Binary options are one of the fastest growing investment types. Over the last few years, binary options for day traders have become more and more popular.
Was that a smart move? Can binary options present a legitimate alternative to CTFs and conventional assets for day traders? In this article, Binary options for day traders, we will shed light on these question.
In this article, you will learn:
- What are binary options?
- How can day traders profit from binary options?
- Which types of day traders should trade binary options?
With this knowledge, you will immediately be able to judge whether binary options are a legitimate alternative to your current type of investing. Learn more in our article Binary options for day traders here:
Binary options for day traders – What are binary options?
Binary options are a new way of trading financial markets. Binary options are revolutionary different from conventional assets for a number of reasons:
- Binary options use a predefined payout: With binary options, you know what you can win before you invest. In every situation, your broker will offer you payouts for every possible investment. You choose which payouts you accepts, and which you pass up.
- Binary options use a predefined expiry: With binary options, you define when your binary option ends before you invest. You can choose the expiry from 30 seconds to months and years, with hundreds of steps in between.
- Binary options allow you to invest in rising and falling prices: Binary options always allow you to choose whether you want to invest in rising or in falling prices. Binary options also make investing in falling prices easier than other assets. With conventional assets such as stocks, it is difficult to invest in falling prices and the most advanced investment types are reserved for banks and professionals. Binary options make these types of investing available to everyone.
- There are many different binary options types: Where conventional assets only offer one investing style – you buy an asset, or you do not – binary options offer many different types that all offer a different trading style. With high/low options, for example, you can predict whether the market will rise or fall over a given period of time, with one touch options you can predict whether the market will reach a predefined market price, with boundary options you can predict whether the market will leave a price corridor, and there are many more.
As you can see from this list, binary options are fundamentally different from other investment types. Consequently, they offer new possibilities and new chances no other asset type can offer. Let’s look at these possibilities and how day traders can use them to their advantage.
How can day traders profit from binary options?
With their unique characteristic, binary options present a similarly unique set of advantages and disadvantages. Day traders can use the advantages to make their trading more profitable and trade unique new strategies. Learn more about binary options for day traders now:
- Binary options make trading more quantifiable. Because you know the payout you will get in advance, binary options make it easy for you evaluate each trading situation in terms of risk and reward. If you know that you will win trades based on a specific indicator 70 percent of the time, you know exactly which payout you need to trade this strategy profitably – roughly 60 percent. The next your indicator creates a trading signal; you only need to check whether your broker offers you a payout for the trader that is larger than 60 percent. If they do, you know that you will make money if you invest in these situations. With conventional assets, you face more uncertainty. You never know how much profit you can make, which is why creating a risk/reward calculation is more difficult.
- Binary options make managing risk easier. With binary options, your risk on every trade is limited to the amount of money you invest. This is a fundamental difference to CTFs and other leveraged assets, where you potentially can lose more than you own if the market runs against you far enough. While providing a similarly high earning potential, binary options make it easier to manage your risk than other types of short-term investments.
- Binary options allow new trading strategies. Binary options offer many different trading styles that allow all sorts of new strategies. With one touch options, you can predict whether the market will reach a target price; with ladder options you can predict that the market will trade above or below a target price when your option expires, and so on. Each option type has its own unique risk/reward ratio, and the amount of strategies that you can build on this variety of trading styles is almost endless.
- Binary options make trading easier. Banks have long offered assets that allow more complex predictions than stocks. With knockout certificates and the alike, you can make predictions that resemble binary options trading styles. While these certificates allow somewhat similar strategies, understanding them and getting into a position where you are allowed to trade them is difficult. Consequently, they have been reserved mostly to professional traders. With binary options, however, even complete newcomers can trade complex prediction. You choose your trading style, the stock, indices, currency, or commodity you want to trade, and invest in rising or falling prices. The whole process could not be simpler.
These four differences between binary options and conventional assets make binary options a worthwhile alternative for some traders. To understand which traders can profit from using binary options, let’s now look at two examples.
Which types of day traders should trade binary options?
Whether you should use binary options for your day trading depends on two factors: your personality and your preferred strategy. Since your strategy says a lot about your personality, let’s focus on this part and look at strategies that are ideal for binary options.
Great strategy for binary options #1: The straddle strategy
If you like the straddle, binary options can make your life a whole lot easier. With a traditional straddle strategy, traders would simultaneously invest in one asset that profits from rising prices and one asset that would profit from falling prices. They would set a stop loss for both assets and hope that the option in the direction of the market movement direction would make them more money than they would lose on the option in the other direction.
If the market moves strongly in one direction, this strategy can turn a profit. One asset will run far into the money while the other loses less than you win. With conventional assets, there are, however, two problems with this strategy:
- You have to cover your broker’s spread before you start making money. Right after you invest, both of your assets will be in the red. You will have to cover the spread before one of them turns a profit. While the market moves in one direction, the other asset will lose, which means that you will carry your disadvantage with you for the entire time of the investment. Especially when you want to trade small movements, this disadvantage grows relative in proportion.
- There is a good chance you will lose money on both options. If the market fails to move strongly in one direction, you face a problem. Alternating up and down movements might cause both of your options to run into their stop loss, which would lose you money on both trades.
Binary options can solve both of these problems. Firstly, when you trade binary options, there is no spread and no fee, which means that you can trade even the smallest movements without having to worry about the spread becoming too large.
Secondly, binary options offer a tool called boundary options. With boundary options, your broker defines two target prices, one above the current market price and one below the current price, with both target prices equally far away from the current market price. If the market reaches either target price, you win your option.
With this setup, you can replace the two assets used in conventional straddle strategies with only one asset. While you might lose this option, this worst-case scenario with binary options is no different from the best-case scenario with conventional assets. With conventional assets, however, you might lose two assets. Consequently, your risk is twice as high.
For day traders who like the straddle strategy, binary options present more than a legitimate alternative to conventional assets – binary options are the superior trading style for straddle strategy traders.
Great strategy for binary options #2: Ultra-short term trades
Those traders who want to trade the shortest of time frames with conventional assets suffer from the problem we alluded to earlier: conventional assets use a spread system, and this spread can render trading short term trading impossible.
To understand this problem, let’s look at an example. Assume that an asset is currently trading at $100 and that you want to invest in a movement that might last about 15 minutes. Such a short movement will be relatively small, maybe $0.05 in the right direction. If your broker’s spread is $0.02 for this asset, which is a realistic assumption, trading this movement makes little sense. Even if your prediction was perfect, you would waste half of the movement only to cover the spread, which would make your trading unprofitable.
With binary options, on the other hand, there is no spread. Consequently, no movement is too small for you to trade.
To put traders in the perfect position to take advantage of short-term movements, binary options brokers developed an option type called 60 seconds options. With 60 seconds options, traders can predict whether the market will rise or fall over the next 30, 60, 120, or 300 seconds.
The unique thing about 60 seconds options is that it is unimportant how far the market will rise or fall. Even if the market moves in the right direction by the smallest possible increment, you will win your option and get the full predefined payout. This payout is around 70 to 80 percent, which is much higher than you could get with a CFD or any other conventional asset.
Additionally, the ability to trade shorter time frames allows you to place more trades in the same period of time. With a winning strategy, more trades equal more money, which is why 60 seconds options can be a great tool to increase your profits.
For traders of ultra-short time frames, binary options might present a preferable trading style that enables them to trade market environment and movements that would be unprofitable with conventional assets.
Binary options are a unique form investing that provides unique advantages. For some traders, they present a legitimate alternative to classic day trading tools such as CFDs and stocks. Binary options are especially attractive for traders that want to trade ultra-short time frames, small movements, and complex strategies such as the straddle strategy.
If you trade one of these strategies, you might want to give binary options a try. Many brokers offer demo accounts that allow you to test their service and binary options with play money instead of real money, thereby putting you in the perfect position to try binary options risk-free. There is little reason for day traders to reject such an offer. If you like binary options – great. If not – you have not lost a Cent – you can only win.
Binary options are so different from everything else that it is difficult to make a general recommendation whether everyone should trade with them or not. Some traders will love them; some traders will hate them. We suggest you find out for yourself.