Best Beginners Guide
Beginners to binary options should be aware of all of the hidden jeopardies before they start trading on a live account. You must know all disadvantages of binary trading to put yourself in a better position.
Your chances to profit on the market will definitely increase if you trade at a regulated binary broker. With a $10,000 demo account, you can start practicing binary options risk free.
The binary options are derivatives or synthetic products, which are used by investors to better hedge their risks. The binary product is offered by exchanges or licensed brokers, which operate as betting houses. The latest are offering traders the opportunity to profit on the market with simple predictions of Higher or Lower on the price.
The options for High and Low are offered with a fixed payout of about 85%, and the risk is defined by the trader. You can place $100 trade and make $85 profit in less than 5 minutes, but you should also know if your contract expires out of the money, you lose the initial $100.
History of binary options
The binary options industry evolved in the United States after the financial crisis in 2008 and for a short period spawned across the globe. It all started with the CFTC regulated binary options exchange NADEX, which began operating after a merger with the UK-based IG Group. Many brokers, most of them based in Cyprus, followed the trend but didn’t follow the exchange model. They started operating as betting houses by offering fixed returns on forex and stock binary options. After the rise of Banc de Binary, many crooks flooded the industry, which soon became out of control.
Binary options trading or gambling
If you are familiar with financial betting, which is offered by the UK bookmakers, you know binary options are a similar product. From that point of view, binaries could be considered very close to gambling. But since CySEC regulated the product, binary options were widely marketed as a financial instrument. Many binary brokers were operating with CySEC licenses before the crash in 2017. Some other brokers continue operating with a gambling license in Malta. The debate whether we trade or gamble with binary options is not likely to fade away, so traders can decide for themselves.
How binary brokers make profit
Most the binary firms are operating as market makers, which means when a trader places a Call or Put option, the broker executes the trade in-house and becomes the counterparty. This naturally leads to a conflict of interest between the parties because, when a trader makes a profit, the broker suffers a loss. On the other side, the exchange model avoids a conflict of interest by matching the traders and the market makers on every trade. Thus far, there is one well-known binary options exchange, NADEX, which operates in the United States.
How to avoid binary options scams
You can make profit with binary options and withdraw your money in less than one hour, but this can only happen if you trade at a regulated company. There are thousands of fraudulent schemes in the financial industry, and binary options are certainly not a safe haven. Not only are the scam brokers chasing your money, robots and binary gurus are as well. If you are new to binary trading, you better first learn how to avoid scammers before it is too late.
How to choose your broker
You can, of course, test drive any broker on a demo account, but when it comes to opening live account, you better do your research. You shouldn’t always trust comments and reviews by other traders because they could be fake. First, check the “Regulation” pages on the broker’s website and make sure the clients’ money is protected in segregated accounts. Spend some time in live chat with the broker’s representatives and ask them questions, including their license, withdrawal approvals and fees. The payouts are also important, of course. Your broker should guarantee you at least an 85% return.
Demo vs Live account
When you open a new trading platform, web or mobile app, you first demo it. That is natural. The question is this: once you have a profitable strategy that works on your demo account, how long should you wait before you go live? To be on the safe side, you should demo your binary trading strategy until you reach at least an 80% win ratio. It is well-known that, to make profit, you need at least 60% ITM trades, so by reaching 80% you are giving yourself enough space to manage the risk.
Many traders are entering binary options with the idea of making big money in a short time. The opportunity to place a $1,000 trade and make $850 net profit in 60 seconds is indeed tempting, but it requires considerable skill to maintain such tactics. When you are a rookie, you probably wouldn’t risk your entire initial deposit in one trade. It is true that only one pip in the correct price direction will make you profit, but it is equally true you are one pip away from losing it all.
It is much advertised that in binary options the risk is fixed and you can’t lose more than you invest. That is true, but it is also true that some binary traders tend to gamble and double their investments to cover previous losses. Beginners should keep in mind the martingale strategy is a casino system that could easily blow their trading accounts. You have to decide whether will you gamble or make decisions based on market behavior.
It is worth knowing that binary trading, like gambling, could lead to addiction. Scientists just recently discovered that addiction is not a dependency on a chemical but repeatedly pursuing a reward. When we trade and make profit, the neurons in our brain squirt out dopamine, which gives us little waves of satisfaction. Making $100 profit could be a delight, but soon, you may want a bigger reward and you could push yourself into riskier ventures.
How to learn binary options trading
Many binary gurus on YouTube try to sell the idea you can make profit by simply learning one strategy or buying an auto-trading robot. Well, good luck with that. Some forex experts, on the other hand, say you don’t need to analyse fundamentals because everything is reflected on the chart. Yes, we all know price action reflects past economic events, but we actually need to look into the future. In fact, the fundaments are the driving forces behind price, and it would be stupid to ignore them.
How to build a trading strategy
Yes, you need a strategy when you trade binary options to keep profiting in the long run. However, will you build your own strategy or will you look to buy someone else’s great success. With brokers offering about 85% payout on a successful trade, you have to keep your winnings above 55% just to break even. Many binary “experts” try to sell some quick reach scheme with a 99% win ratio, but this couldn’t be more fake. If you had spent some time trading on the markets, you would know that anything above 70% is a great deal.
Binary options vs Forex
It is true that, with binary options, your risk is limited and you can make profit with only one pip in the right direction. However, it is also true, once you enter the contract, you have limited tools to manage it. Some brokers are offering the feature “Sell option”, which allows you to minimize eventual losses before the original expiries. When trading forex, you have to deal with leverage and spreads. Binary trading is much more simplified since you are not using leverage and you are interested only in the strike price.
Binary options trading might look easy to you, but profiting in the long run is far from an easy job. About 90% of traders struggle to maintain consistent income. To get into the 10% club, you have to gather your wits and quit gambling. The martingale strategy could save you a few times, but it won’t always work.
You must toss aside the idea of making big money with some magic indicators and auto-trading robots. Humans still have an advantage: intuition. If you have the pulse of the markets, chance will be on your side. You better invest time into learning fundamentals and price action. You’ll need them both to succeed.