning to minimize the risk, The best way to minimize the amount of possible loss while investing in binary options includes avoiding investing one’s entire capital in one go.
- Studying the price behavior of the underlying asset for some time before investing
- Allocating between 5% and 10% of one’s investment capital to each placement
In the above strategies, it is clear that if the investor were to lose in the prediction, only a small proportion of the trader’s capital would be lost. At the same time, chances of making a winning prediction are high after having observed the asset market trend for a while. Cautious binary options brokers advise on small frequent placements rather than huge one-time placements.