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Learn How To Trade Binary Options Successfully And Profitably
How to trade binary options, is a question frequently asked by beginners including our readers. So, we aim to give you a proper solution through this article.
Binary options are popular because of its simple trading nature, with a fixed return percentage. Despite its simplistic nature, many traders use on their binary trades far more often than you think.
It boils down to reasons such as lack of trading knowledge, experience, or choosing the wrong broker. Whatever the reason may be there must be a clear plan ahead of trading, so you don’t face ill-consequences in your trading result.
Before enlightening you with the step by step guideline on how to trade binary options profitably, we will give a short brief on what binary options are.
What Are Binary Options?
We are going to explain a basic concept on binary options here, but for detailed information, read what is binary options trading article.
Binary Option is an investment type where you have two outcomes, all or nothing. It has also a fixed expiration.
You have to accurately predict the outcome with an expiry time to make a profit. Either you will win a trade or lose all the money that you have invested for a particular trade. Moreover, you can perform binary trade in two ways.
- Manual Trading
- Automated Trading
In manual trading, you do all the hard-work and place the trades yourself using trading strategies . But in auto-trading, automated trading software does the trading for you, using a build-in trading strategy.
Which method you use for trading depends entirely on your preference. If you are a new trader, you might take help from a trading robot in exchange for a price. Or you can learn the basics of trading, and do it yourself.
Binary Trading Example
You already know through our citation that binary options give you a fixed payout and loss amount. To power-up your trading journey, you must have to follow some rules.
Before jumping to those specific points, we will try to connect your existing knowledge with a small example.
James Chen from Investopedia explains binary options trade with the help of an example.
Assume stock XYZ is currently trading at $64.75. A binary option has a strike price of $65 and expires tomorrow at noon. The trader can buy the option for $40. If the price of XYZ finishes above $65, the option expires in the money and is worth $100. The trader makes $60 ($100 – $40).
If the option expires and the price of the stock is below $65, the trader loses the $40 they put into the option. The potential profit and loss, combined, always equals $100.
5 NoteWorthy Steps To Trade Binary Options
What you are expecting from this phase?
Hang on! Let me guess. Maybe, you might think that we will share with you a spell so that you can earn a lot of money. But, the section will focus on the 5 noteworthy steps on how to trade binary options.
- Choose a regulated broker
- Analyze the market and asset
- Practice on a demo account
- Make an initial deposit
- Start Live trading
As each step is very powerful, so our recommendation is to read each step without skipping.
# Choose A Broker
Choosing a broker without evaluating some factors can bring disaster. On the other hand, the retail investment market is large and have a lot of scopes. According to a report of SEC,
approximately 7,600 investment advisers registered with the SEC that serve retail investors, with over $12 trillion in retail client assets under management, and approximately 34 million clients.
Isn’t it crazy!
The actual craziest thing is that one has to choose one or more than one broker from thousands. Here, we will mention some factors that you should keep on mind before selecting any broker.
- Demo account
- Minimum initial deposit
- Ease of use
- Variety of assets
- High Payout percentage
- Fast withdrawals
- Multiple modes of payment
In addition to that, you refer to our list of binary options broker . It’s not necessary that you have to stick to one broker. No broker is perfect, and one broker may not suit all your needs. Don’t hesitate to trade with multiple brokers.
Taking all the above factors into consideration, we have prepared our list of recommended brokers that you can trade with.
These brokers meet all the requirements such as regulation, offering a demo account, huge asset index, high payouts, fast withdrawals, easy-to-use trading platform, and much more. Here is the list of brokers Binary.com , IQ Option, and BinaryCent that we think will offer you the best binary options trading experience.
# Analyze The Market & Asset
The trading market is unpredictable and changes every sec. Three main types of analysis bring an optimal trading result.
- Fundamental Analysis
- Technical Analysis
- Sentimental Analysis
Here, an economic calendar works as a ground from where traders use data to forecast the market movement. As there is “no” best method of analysis, so you have to pick the most viable option depending on time-frame and asset information.
# Practice On A Demo Account
Registering an account is free of charge with most brokers. All it takes is your vital information such as an email address, your first, and last name. Once you have created an account, you need to practice trading through a demo account.
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Train yourself with the help of a demo account until you create an unbeaten situation. Educate yourself on the basic concepts of binary trading. Understand what strike price, expiry time, call, and put option, etc. Familiarize yourself with the different ways you can trade binary options.
Just because the funds and the outcome in demo accounts don’t hold any real meaning, it doesn’t mean you should trade recklessly.
Trade on the demo account exactly how you would live trade. This practice will develop your trading skills and build valuable experience.
There is no fixed duration on how long you have to practice on a demo account. Take as long as you need. Finally, when you feel confident enough, you can step up to real trading.
# Make An Initial Deposit
The initial deposit amount varies from broker to broker. You need to deposit on the trading account to carry out live trading. On the other hand, there is a big difference between an investment and deposit.
An investment is a price what you pay to get the future value. Meanwhile, the deposit is a certain amount of money that one needs to open an account.
It is wise to start with a small deposit amount like $10 to $20.
# Start Live Trading
You can start trading on a real account once you are familiar with the ins and out of binary trading. Select your preferred asset and choose your investment amount. Depending on your prediction, buy a call or put option.
Place your trade, and wait until your trade expires. In the next section, we have listed some tips and techniques on binary trading to make your trading successful and profitable.
How To Trade Binary Options Successfully And Profitably – Best Way To Trade
We already discussed a few steps above. Those steps are the principle that one trader should follow whether he is professional or not. After that, you need to turn your binary options trading into a successful profit machine.
Don’t miss out the chance by skipping points that we covered below. Follow these tips to ensure you don’t lose money while trading binary options.
- Choice of assets
- Start trading with small
- Eliminate emotions from trading
- Choose the right expiry time
- Follow the market news
- Risk management
- Knowledge is power
Choice Of Assets
As you can trade with a large number of assets, so trade those assets that you are most familiar with. Do not take unnecessary risks by trading in markets that you cannot predict.
Successful binary trading depends on how well you can predict the market. Follow the market news before executing trades. Diversification of your portfolio is one way of reducing your overall trading risk. But it doesn’t mean you should diversify to assets that may not be profitable to you.
Stat Trading With Small
You may have heard about the risk management where you have stick on either 1% or 2% rule. It is a general rule of thumb for traders.
90% of traders failed in trading because they have lack of knowledge on money management. Investing a huge amount of money will not help you to increase profits.
So, at first, start with a small amount like $10. After gaining valuable experience, you can start increasing your trade size. No matter how much you practice on a demo account, trading on a live account is a different scenario. As there is real emotion involved, which brings us to our next point.
Eliminate Emotions From Trading
Professional traders are not super-human. They also fight to control their trading emotions. Eventually, all traders must go through a cycle of market emotions.
Controlling emotions is not sky-rocket. However, you will find a difference in gratitude of a winning trader and a losing trader. No wonder, a low expectation level can save you from a massive failure.
Stop dreaming about to get rich quick and follow the 7 secrets that will help you to improve your trading emotions or psychology.
Choose The Right Expiry Time
It is may seem like a matter of preference or a trivial issue, but even expiry time is a crucial factor when it comes to binary options trading.
For example, a trend was supposed to reverse within an hour. But if you placed a trade with 2-hours expiry, the trend would have reversed by then. And, you had lost the trade.
Follow The Market News
Whatever underlying asset you may trade, you need to be informed on the latest global events, and news associated with that asset. Many traders build strategy depending on the market news. So don’t skip on that, and act accordingly.
For example, if there is negative news regarding the gold and a price drop is imminent, log in to your binary options trading platform, and open a put position on gold.
Reacting appropriately to market news can bring in more trading success than you think.
Risk Management (Hedging)
Unless you are a pure gambler looking for absolute results, you should make use of hedging. Hedging is a money management strategy used to protect your profits. In this way, if you are wrong on your prediction, you lose money from your call option, but you regain that back from the put option.
Protecting your investment by buying a binary option contract opposite to your initial contract is hedging. Hedging may reduce your overall profit potential, but it also protects your capital.
If you quite confident about your prediction but still want to hedge, invest the lesser amount in the hedge position compared to your main position.
Knowledge Is Power
Trading education is one of the big factors that play a vital role in success. You need to constantly educate yourself with trading knowledge. Even though binary options look easy and simple, there is a lot that goes into constantly turning your trades into a profitable one.
Moreover, you are less likely to commit mistakes and perform better trading analysis when you are equipped with trading knowledge.
Learn To Trade Binary Option (Manual Vs. Automated Trading)
You can either manually trade binary options or can use binary options software which will do the trading for you.
When you trade manually, you choose the asset, the expiry time, and most importantly, the decision to call or put. Everything depends on you alone. Moreover, you have to set a strategy using indicators and trend lines to make a decision.
In the case of automated binary options trading, a binary robot does all the work for you. It is a programmed software that makes decisions based on certain algorithms.
On the other hand, most binary options robots allow you to customize settings such as investment per trade, risk level, indicators, and choice of assets.
However, if you want to completely leave your fate at the hands of the trading robot, you may do so. Or you can put manual effort also by building strategy.
We would recommend a mix of both auto and manual trading for the best results. We have compiled and reviewed the best binary option trading robots for you.
What are Binary Options and How Do They Work?
What is a binary option?
A binary option is a financial instrument based on a simple yes or no question where the payoff is a fixed amount or nothing at all.
This means binary options offer defined risk and clear outcomes on every trade.
Each binary option trade starts with a question – will this market be above this price at this time? If the answer is yes, you can buy the option. If it’s no then you can sell the option.
The price of a binary is always between $0 and $100, and just like in other markets, there is a bid and ask price.
The binary options we offer are always built the same way. Each trade is easy to understand.
If you think about it, binary options reflect the way we think about things in our daily life. Things either happen or they don’t. With a binary option, payouts reflect that and are always all or nothing at expiration. You’ll find we like to keep trading simple.
You can also close a position early to lock in profits or limit losses.
As an active trader, we know you are busy scanning markets each day. You are dealing with complexity all the time. The last thing you need is to be slowed down with more complications and hard to understand details with a brokerage.
When you trade, we know you want to focus on the market and your position, not on a series of unnecessarily complicated products.
So we built an innovative full service exchange to trade binary options that lets you do just that.
How do binary options work?
There are three concepts to learning more about how binary options work; the underlying market, strike price and time to expiration.
Become familiar with those three concepts and you’ll understand the basics of binary options.
Let’s walk through the three parts of each binary option trade:
With binary options the amount you pay is the maximum you can lose. Because of that we say your risk is capped.
Maybe you don’t want to wait until expiration. You can place an order to close your position to limit loss or lock in profit early.
Along with offering clear outcomes and defined risk, we also designed our binary options to work in a way that offers unique leverage that enables opportunities to profit even from small market movements.
1 The first step is to pick the assets or event you want to trade. Each one is based on an underlying market and your trade is based on that underlying markets price movement.
2 Then you want to find a strike price that works for you. The strike is the price level you think the market will be above or below at expiration.
3 When opening a trade you will select an expiration day and time. The expiration is the moment of truth traders live for. This is when trading is over and the value of your binary option is determined.
How risky are binary options?
You always know your binary option risk reward ratio before you enter into a new trade. Your trade is fully paid for up front, which means you will never lose more than you pay. You always know exactly what you have at risk.
Trading also offers the opportunity to profit. Just like you know what you have at risk, you will enter each trade knowing your maximum potential reward.
We’re serious about helping you understand and limit your risk. Our goal is to let you define and understand it clearly and upfront on every trade.
It’s why we’ve worked to design and offer an innovative way to define and cap risk while also providing an affordable way to trade.
You can start with one contract at a time for less than $100, and decide your maximum risk and reward up front when you set up the trade.
Here’s how that works:
If you buy a binary option contract for $30, hoping to have it end at $100, your profit target is $70. This is $100 less your $30 investment. A loss would never be more than $30 no matter how much the market moves.
We think that hard to understand margin requirements, complicated fees and confusing payout structures can make trading riskier than it needs to be.
You can make those things part of your past by trading binary options with us.
How are binary options regulated in the US?
Binary options are legal and available to trade in the US only on a Commodity Futures Trading Commission (CFTC) regulated United States exchange.
We are a full service exchange located in the heart of Chicago’s financial district and we are regulated by the CFTC.
As the leading United States based binary options and spreads exchange, we are proud to say we are designated by the CFTC as a Designated Contract Market and Derivatives Clearing Organization.
What this means for you is we are a well-regulated and leading binary options exchange.
Our role as the leading US based binary options exchange is to match buyers and sellers in a fair, accurate and secure way.
That way you can trade multiple global markets with us from one account knowing your trades are fair and your money is safe.
Binary options trading example.
Let’s walk through a trade on the EUR/USD currency pair.
Here is how the outcomes work at expiration:
- If the market is at or below 1.1600 at 3AM ET the seller will get the $100 payout.
- But if the market is one tick or more above 1.1600, you get the full payout as the buyer.
If you don’t want to wait until expiration, you can close your position at the current market price. Your profit or loss in that case is the difference between your entry and exit prices.
Each binary option reflects a question. In this case, the question is, will EUR/USD be above 1.16?
We show that as EUR/USD > 1.1600
In this example, the option has 4 hours til expiration and it’s 11pm.
If you think EUR/USD is going to be above $1.16 at 3AM, then you would then buy the binary.
How To Trade with The Moving averages and RSI Strategy
By using moving averages and the Relative Strength Index, you can construct a strategy that delivers effective yet simple trades.
What is a ‘moving average’? It is the simple average over a certain number of periods. This technical indicator aids you in trading with the trend. Being lagging indicators, they do not predict future trends but instead give confirmation of trend continuation. Upward trending moving averages indicates an uptrend and vice versa.
Many traders look at the 50-, 100- and 200-day Moving Averages of asset prices but we can also use Fibonacci numbers such as 13, 21, 34 and so on to capture herd behaviour in the market. Exponential moving averages can also be used, placing more weight on the most recent periods.
Whatever the variant of moving averages, find the best one that generates reliable signals for the trading instrument. Moving averages are easy to interpret; if the price is above the moving average bullish momentum is dominating, if it is trading below the moving average then bearish momentum is dominant.
What is the Relative Strength Index (RSI)?
The strategy blueprint
The moving average & RSI strategy utilises both of these indicators to work together as a system. To follow the system, we need to examine the conditions for entry, stop loss and take profit of trades.
Entry: There are two types of crossovers with respect to moving averages that form the foundation of this strategy.
- Firstly, when the price action closes above or below the moving average, it indicates that resistance or support has been broken and there is a shift in momentum. This can be used to determine entries into long or short positions, for instance, when the price closes below a moving average, it indicates support has been broken and a shift to bearish momentum so we should look to sell.
- The second type of crossover is when the short-term moving average crosses over the longer-term moving average. You can use this to identify strengthening momentum in one direction. For instance, when the short-term moving average crosses above the longer-term moving average, this generates a buy signal.
Also, the RSI is used to confirm the moving average signals. The equilibrium level for the RSI is 50, where if the index is above 50 this suggests bullish momentum. When it is below 50, this indicates bearish momentum. So when the moving averages generate a signal, you can use the RSI to check if momentum is strong enough to justify taking your trade.
Stop Loss: The moving averages can be used to exit a trade when it turns out to be unsuccessful to limit your risk. You would place stops just above or below the moving averages since these are important resistance or support levels. For example, if the price action closes above the moving averages, then we would place the stop loss just below the moving averages as they will now provide support.
Take Profit: This is where the RSI comes in. This index indicates overbought and oversold regions and suggests a reversal is more likely when the index is within these regions. Therefore, you should hold your position until the RSI enters the overbought region for buy positions or the oversold region for sell positions.
The chart below illustrates how to use this strategy. The first white arrow indicates that the price action closed above both of the moving averages giving a bullish signal. EUR-USD closed above both moving averages at 1.08919, which is illustrated by the yellow ray, and this provided an indication that an upward trend was starting. Also, the RSI was higher than 50 at this point confirming bullish momentum.
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Long positions or call options would then be entered into at this price and once that candle closed on the hour. Then we should look at the 13-period moving average (orange line) to provide support and exit the trade if the price closes below this moving average.
The long position is held until the RSI indicates overbought conditions in the market, that is when the RSI is larger than 70. This also signals that the uptrend may soon reverse. Overbought conditions are indicated by the RSI and with the white arrow on the chart. This occurs on the hourly close at 1.09535 and this would be your exit price, indicated by the yellow ray. Notice that a few hours after this, EUR-USD started to move lower and broke back below the moving averages.
Another buy signal was provided by the crossover of the moving averages indicated on the chart by the second white arrow. When the 13-period moving average crossed above the 21-period moving average, the price closed at 1.0924. Bullish momentum is confirmed as at this entry the RSI is larger than 50. The exit is still the same at 1.09535.
Now let’s look at another example but for a short position. The chart below shows GBP-USD on the daily timeframe. The slower moving average is trending above the faster moving average indicating a downward trend. The best strategy in this case is to wait for the price to test the resistance provided by the moving averages and then enter a short position when the price action closes back below the moving averages.
For example, in the chart above the price action briefly trades above the moving averages for a few days in December. Then we obtained a sell signal when the daily close was below both of the moving averages at 1.50348 indicated by the white arrow. Also, using the RSI we see that the index indicates bearish momentum since it is below 50.
So a short position or put option would be entered into at this level 1.50348. The stop loss would be either of the moving averages and an exit point is reached once the market is indicated to be oversold which occurred when the price action closed around 1.4400.
Advantages and limitations
Using shorter time periods for moving averages is more likely to lead to false signals whereas longer period moving averages are likely to give more successful signals. Similarly, using technical indicators on longer-term timeframes provides more reliable signals than those on lower timeframes. The strategy is best used on the 4-hour, daily or weekly timeframe.
Purely technical analysis most also watch out for any fundamentals and the economic calendar. Traders just focusing on technical aspects will get a shock when an unexpected data reading is released. Therefore it is important to be aware of any important data releases that may affect your trade plan based on this strategy.
In summary, this strategy is easy to use, effective and can be used to trade a range of instruments. By using Fibonacci numbers for the moving average period captures herd behaviour in the market. Two types of crossovers generate entry signals which should be confirmed with the RSI. Exits are determined by both the moving average and RSI depending on whether the trade is successful or not. When making a trade, you just wait for the RSI to indicate overbought or oversold conditions and then exit with your profit.
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