The Fundamentals of Binary Options Trading
Before getting into binary options trading, it's important to get a good grasp of the basics, understand how binary options work, and be aware of the potential benefits and risks.
What Are Binary Options?
Binary options are a unique and simple investment mechanism based on a "yes or no" proposition, which is why this financial product is called "binary". Technically, binary options are derivatives, which means that investors do not directly buy the underlying asset but instead try to determine whether the asset's price will be above or below a projected price in a given timeframe.
How Binary Options Work
Each binary option is defined by the duration and the direction of the speculated asset. These are the three main variables considered in a binary options trade, making these types of trades relatively simple to grasp.
All binary options have a set expiry date/time, ranging from a minute to more than a week or longer. When the option expires, it automatically exercises, and your trading account will be credited or debited based on whether the underlying asset was above or below the strike price at the time of expiry.
In a binary options trade, a buyer can either win a payout or lose the entire investment, while a seller can make a full payout or retain the buyer's premium.
For example, a simple binary options trade could involve betting on whether the share price of Apple (AAPL) will be above $190 on September 10th at 9 am. You can bet "yes" if you believe the share price will be above $190 or "no" if you believe it will be lower. If you stake $100 on that trade and you are correct, you will receive a payout based on the agreed terms.
If the payout rate is set at 80%, the binary broker will credit your account with $80. If your bet is unsuccessful, you will lose the entire $100 stake.
The payout rates on binary options can vary drastically depending on factors such as liquidity and volatility and can range from as low as 50% to as high as 100%.
Types of Binary Options
Binary options trades have grown in popularity in recent years, leading to the introduction of various trade types. The original trade type, known as High/Low, is still popular, but new trade types have gained prominence.
One of the popular trade types is One Touch/No Touch, where traders speculate whether the asset will touch a trigger point on the chart by the expiry time. The trigger points can be placed anywhere on the asset chart, with higher trigger points offering higher potential payout averages. One Touch/No Touch trades carry more risk than traditional High/Low trades but can offer larger payout averages, with some brokers paying out as much as 300%.
Another popular trade type is the 60 Seconds trade, where the expiry time is set at 60 seconds. Some platforms also offer Short Term trades with extended expiry times of two or three minutes. On the other end of the spectrum, Long Term options have expiry dates ranging from weeks to months and are considered safer for traders who prefer price action and technical analysis.
Other notable trade types include Boundary/Range trades, which involve predicting whether the asset's price will stay within a designated range, and Ladder trades, which offer more complexity and allow traders to choose strike prices and expiry times to gain partial profits.
Finally, some platforms offer Pairs trading, where traders estimate the performance of two different assets and choose which one will outperform the other within a set period.
Pros and Cons of Binary Options Trading
The main advantage of binary options trading is its simplicity. Binary options have just three variables (asset, direction, duration) and require a smaller amount of capital, making them suitable for beginners and traders with limited experience.
Binary option trades also carry a lower level of total risk compared to other trading options, as you can only lose the amount you invested in a trade. Furthermore, binary options trading is highly flexible and adjustable, offering a variety of underlying assets to trade and strategies that you can employ.
However, there are some disadvantages to binary options trading. The most popular trade types offer little time to study the market before making a decision, which can lead to impulsive and emotional decision-making. This can result in the quick accumulation of losses at a higher rate compared to other trading options.
Are Binary Options Legal in the US?
Binary options are legal and available to trade in most countries, including the US. However, it's important to note that not all companies offering binary options are legally authorized.
Regulation is crucial to protect investors and ensure their funds are held in separate accounts. Therefore, it is recommended to choose platforms authorized by designated regulatory agencies.
In the US, binary options are considered gambling due to their associated risks. Brokers and exchanges offering binary options to US traders must be regulated or licensed by the US Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC).
It is important for American traders to partner with brokers operating under the supervision of these government bodies, regardless of whether the platforms are US-based.
For traders in other countries, it is essential to check whether the broker platform accepts users from your location and operates legally.
Some notable regulatory bodies outside the US include the Financial Conduct Authority (FCA) in the UK, the Australian Securities and Investments Commission (ASIC), the Financial Services Board (FSB) in South Africa, and the Cyprus Securities and Exchange Commission (CySEC) for Cyprus and the EU.
Our Methodology
How We Evaluate Binary Options Brokers
With the binary options market rapidly expanding, there are dozens of platforms for this type of trading on the web. While some exchange websites are regulated and completely reliable, there are just as many online trading platforms that are risky or even operating illegally.
When browsing for a binary options broker, make sure to take the following criteria into account:
Broker Regulation
Regulated binary options brokers in the US typically hold licenses issued by the same agencies as platforms offering other types of options trading.
Note that some exchanges may operate under the supervision of a UK licensing agency or an authority located in other parts of the world.
Binary options brokers around the globe also need to abide by country-specific regulations in order to operate legally, but they might not require a specific license like in the US. In our reviews, we’ll note whether the broker in question has a license and in which countries their service is available.
Given that there are still many unregulated brokers within the industry, make sure that the platform you’ve chosen for your binary trading endeavors is entirely safe and secure.
Available Underlying Assets
So what are underlying assets when it comes to binary options, you may wonder? In this context, an underlying asset is an instrument you choose to bet on. In other words, you select a financial product and predict whether its price will increase or decrease over a set period.
While some exchanges may offer more than 100 underlying assets, the most common instruments tou can bet on with binary options brokers are Forex, cryptocurrencies, stocks, indices, and commodities.
If you’d like to speculate on the price of a specific underlying asset, make sure that you opt for the binary options software that will meet your requirements. You may also benefit from a platform with a wide range of financial products on offer.
Account Minimums and Fees
When comparing online trading brokers, one of the first things you should check is the minimum amount the platform expects you to invest. This is especially important if you're new to the world of binary options trading. Account minimum requirements can range from a few dollars to several thousand, depending on the site’s policies.
If you don’t want to risk more than a few hundred dollars, don’t feel pressured to invest more than you can comfortably afford - make sure to choose a binary options low-deposit platform. On the other hand, if you aren’t a complete beginner and are hoping for a higher payout, we suggest you look into solutions with higher initial deposit requirements.
Moreover, don’t forget to examine brokers’ fee schedules. Make sure that you understand what the minimum trade amounts imposed by different platforms are. Some brokers, for example, may require minimum trade amounts of $20. Others, however, may let you enter a trade with just $1.
Payout Rates
Always remember to look at the payout rates and expiration times, as some brokers place caps on the amounts users can withdraw from each payout, such as $2,000 or $15,000. Other platforms charge fees on each end of the trade, leaving you with a maximum payout of 85% or 90% of your total profit.
Note that the payout rate can vary significantly depending on the expiration time and the underlying asset of the trade in question. Additionally, the rates can differ on a trade-by-trade basis, as brokers are constantly trying to maintain acceptable risk levels. So, if you are not sure how to trade binary options successfully, look for a platform with a solid general payout percentage.
Demo Account Availability
If you are still learning about the ins and outs of binary options trading, a broker with a demo account functionality is the right choice for you. With many online trading platforms, as a prospective user, you get the opportunity to test out all the features they offer to binary options traders without running the risk of losing any money.
By investing practice funds, you get to explore all the functionalities different platforms offer and build your confidence for the paid trading account.
Another great thing about demo accounts is that you can try out several binary options brokers before choosing the one that best fits your investing style. While evaluating different platforms, make sure to look at technical indicators, risk management tools, and the user interface.
Deposit and Withdrawal Methods
Trustworthy brokers should be transparent about what types of payment methods they support: The best platforms typically accept credit cards, debit cards, e-wallets, cryptocurrencies, and wire transfers. As you search for the right platform, think about the payment methods you’d prefer to use.
Once you earn profits on your binary options contracts, you’ll probably want to cash out the funds as quickly as possible. The leading binary options trading platforms offer lightning-fast withdrawal times, allowing you to cash out your funds in just a few hours. Other sites, however, may take up to five business days to process your withdrawal request.
Trading Apps
Long gone are the days when trading wasn’t easily accessible to everyone. Nowadays, most trading sites offer both browser-based and mobile applications, and the same goes for binary options trading.
If you plan to do most of your trading from the comfort of your home, using your desktop or laptop computer, a browser-based platform should easily meet your needs. However, if you’d enjoy the convenience of being able to trade binaries or check up on your account from anywhere using your smartphone, make sure that you look for solutions compatible with iOS and Android.