Binary options: a guide for absolute beginners

The world of trading can be a difficult one to understand, especially for those who are just starting to dip their toes in the water. Binary options, however, are generally understood to be one of the least complex ways to trade and so are good for absolute beginners.

What are binary options?

The reason this form of trading is called binary is because of the yes/no outcomes that are predicted. Essentially, when you trade with binary options you are predicting which way the asset’s value will move, this being either up or down. When you predict the asset’s value will rise, you are taking a ‘call’ option; when you predict the asset’s value will fall, you are taking a ‘put’ option. This 50/50 way of trading means it is one of the simplest methods in the market, but it does mean an all or nothing payoff. Although simple, it is wise to gain a thorough understanding of how binary options work, what the terminology means and how prices are determined because it is notoriously easy to fail to make a profit with binary options through simple ignorance of their nature. That being said, with binary options you only stand to lose the cost of the trade, as their prices are capped.

Getting started

You will first need to register with a binary options broker and then make a deposit into the brokerage’s account. This does not pay the broker but rather serves as a fund to buy assets when you are ready to begin trading. Once your account is open, you need to choose the assets you want to trade in. Stocks, financial indices, commodities and forex currency pairs are the most common kind of assets for binary options. These sorts of assets include stocks in companies such as Apple and Google, metals such as gold and silver, indices such as the DOW Jones, and forex pairs such as USD/GBP.

The trade begins

A binary options trader is not trying to put a price on a particular asset, just determining whether its value is going to rise or fall at a specific time, known as the expiration date. This is where you need to do your research on your chosen assets to judge their movement and place in the market. If you are correct by saying a certain asset will rise by the expiration date, your binary options will ‘expire in the money’ and you will receive a payout according to the settlement value as made in your original contract with the broker. If you are wrong, predicting that the asset will rise when it actually falls, you will receive no payout.

All the figures involved can be confusing, so it can be helpful to watch a demo that simulates an actual binary trading scenario to see how the trading unfolds and what kind of payout structure can be achieved. While binary option trading is a great entry into trading for both individuals and companies, it can be easy to make mistakes. Invest your time wisely by carefully studying how binary options work and the profits that can be made out of them.

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