What is binary options trading?

Binary options trading has become a very popular way of speculating on the markets among the online entrepreneurial community, and once you have spent time learning binaries, and become proficient, it is certainly possible to make a profit from it. If you fancy yourself as city trader or technical analyst, read on for a basic overview of how binary trading works.

What is a binary option?

So what is binary trading? Very simply, it is the trading of binary options. Binary options are pretty straightforward to understand. Binary simply means two, and in the case of options trading, refers to the fact that there are only two possible outcomes from every trade; you either win a fixed payout or you lose the invested amount.

Your potential win is determined at the start of the trade, and if you lose, you only lose your initial investment. This makes the outcome predictable and enables you to keep control of risk, your losses, and manage your initial ‘bank’ efficiently.

You can trade on various assets; commodities, indices, forex rates or stocks, as offered by the broker you choose. You are only trading the underlying asset, not the asset itself and the value of a binary option is derived from the price of that underlying asset. Binary option contracts run for set time periods (‘expiry times’). You can choose from trades that last for a few minutes to those that last for a year.

Types of binary trading

There a number of different ways to trade.

• Rise/Fall – predict whether the market will fall or rise from the ‘entry point’ you choose.
• Higher/Lower – predict whether the market will end lower or higher than a target price.
• Touch/No Touch – predict whether the market will or will not touch a pre-set target price.
• In/Out – predict whether the market will move outside or stay inside two price parameters.

The return on your investment is set at the time you take out the trade and varies depending upon the market and the underlying price. You place your trades through a broker who may take a small commission or weight the price so that they are guaranteed a return.

There is no doubt that money can be made through binary option trading – but it should not be viewed as a ‘get rich quick’ scheme. The best way to trade is to learn about how the markets work and to follow the tried and tested strategies used by professional traders. These include learning to read price action, judging news events, researching the fundamentals (for longer term trades) and getting to know a handful of specific markets in detail.

Further reading for binary traders

There are further useful articles in our guides section, including how to read charts, manage risk and find the right broker.