Binary options are the hottest new investment trend. But what exactly are binary options and how do you trade them? In this guide, we introduce you to binary options and tell you everything you need to know to start a successful trading career.
In detail, we will answer these questions:
- What are binary options?
- Are binary options safe?
- Who should trade binary options?
With the answers to these questions, you will know whether binary options are right for you, and you how to test binary options risk-free, and how to start your career in a way that allows you to make money from the start.
What are binary options?
Binary options are a relatively new form of investments that have developed from earlier forms of option assets. To understand binary options, there are three main things you have to know. Those things are:
1. With binary options, you are making a prediction about an asset; you are not trading the asset directly
Most people know how stocks trading works. When you buy a stock, you actually own the stock. You can keep it, or you can sell it at any time for any price that a buyer is willing to pay for it. Intuitively, many newcomers to binary options think that they work in the same way as stocks. This is a misconception.
With binary options, you are not buying and selling something, and you never own the asset. All you do is make a prediction about what will happen to the asset’s price.
This prediction can be very simple. You can, for example, predict that in four hours, the price of a stock will be higher than it is now. This is a prediction that you could trade with binary options. Instead of buying and selling the stock, you never own it, but you can make money with it nonetheless.
2. How much money you make with binary options relates only partially to the asset’s performance
With binary options, your profits are determined differently than with stocks. When you buy a stock and its price rises by 3 percent, you make a profit of 3 percent. It is not enough to buy a stock whose price will rise, the price has to rise significantly. There is such a thing as being right and being more right. Intuitively, many newcomers to binary options expect them to follow the same system.
Binary options determine your profit differently than stocks. As we pointed out, with binary options, you make a prediction. When you make this prediction, your broker offers you a payout that it is willing to pay you for if you win this prediction. This payout determines how much profit you can make on this trade. With a payout of 80 percent and an investment of $100, for example, you will make a profit of $80 if you win your binary option.
In this system, you are either right or wrong. There is no gray area as with stocks where you can be right and more right, the entire system is binary, hence the name binary options.
When you predict that an asset’s price will rise over a given period of time, it is unimportant by how much the asset’s price will rise. Whether it rises by 100 percent or by the smallest possible margin, you always get the same payout.
3. Binary options are short-term investments
Compared to most other forms of investments, binary options are short-term investments. With stocks, for example, most experts recommend that you should buy a stock and then hold it for decades. This advice makes sense, but it is mostly due to the fact that you can be right and more right with stocks. By holding a stock for years, traders try to be more and more right and increase their profits.
With binary options, there is no such need. When your prediction comes true, you always get the same profit. Consequently, it makes sense to reduce the time period over which you make these predictions to the shortest period possible for you to trade profitably. If you can make a profit of 80 percent over 1 hour, why would you wait a year to make it?
Binary options use predefined expiries from 30 seconds to a few hours. While there are long-term options that allow you to make predictions over days, weeks, months, and even years, these options are more of a niche. The main focus of binary options is short-term investments.
4. Binary options offer an unmatched potential to make money
Combining the first three points we made about binary options, it is obvious why binary options offer an unmatched potential for you to make money. With a single investment over a few minutes or hours, you can make a profit of 80 percent or more. With stocks, the trading fees would be too high for such short trades to make sense.
Many binary options traders place five trades a day. In fact, five trades would be an average number even a hobby trader could achieve. Having the ability to make a profit of 80 percent or more with each of these trades is a unique potential.
Over the time of one month, stocks and other regular assets offer a limited potential for making money. The best traders might make an average profit of 1 percent per month, but anything more than that would be an illusion. There will be months when it is simply impossible to make money with stocks.
Binary options, on the other hand, can help you to make more money than with stocks, and they can help you to make money in any market environment. Because of the high number of trades that you can make with binary options, you can also expect an averaging effect that allows you to predict how much profit you will make over the course of one month.
This is why it is much easier to finance a lifestyle with binary options than it is with stocks and other conventional assets. With binary options, you can make more money, you can make money in any environment, and you know what to expect by the end of the month. These are the features you need to create a steady stream of income.
5. To make money with binary options, you have to get away from random trading
When they trade conventional assets such as stock, most traders employ a very simple form of money management, and they pick the assets they invested in more or less randomly and based on how they feel.
They simply spread their money over a number of stocks but do not pay too much attention to how much money they invest in each stock. Quite often, traders invest half of their money or more in a single stock, simply because they like the firm’s products.
With binary options, this style of investing is a recipe for disaster. To make money with binary options, you have to get away from trading randomly. You need a good money management and a good trading strategy.
When you lose a binary option, you lose all the money you invested in it. Investing 50 percent of your money into a single option means that you will sooner or later lose one of these trades and half of your money will be gone.
When you lose two or three trades of this type in a row, you have dug yourself into a whole that it will be tough to get out of. For each 50 percent loss, you need to double your money again just to get back to where you started. Having to double your money four or five times without losing a trade in between is a tall order that is almost impossible to accomplish.
To prevent such a disaster, binary options traders use money management strategies.
A money management strategy defines how much money you invest on a single trade. The most effective type of money management strategy and the type of money management strategy that we recommend is a strategy where you invest a small percentage of your overall account balance, ideally less than 5 percent.
When you invest 2 percent of your overall account balance per trade, for example, an account balance of $1,000 would mean that you invest $20 on a trade. As your account balance increases, you can increase your investment per trade accordingly. When you suffer a losing streak, you might have to decrease your investment.
With such a strategy, you can survive losing streaks without suffering setbacks that can end your career. At the same time, you gradually grow your capital when things are going right.
To make sure that you win enough of your trades to turn a profit by the end of the month, you need a trading strategy. A trading strategy define which assets you trade, how you trade them, and how you generate trading signals.
A trading strategy makes your trading repeatable. You know that you always make the same investment decisions in the same situation and that these decisions will help you to make money by the end of the month.
On our sites, we provide you with plenty of in-depth articles on money management strategies and trading strategies. We suggest you take a good look at these articles.
Are binary options safe?
Understandably, many newcomers to binary options wonder whether the system is safe. When you deposit money with a company you have found online, you want to be sure that you can trust this company and that your money is in good hands.
Binary options are one of the safest forms of investing that you can find. In fact, if you play your cards right, you can guarantee that you will never lose money with binary options. To help you transform this goal into a reality, we will show you how to find the 100 percent risk-free start to your trading career. Here’s what you have to do:
Step 1: Find the right broker
The first step to guaranteeing a risk-free trading career is finding the right broker. There are hundreds of websites out there, which can make things look more difficult than they really are. The good news is that when it comes to finding a trustworthy broker, there is an easy way for you to make a good decision: this way is making sure that a broker is regulated by a trustworthy government.
Just like all banks have to fulfill certain minimum criteria in order to be allowed to handle their customers’ money, governments control binary options brokers, too. As long as a broker is controlled by the European Union or the United States, you can be absolutely sure that the broker is trustworthy.
These brokers have to abide by strict regulations that protect you and your money. One of the most notable examples of this protection is that these brokers have to keep the money of their customers in a separate account from their own money. When a regulated broker has to file for bankruptcy, this system guarantees that its traders will always get their money back. With an unregulated broker, this money could be gone.
Similarly, EU and U.S. government regulations guarantee that you have a fully functioning legal system that monitors every aspect of a broker. Consequently, you can be sure that there is no funny business going on and that the broker is not trying to trick you.
For U.S. traders, the decision which broker to sign up with is simple. There is only one broker that has accepted regulation by the CFTC, the U.S. government authority monitoring binary options. This broker is Nadex. Nadex is the only broker that is legally allowed to offers its services to U.S. traders, and all brokers that are regulated by the European Union will refuse U.S. traders as customers. Consequently, the only other brokers that are willing to accept U.S. traders are unregulated and untrustworthy.
Luckily, Nadex is one of the best binary options brokers in the world, offering a completely trustworthy service and the highest payouts that you can get anywhere. If you are from the United States, you can skip to step 2 and sign up with Nadex straight away. Follow one of the links we provided for you, and you will be fine.
If you are not from the United States, there are a few alternatives to Nadex. While we generally recommend Nadex as one of the best brokers to anyone regardless of where they are from, traders from the rest of the world can also take a look at the brokers that are regulated by the European Union.
In our top-list of available brokers, we have gathered a selection of the best brokers you can find. Take a look at the list and pick the broker you like best. We generally recommend IQ Option as a great alternative to Nadex. With IQ Option, you will be equally well-set-up for the next step to risk-free trading.
Step 2: Develop your strategy with a demo account
Once you have chosen a broker, it is time to start trading. The danger, of course, is that you will make rookie mistakes that cost you a lot of money. This is where most traders fail: they suffer a few early losses and turn their backs on binary options trading as a whole. Luckily, there is a tool that can eliminate this risk. This tool is a demo account.
A demo account works just like a regular trading account, but there is one major difference: you can trade with play money instead of real money.
In this environment, you can test all the functions of a regular trading account, but you are protected from all risk. You can develop your strategy without having to worry about losing money, and once you are good enough to know that you will make money by the end of the month, you can switch to real-money trading and turn a profit from the start – this is the genius of a demo account.
To get the best demo they can, newcomers have two alternatives.
- Get the Nadex demo. Not only is the Nadex demo with one of the best brokers that you can get, but it is also a rare deposit-free demo. Where other brokers require you to get one of their regular trading accounts, which involves depositing at least $250 with the broker, you can get the Nadex demo by simply signing up for it with your email and a username. The system is completely free, helping newcomers to find easy access to the binary options market.
- Get the IQ Option demo. The reason why we mentioned IQ Option earlier is that IQ Option is one of the very few brokers other than Nadex that offers a deposit-free demo. IQ Option is regulated by the European Union and offers some of the highest payouts you can find outside of Nadex, which makes IQ Option a legitimate alternative for traders outside of the U.S. You can get the IQ Option by simply signing in with your Google account, Facebook account, or email.
For newcomers, we strongly recommend choosing either the Nadex demo or the IQ Option demo. Develop your strategy and test your skills, and when you have found a way to guarantee that you will make money by the end of the month, switch to our next step.
If you should find that binary options are not for you, you should get out at this point. You have neither lost nor risked anything, and you have learned something new about yourself and how financial markets work, and you had some fun. That is a huge positive, too.
In this way, the Nadex demo and the IQ Option demo help everyone to be a winner without risking a single Cent. If you are new to binary options, follow one of our links to Nadex or IQ Option, and try their demos now before you do anything else.
Step 3: When you know that you will make money, adapt your strategy from the demo account to real-money trading
Once you have developed a winning strategy and can guarantee that you make money by the end of the month, it is time to switch from your demo account to real-money trading. If you have done everything right during the first two steps, you should now be able to adapt your strategy exactly as it is and turn a profit right from the start.
By now you should have a clearly defined trading strategy and a clearly defined money management. If you have both of these things in place and can make money regularly, start trading with real cash.
Who should trade binary options?
Binary options are a unique form of investing with unique characteristics. Not every trader is a good fit to trade binary options, but there are some types of personalities who can profit immensely from switching to binary options trading. Let’s take a look at these types.
1. Traders who want to make as much money as possible as quickly as possible
As we mentioned earlier, binary options offer an unmatched potential for profits. Compared to stocks, where even the best traders are unable to make more than 10 percent per year over a longer time span, good binary options traders can make 10 percent in one week – every week.
The downside to this high potential is that it requires you to be more active. With stocks, it might be enough if a trader makes one trade per year. To maximize the potential of binary options, you have to make multiple trades every day.
In this sense, binary options offer a tradeoff: you have to invest more time, but you get more in return. Not every trader is willing to make this tradeoff, but those traders who want to maximize their earnings are glad to have the opportunity to make this deal. Consequently, binary options are ideal for those traders who want to trade their way to the top through hard work and dedication.
2. Newcomers who want to learn a lot quickly and risk-free
For newcomers to the trading arena, binary options combine a number of characteristics that make them the ideal tool for a crash course in how financial markets work.
- The deposit free demos of IQ Option and Nadex allow traders to get easy access to the financial markets. With other types of assets, you have to invest real money from the start, which is an unnecessary risk no trader should take.
- As short-term investments, binary options teach you a lesson every few hours. With stocks, you might have to wait for years to learn whether you have made the right investment decision. By then, the market environment will have changed, and you will be unable to adapt what you have learned from your last trade to the next trade. With binary options, you can easily make five trades per day. You will learn more quickly and find a much quicker way to success than with stocks.
- Binary options give you definite feedback. When you invest in a stock, you are never 100 percent right or wrong. Lingering questions always remain, and if you lost money, there is always the possibility that you could have made a profit if you held the stock a little longer or sold a little sooner. This uncertainty makes it difficult to learn. With binary options, you always get definite feedback. You know whether you are right or wrong, and you know when you made a bad decision. This system allows you to learn much quicker.
As a consequence of these three advantages, binary options are the ideal trading style for newcomers to the trading scene. Even if you do not intend to trade binary options forever, every trader can profit from using a deposit free to get a feeling for the fast-paced market environment of short time frames.
3. Traders with limited time
Compared to conventional assets, binary options have another huge advantage. When you invest in a binary option, the predefined expiry determines when your option will close, which is why you can forget about an option once you have invested in it – your broker will take care of everything. With assets such as stocks, things are more complicated. You have to monitor your asset constantly and find the right time to exit, which is a time-consuming task.
For traders who have a busy day, it is almost impossible to day trade stocks and other assets such as CFTs. Binary options provide these traders with a trading style that they can fit into their schedule.
Whenever they are in a meeting, stuck in traffic, or waiting for their girlfriends, these traders can scan the market for a trading opportunity, invest in an option, and check back on the results whenever they have time. There is no need to constantly focus on the option and find the perfect exit; you can predetermine the perfect exit when you set your expiry.
This is the system that traders with limited time need. It is quick, easy, and simple, and it adjusts to their daily schedule perfectly.
Binary options are a new style of trading the financial markets that offer an unmatched potential for earnings. Due to their unique characteristics, binary options require special trading strategies and a solid financial management. With a deposit-free demo account, you get the perfect opportunity to develop your strategy in a risk-free environment. You can switch to real-money trading when you can guarantee to make a profit by the end of the month, which allows you to start your trading career completely risk-free.
If you are from the United States, we recommend you follow one of our links to Nadex and test their demo now. If you are from anywhere else in the world, you can also think about testing the IQ Option demo. We have provided links to both brokers, feel free to pick the one you like best.