A binary option is a quick financial option whose payout is either a fixed monetary amount or nothing whatsoever. It allows investors to predict as to which asset’s value will increase or decrease in a particular time frame.
Table of Contents
- How to Make Money on Binary Options Online?
- Types of Binary Options
- Closing a Trade
- Do’s and Don’ts in Binary Option Trading
How to Make Money on Binary Options Online?
How It Works?
For instance, a trader could trade EUR/USD and predict that the price will rise or fall. On his or her trading platform, the trader can find a broker offering a payout rate on an option contract set to expire in a matter of minutes or hours. The trader can then decide to buy a “call” or “up” option, if he or she thinks the price will fall, or a “put” or “down’ option, if they think that the price will fall, and risk a premium that goes to the broker. If the prediction is correct, the trader is then immediately credited with a payment that is calculated by the broker’s payout rate and the premium invested. If the prediction is wrong, the trader loses all his or her money.
Each broker in the binary options trade will have its own payout rate. Forex Ninja indicates that most brokers will provide a rate that will range from 70% to 75% for a basic option while others go as low as 65%.
The rate isn’t a figment from the broker’s imagination; a myriad of factors like determines it…
- The underlying asset: More valuable assets like precious metals are more likely to produce a higher payout rate
- Time to expiration: the longer the deadline on the trade, the lower the payout rate.
- Market volatility: if the market is stable and isn’t seeing too much upheaval, the payout rate is going to be low
- Broker’s commission: the service the broker provides the trader also accounts for the payout rate as the broker has compensation for carrying out the trade on behalf of the trader.
Types of Binary Options
There are three general types of binary options available for you to trade with.
1. Up or Down options:
Also known as call or put and high or low options, these are the simplest type of binary options online available. All you need to do is predict if the price of an asset will rise or fall when the option expires.
2. One Touch options:
These options are also simple enough. You need to predict if an asset’s price will reach or “touch” a certain price, either by rising or falling before the option expires.
3. Range options:
These binaries allow you to predict if an asset’s price will remain inside or rise above or below a certain range before the option expires.
Closing a Trade
A binary option can be closed ahead of time if the broker permits the decision. It often depends on the option’s type and is usually only available within a timeframe (e.g., 5 minutes before the option expires or 5 minutes after the trade opens).
Brokers that allow early trade closures tend to have lower payout rates than most.
Also, the trade’s value tends to move along with the asset’s underlying value. For instance, in the case of a “put” option, the trade’s value increases as the asset’s value continue to fall. Thus, the closing value of the trade can surpass the initial premium but not agreed upon maximum payout.
If the asset’s value climbs instead of dropping, the trade’s value decreases until the option contract expires, or the trade is close. The trader then receives some of the premium, if he or she closed the trade, or none of it if the trade expired in a loss.
The broker’s commission will still be accounted for in the payout of the option if closed early or even if closed in a loss.
Do’s and Don’ts in Binary Option Trading
Given its all or nothing nature, trading in binary options can be a very risky proposition. Here are a few tips to help any beginner with the process.
1. Use Candlestick Charts
A candlestick chart shows the rise and fall of the price of assets over the years. They may look like gibberish at first but, with time and some basics under your belt, it should be simple to read a candlestick chart. The information provided by a candlestick chart is invaluable.
2. Research Underlying Assets
You should understand the assets you choose to trade in completely. Making a binary options trade with little or no information is more in line with gambling, not trading. A good trader can use information about the asset in the news or circulating in rumor mills to make accurate predictions on the rise and fall of the asset’s price.
3. Pay Attention to Trends
Sure, betting that an asset’s price will rise after it has been falling steadily or betting that an asset’s price will fall after it has been rising steadily will be more lucrative, but it also comes with tremendous risk. There is no guarantee of when the trend will stop so, your safest bet is to follow the trends, especially when dealing with binaries in the short-term;
4. Play it Smart
You cannot predict an asset’s behavior with complete certainty. So, even if you believe with every fiber of your being that a trade will go your way, make sure that you haven’t placed all your eggs in one basket. The risk with binary options will always be significant, even under the best of conditions. Any number of things could go another way and take you from potential riches to literal poverty.
5. Avoid Rookie Mistakes
It will always benefit you to have some kind of experience before you begin trading binary stock options. Luckily, there are demo accounts offered by legitimate binary brokers that will let you experiment safely with making predictions and trades using real-life data and virtual currency. This will allow you to become conversant with binary options trading and give you experience trading with platform offered by the broker.
Our guide to How to Make Money on Binary Options is simple to follow and Money can be made trading binary options; it happens every day. You need to fully understand the risks and factors involved in binary trading properly to make profits consistently.
Read Next: How to Open an Olymp Trade Account?