Trading is risky
Binary option trading is asimplified way of trading commodities, stock, currencies and other assest. This seeming simplicity created a false sense of security that often attreact people looking for easy way to make money. Please not that just like any other type of financial trading, binary option trading involves risk. The takeaway here is that it's not as easy it looks and need to learn at least the principles of fundamental and technical analysis.
3 Mistake from Newbie
Here are the most populat mistakes and misconceptions about binary option trading that you should avoid.
Choosing short expiry times
Many beginners are tempted to use the shorter exp times ( 30sec-60sec), mostly because they want to see faster outcome.This choice however is the riskiest one and good only for those who want to test their luck.
To make market analysis-based predictions you must choos expiry times at least 15 minutes. You can read more about choosing expiry times in the dedicated chapter.
What most people don't know about bonuses
As you will notice, most brokers offer deposite bonuses of up to 100%. Unfortunately most of the people who take these bonuses do not read the terms so the typical story goes like this:
I deposited 300$ and got an extra 200$ as a bonus from the broker, which was great. Then I did a couple of trades, made some profit and wanted to withdraw my money, but the evil broker did not let me withdraw my money!
Why does the happen?
Because many trader do not pay attention to the rules regarding the bonuses, and they usually are written this way:
> In Order to withdraw your profites you need to trade an average of between 20-30 times the volume of the bonus, depending on the specific broker you are trading with. Some brokers also aplly a deadline by which the turnover has to be made.
>If you don't meet the necessary trading volume, the profits you made using the bonus can also taken awy after the deadline.
So just keep in mind that bonuses always come with certain rules attached!
How brokers mak money
How do you think, what happens when traders lose their money as they trade without any tactics? And they do not read the rules about bonuses and are surprised that they can't withdraw the money?
They blame the brokers for stealing their money.
However, there are honest binary brokers out there who run a legitimate business and make money through honest means. And because " the house generally wins" there is no need for them to rob those who do their homework.
Why Binary options?
Binary options are generally simpler to trade than other instruments. This is because you nonly need to form a view on what direction the price of the underlying asset will move. In comparison, traditional options also require yo to form a view on the mahnitude of any price movement.
Binary options offer contracts with short-term durations, from 60 seconds to 60 minutes. This provides the trader with several investment opportunities during a day. It aslo offer flexibility as markets change over time.
With the forex market, every time you enter into a trade you risk the entire amount of money in your trading account. With binary options, however, you risk is always limited to the amount you committed to that specfic trade.
Unlike with other trading instruments, there are usually no fees or commisions attached to binary options. Brokers make their money from the percentage disvrepancy between what they pay out on winning trades and what they collect from losing trades.
Binary options vs Forex
People often ask which is better- Forex or Binary options. We will be honest - there is no right answer, both are risky and both have their pros and cons.
When to choose binary
If you are more like a gambler and don't want to spend weeks just to understand the trading platform then Binary might be more suiable for you. It takes very little time to start trading binary options and the best part is that you can get ~15% back even if you lose trade. In binary options the rate of return is fixed thus you also know the exact risk, which is not the case with forex.
When to choose forex
If you are ready to dive deeper and dedicate month and years learning fundamental and technical analysis then forex is the better choice- Forex also usually required morde investment. But it is a more respectable type of trading and you learn a lot about global economics and politics as you progress.
How binary option trading works
In one sentence
Binary options offer a way to trade stocks, commodities, indices and currency pairs where your rate of return is FIXED. You just need to correctly pick whether the value of the assest is going up (Call) or down (Put). Usually, these options expire in 15-30 minites.
Wall street slang
On Wall street, the bulls and the bear are in a constant battle. If you haven't heard of these terms already, you undoubtedly will as you begin to invest. The terms "bull market" and "bear market" describe upward and downward market trends, respectively and can be used to describe either the market as a whole or specific sector and securities. These images will help you memorize which is which.
Best time for trading
One of the most important aspects when trading binary options is to know when to trade the market. Even though trading on currencies, stocks, commodities and indexes is available 24h a day, five days a week, not every hour or minute is worth trading. There are different hours during the day and different days of the week, which see more volume and liquidity than others, resulting in high volatility and opportunities to maximize trading profits.
The financial markets are most active when there is an overlap of the London/New York and Asia/London sessions. The market experiences a high volume of trades at these times.
When more than one market is active, you can expect to see increased volatility, meaning that the prices move around more and in a clearer direction. This also means that there is more basis for predicting price moves using either technical of fundamental analysis, if using longer time-frames.
During off-peak hours, there is little volume and less price movement, resulting in flat and harder to predict markets.
Best day of the week
According to research, the biggest movement in the four major currency pairs and commodities is observed on Tuesdays and Wednesday. Fridays are busy as well, but only until 12:00 PM and during the second half of the day the movements can be more unpredictable as the markets are preparing to close the week.
What expiry times to choose for trading binary options
When it comes to trading binary options, you have a variety of choices for what of expiry time (time frame) to trade in.
Many beginners are tempted to use the shorter expiry times, mostly because they want fast outsome. This choice however is the most risky one. In this chapter you will find out why.
The majority of binary options have expiry time ranging from 60 seconds to 12 hours. But there are also long term options with expiry times of up to 7 days and more.
The main difference lies in the level of predictability. As you see i the table above - the shorter the expiry time - the harder it is to make a logical forcast based on fundamental and technical analysis.
Looking for 70-90% chance of correct predictions?
For example if you know that there will be a referendum in the United Kingdom whether to stay in the EU or not, you can logically predict that in the longer term (days and months) the price of the British pound will fall against the EURO and other currencies. Investors don't like uncertainly, so they stop investing in Britain, thus the price of pound falls. Such situations offer an increased chance of winning when bigger expiry times are used.
Happy with 50/50 chance of winning?
It is almost impossible to predict the price swings based on fundamental factr in a time frame of 30-60 seconds. That's because there are too many often unforeseen factors that can influence prices in such short time. So these expiry time are more like gambling with 50/50 chance of winning. This however is not too bad rate comparing too traditional gambling opportunities.
Whit expiry time of several minutes and above, you can start to implement also technical analysis and predict the movements based on historical actions.
In order to confirm a trend use a candlestick chart with bigger time fram than the one you use as your expiry time.
It is Usually recommended to use a time frame of at least 1 hour for chart pattern recognition.
Short-term traders, however, may choose to use 1-minute and 15-minute candlestick charts.
The 1-minute chart provides entry and exit signals while the 15-minute and hourly charts are used to confirm the trend and support and resistance levels.
If you trade binary options with 15-minute or 30-minute expiry times, 1-hour and 4-hour candlestick charts can be used to determine/confirm your trend forecast.