Trading binary options attracts traders by its simplicity and the possibility to get high returns. Binary options, also known as digital options, offer a unique way to trade that differs from traditional forms of investing. In this article we will explain how trading binary options works.
What are Binary Options
A binary option is a financial instrument where the payout is in the form of a fixed amount or no payout at all. In other words, you either get a fixed amount of profit or you lose your initial investment. Generally, binary options trading is based on predicting whether the price of the chosen asset will be above or below the initial price after a certain time, the expiration time. All options trading takes place on the broker’s website and it is important to choose the right broker – it must have a good reputation, without withdrawal problems, with bonuses, promotions, support for newbies. Judging by the reviews of traders, such broker is Pocket Option – https://revieweek.com/review/pocketoption/.
Selection of an Asset and Determination of an Expiry Date
The process of binary options trading begins with the choice of an asset. It may be a currency, cryptocurrency, stock, index or commodity. After choosing the asset, the trader needs to determine the expiry time. The expiry time is the period of time in which your option expires. This can be any length of time – from a few minutes to a few months.
Predicting Price Movements
The next step is to make a prediction about the price movement of the asset. If you think the price of the asset will be higher than its current price at expiration, you buy an option “above” (or “Call”). If you think the price will be lower, you buy a “lower” (or “Put”) option.
Profit and Loss Calculation
In the case of a correct forecast, the trader receives a predetermined profit, usually in the range of 60% to 90% of the invested amount. In case of an incorrect forecast, the trader loses his initial investment. Some binary option brokers may return a small percentage of the investment as a consolation prize, but this is not guaranteed.
Using Strategies and Indicators
Although binary options trading may seem simple at first glance, successful traders often use a variety of strategies and indicators to increase their chances of success. Some of the popular strategies include technical analysis, news or trend trading, and the use of indicators such as moving averages or the stochastic oscillator.
It is also important to remember about risk management when trading binary options. This may include setting limits on daily losses, investing only a certain percentage of your capital in a single trade, diversifying your portfolio, and using features such as stop loss.
Binary options trading is a unique form of investment that can bring high returns, but also comes with high risks. Successful trading requires an understanding of the basic principles of binary options, the use of strategies and indicators, as well as strict adherence to the principles of risk management.