How to Trade Binary Options
Now that we have understood the basics of a binary option, we will focus on how to trade them. Binary options offer substantial returns to traders and therefore they have become increasingly popular.
When trading binary options, a trader is basically predicting the price of an underlying asset. If the prediction is right, then the trader can make a significant profit in a short time and if it is wrong, he risks losing his entire investment. Although the risk in trading binary options is quite high, the potential reward is also quite high.
One reason why binary options are attractive to retail investors is because one can start trading them even with limited capital. For example, opening a trading account for stocks may require a trader to start with a minimum balance of $10,000, a binary option trading account can be opened for as little as $100. This makes trading in binary options particularly attractive to retail investors. Binary options are not bought on margin.
Initiating a binary option trade is very simple. A trader has to simply select whether he wants to buy a binary call option or a binary put option. Next he has to choose input an investment value. Finally, he has to choose an expiry date for the contract before executing the trade. The strike price for the option contract is established when the contract is bought.
Most brokers providing training videos on how to trade binary options on their website for free. Brokers also offer traders other resources when they start trading to learn in-depth about binary options.
One needs to understand chart patterns when trading binary options. This is because, a trader is betting on short-term price movements in the underlying asset.
It is also important to choose the best trading time. Trading in binary option will be best when there is significant activity in the market. Although currencies and commodities trade throughout the day, trading activity tends to be thin towards the end of the day. When trading in currencies and commodities, it is best to trade when the different trading zones overlap as market activity is the highest during this time.
For stocks, it is best to trade in the first few hours after market open as this is the time when trading activity is most intense.
Trading Binary Options
Stock binary options are one of the most popular binary options. When trading stock binary options, it is important that you are aware of the factors that cause movement in stock prices.
Stock price can move for a number of reasons. One of them is earnings reports. When a company releases its quarterly earnings reports, there can be significant price movement. If the earnings are below expectations there is generally a sharp decline in the price of the stock and vice versa. The crucial thing is to be aware of the earnings release dates as stocks can be extremely volatile shortly after releasing quarterly results. Stocks can also move on announcement of a merger or acquisition.
Always keep an eye on the news related to the underlying stock. For example, if you trading binary options on Google, it is important that you are aware of Google’s earnings release dates, market sentiment, and chart patterns.
Let us look at an example of how you can trade stock binary options after a major news announcement. Suppose, Google is trading at $700 ahead of its earnings release. Now expectations are for the company to report earnings of $6.60 per share, but Google’s earnings fall well short of expectations. Given the earnings miss, it is likely that Google shares will fall sharply as traders will start offloading their positions. If you are a binary option trader, then buy binary put options as the price of Google shares are expected to slide. Suppose you buy a put option expiring in 1 hour at $700 strike price i.e. you are betting that Google shares will fall below $700 before the expiration of the contract. Now if the predicted price movement takes place then your option is in the money. Because most binary options are European style, you will have to wait until the expiration of the contract to book your profit.
Risk management is one of the most important aspects of trading in any financial products. Same goes for binary options. It is advisable that you trade no more than 5% of the account size. Suppose you have a $2000 deposit in your trading account then it is advisable to not expose more than $100 to the market.