Binary options trading is a high risk trading option that involves only two possible financial outcomes, just as the name suggests. The advantage of this kind of trading is that you get to trade only on the amount of money you are comfortable losing, and at a fixed time frame you are comfortable with. In such a case, you will know exactly how much you will lose if you choose to trade on an asset. In essence, all forms of investments involve some risks, but there are some measures you can take to minimize those risks and amplify your gains.
You can hedge on binary options. Hedging will ensure that you get a profit on investment, with minimum risks. Though the profits gained through hedging are not huge, the risks reduced are worth it. Here the hedging is done by placing trades on either two rising or falling predicted asset prices or in opposite asset price positions. If you go for the standard binary option, you will require buying both a Put and Call option for the same asset. A Call option (uptrend) allows you to buy an asset at a set price within a given time frame, while a Put option (downtrend) allows you to sell an asset at a set price within a given time frame. Keep in mind that the assets being bought or sold are not actual ones.
The Put and Call options are made at a price (strike price) that overlaps them. This means that should the price of the asset fall below a given target, you will still make some money, instead of losing it all. As an example, you place a $500 Call on an asset target price to anticipate a rise (uptrend), and another $500 put on the same asset for anticipated decline in price (downtrend). Should the price go above the target, you win the Call money, whereas if it goes below the target, you win the Put money.
This is another technique to help you minimize loses while trading in binary options. It is highly used by more experienced binary options traders. Here the movement of asset prices in highly volatile markets is capitalized and losses cushioned by use of the straddle technique. The Call and Put options are used, but with the same expiry time frame, as opposed to the hedge where the time frames can be set differently.
Most traders use this technique for fast moving assets and the gains obtained from the profits should outweigh the losses incurred. In given scenarios, one has the possibility of gaining the call and losing the put, gaining the put and losing the call or in gaining both the put and call or losing both the put and call.
The above two are the most common techniques used by traders in trading binary options profitably. Other techniques are much simpler but also can be used.
- TECHNICAL: This technique makes use of historical prices of assets as is presented by charts. The investor will thus be able to analyze how the market prices performed in the past and predict how they will perform in future. This will take into consideration market basics such as supply and demand of a certain asset. Tools such as oscillators and indicators are also widely used with these charts to show the exact mathematical trends in price variations of given assets. This helps in giving the trader a more accurate analysis and prediction in future price trends. Once you learn using this chart very well, you will be able to predict when to place your Put or Call Options to reap the maximum benefits.
- FUNDAMENTAL: Unlike technical analysis, which stresses on past and current market price trends, fundamental analysis focuses on economic data and how it is likely to impact asset prices in future. This will of course depend on the asset you are interested in investing in. Factors such as unemployment, interest rates, GDP and inflation all play a role in determining how the prices will be affected. Note that these factors affect different assets in different ways. As compared to technical analysis, fundamental analysis is a longer and wider market trend indicator, which is highly suitable for long term predictions. Most traders prefer the technical analysis as it provides short term predictions.