Newcomers face the difficult decision of picking an asset to start with. With their unique new style, binary options for newcomers offer an alternative. But is this alternative legitimate? This article will answer this question and detail how binary options can help newcomers to become successful traders, enabling you to decide for yourself whether you want to start with binary options or a different type of asset.
In this article, Binary options for newcomers, you will learn:
- What is the difference between binary options and other asset types such as stocks and CFDs?
- How binary options can offer newcomers a risk-free way into trading
- How binary options allow newcomers to control their risk once they invest real money
With this information, every newcomer will be able to use binary options to understand the financial markets more quickly and to perfect their short-term trading skills in a risk-free environment.
Binary options for newcomers: What’s the difference between binary options, stocks, and CFD?
Stocks are the classic trading tool of many traders. Based on the relation of supply and demand, a stock’s price can rise or fall, which determines your profit. With CFDs and binary options, you do not invest in the stock itself, you invest in a prediction about the stock’s price.
Binary options and CFDs both are new ways of trading the financial markets that evolved from specialized assets. Traditionally, these specialized assets were used by banks and professional traders to make sophisticated predictions but were too complicated and too difficult to obtain for private traders and newcomers.
To understand the difference between CFDs and binary options, it is important to understand the nature of the sophisticated assets they were built on.
Banks and other professionals traded sophisticated assets because they provided them with two advantages:
- They were able to invest in specific predictions about the market that allowed them to make more money. They were able to predict that an asset’s price will reach a specific target price, that it will not leave a specific price range, or that it will trade higher than a specific price at a specific time. These specific predictions allowed them to trade more precisely and make more money.
- They were able to leverage their money. Because these assets allowed traders to invest more money than they actually had, they could make more profits. Some assets provided traders with a leverage factor of 200 or even 400 times their investment, which means that, if these traders invested $1,000, they were trading with $200,000 or even $400,000.
Of course, both of these advantages also come with a downside. Complex assets take time to master and leverage means that you can lose more on one trade than you have in your entire account. If you invest $1,000 with a leverage factor of 400, the market would have to run only 2.5 percent against you, and it would wipe out your whole investment.
CFDs have made this trading style available to everyone. In the process, they have made little changes to the basic nature of the assets – you can leverage your money, and you can trade sophisticated predictions. While this approach has kept the advantages of sophisticated assets, it also failed to eliminate their disadvantages. Most significantly, because of the leverage factor, new traders can lose a lot of money on a single trade, potentially even more than they have in total.
Binary options aim to keep the advantages of CFDs and classic sophisticated assets but eliminate their disadvantages. For this purpose, they offer you a similar range of sophisticated predictions to invest in, they let you know in advance how much money you can make or lose on a trade, and you can choose whether or not to accept these odds.
The classic binary options type is high / low options, which allow you to predict whether the market will rise or fall over a given period of time. If you are right, you get a payout of around 75 percent to 80 percent. Other binary options types enable you to predict whether the market will reach a target price or escape a price corridor. Risky predictions promise higher payouts, which offers every type of trader a binary options type that matches their level of risk tolerance.
For newcomers, this setup has a number of advantages. Let’s look at them one by one.
How binary options can offer newcomers a risk-free way into trading
Binary options offer a tool called a demo account. With a demo account, you can test all the features of a regular binary options account, but you can invest play money instead of real money. Because of this simple change, a demo allows you to test all aspects of binary options trading completely risk-free.
With a binary options demo, you can test whether you have what it takes to become a successful binary options trader, whether you like to trade short time frames, and whether you have a feeling for the market at all. These are important lessons to learn, and being able to learn them in a risk-free environment is an invaluable advantaged.
Many new traders simply invest in a few stocks to get started and hope for the best, but this strategy often results in rookie mistakes and significant losses. Disenchanted and disappointed, these traders decide to avoid the market from now on and miss out on large profits.
Additionally, binary options are short-term investments that allow you to make more trades and learn quicker than with stocks. With expiries from 30 seconds to a few hours, binary options enable you to make multiple trades per hour.
Every trade will teach you a valuable lesson. Learning to trade means to make many trades and to combine the lessons of these trades to one piece of knowledge. With binary options, you will learn much quicker than with stocks, where you might have to hold an asset for days and weeks before you know whether you have made the right decision and can learn your lesson.
A binary options demo can be your risk-free crash course in market behavior. Within a week or two, you know whether you like analyzing the market and the concept of short-term trading.
With a binary options demo, you can get a safe start and learn the basics quickly. Even if you should decide that binary options are not for you, you will have learned a lot about how the market works, which types of indicators can help you to make decisions, and which types of strategies work well for you. In this way, binary options might not be the final destination for everyone, but it is a great tool to get you started on your journey.
How binary options allow newcomers to control their risk once they invest real money
Once you are finished with your binary options demo, you have to decide whether to invest real money in binary options. If you choose to do so, you have to make the transition from play money to real money, which can sometimes be dangerous. Where rookie mistakes were without consequences in your demo account, they can now cost you a lot of money.
Consequently, many newcomers to leveraged assets never make it past the rookie stage. Scared off by big losses, they decide to quick trading, even though they might have a talent for day trading and just suffered from bad luck a few times.
Binary options for newcomers make controlling the consequences of your inevitable rookie mistakes easier than CFDs and other leveraged assets. The downside to leveraging is that you might lose more money on a single trade than you have in your account. Consequently, one unfortunate rookie mistakes where you invest too much on a single trade might mean the end of your trading career.
Without leveraging but a similar capacity for big profits, binary options offer a simple risk/rewards calculation that even complete newcomers understand. Before you invest, binary options always let you know how much money you can win and how much you can lose on this trade.
- There is a predefined payout, and if you win, you get this payout.
- If you lose, you lose your investment, but never more. Limit your investment per trade to a few percent of your overall capital, and you limit your risk.
This certainty makes it easy for newcomers to set up a risk/reward calculation, to avoid big losses, and to get a successful start to their trading career.
Binary options are a fundamental departure from classic trading styles. As with everything that is fundamentally different, binary options are not for everyone. Some will love their unique characteristics; some will hate them.
The great thing about binary options is that they make testing them so easy. With a demo account, newcomers can get a risk-free look at what binary options trading is like, and they can test their skills without having to fear real-money losses. With the many binary options apps that are available for all mobile devices, learning the basics of trading resembles learning a new mobile game. The only difference is that if you should find that you are good at this game, you can become rich in real life.
If binary options are not for you, they are a great way to learn the basics of trading nonetheless. Stocks, CFDs, and binary options – they all trade the same market, and once you understand how this market behaves, choosing the right tool for you will become easy.