Binary options are extremely popular with day traders who have the analytical skills and market insights to predict future market movements accurately. From market indexes to currency pairs, there is a huge variety of equities, forex and commodities that can be traded using a binary option – as long as you know how to time your trades correctly.
In this article, we will cover the basics of binary options trading, from setting up your trading account to analyzing the markets and planning your trading strategy. Here are five useful tips for first time binary options traders.
1. Understand How Binary Options Work
Binary options fall into the category of derivatives – investments that rely on market movements. Unlike buying a specific share or currency, a binary option is more like a bet you place on how you think the market will move. There are two main types of binary options that traders invest in – call and put trades.
If you believe that the market or forex pair you’re trading will rise, a call trade is the binary option you’ll want to buy. If your prediction is correct, you’ll receive your original investment plus a fixed premium (usually 70%). On the other hand, if the market falls, you’ll lose your entire investment, making binary options a high risk, high reward trading instrument.
If your analysis tells you that the market is likely to fall, you’ll buy a put trade. As long as the price closes lower than it was when you opened the trade, you’ll receive your investment plus the agreed premium (the same as with a call trade). Similarly, if the market turns against you and your prediction turns out to be false, you’ll lose your investment
Each trade has a time limit (from minutes to months in the future), with a fixed payout if your prediction is correct at the exact time when the time expires. Some markets (especially in the US) allow you to trade binary options by the minute, cashing out of trades that are heading south before you lose your entire investment, while others operate on an “all-or-nothing” basis: you either receive a healthy premium or lose your entire investment.
If the risk involved in binary options trades seems too high, you can always hedge your trades by placing one call and one put option on the same market or currency pair. You’ll want to invest more in the outcome you think is more likely, or if you’re betting against the market, you may be able to invest a smaller amount at a higher payout. Once you’ve perfected your hedging strategy, you’ll be able to adjust your trading risk to levels that you’re comfortable with.
2. Set Up Your Trading Account
Binary options require active trading, with most investors placing trades on a daily basis. The higher your number of trades and transactions are, the more important it is to deal with a reliable online brokerage that offers competitive rates, useful analytical tools and dedicated support for traders. Stern Options provides a stable trading platform that will provide you with everything you need to start trading binary options successfully.
At first, you’ll want to get used to the trading platform and place a few demo trades while you learn the markets. Once you’ve gained confidence, you can start trading with real money – but make sure you trade responsibly and don’t use your retirement savings or funds that you need for everyday living. Binary options are ideal instruments for growing your risk capital, but not for not fixed-income or retirement purposes.
3. Study the Markets – And Learn to Feel Them Too
Understanding financial markets is definitely doable, but it does take a certain amount of learning and analysis. Before you start trading, make sure you understand how markets work – including concepts like supply and demand, price levels, trading volumes, liquidity, and trading signals. By taking the time to understand the markets, you’ll make trades that are more like educated predictions and less like random gambles – and that’s the best long term strategy to make a good profit trading binary options.
If lengthy books aren’t your thing, you can gain a lot of insights by watching binary options trading tutorials online, signing up for free training courses, and listening to podcasts. If you happen to have a mind for numbers and a love of graphs and statistics, this will definitely help – but understanding trading psychology and “feeling” the markets is equally important. This makes day trading profitable for deep analysts as well as people with great intuition.
4. Set Daily Targets – And Don’t Overtrade
There are days when your first trades of the day all turn out to be big winners. With a rush of euphoria,you may be tempted to double down on your next trade – hoping to “hit the jackpot”. This type of thinking may be common on the casino floor, but it’s a sure-fire way to lose money as a day trader.
Once you’ve made – or lost – the daily quota you set for yourself, it’s time to sign out and take a breather. Some traders find themselves glued to their screens, placing trades simply because they need something to do, but there are more productive uses of your time. Reading the financial news, studying long-term trends and statistics, or taking time to complete the daily tasks and obligations that are weighing on your mind (and distracting you from trading) are just some of the ways you can use your time away from the trading platform.
If you’ve had a really good week, why not treat yourself or your loved ones to a fun day out? You’ll feel refreshed and ready to trade again tomorrow.
5. Don’t Always Trade in Isolation
There are some really great social trading groups online, bringing traders together to share ideas, strategies and share their experiences. While you should always trust your own analysis and intuition, there is a lot you can share with other traders – and you may learn a thing or two as well.
Binary options are a simple instrument that allows day traders to profit from movements in the market without committing to owning expensive shares or large amounts of forex. If you’re looking for a fast, convenient way to invest your risk capital on a daily basis, take some time to register for your trading account and learn the markets. With the potential for profit that binary options offer, a wise trading strategy and responsible risk management will help to ensure that you trade successfully in this exciting market.
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