Binary Options Trading: What are Binary Options and How to Trade?

Are you ready to start your CFD trading journey? It is essential to master effective strategies in order to achieve success. This guide is designed to equip you with the knowledge you need to navigate the dynamic CFD market with confidence and ease. Let us begin to explore the potential of CFD trading.

KEY DISTINGUISHING FEATURES OF BINARIES

• Easy to trade — simple and straightforward to understand;
• Predetermined payouts and risks — unlike a traditional vanilla option, the possible gain is binomial, predefined and works as "all-or-nothing";
• Payout/Refund trade-off — clients may select a lower-than-base payout ratio (lower than maximum) in exchange for a refund of part of the premium in case the contract expires with a loss;
• Small trading amounts, low deposit required — binary options contracts/premium with Dukascopy Bank start from as low as USD 1;
• No commissions — Dukascopy Bank charges no fees in addition to the premium paid by the trader.

HOW A BINARY OPTION WORKS

In binary options trading, you forecast if the price of an underlying asset, like a currency pair, will rise above or fall below a certain price at a specified time in the future. A correct prediction will result in a fixed payout, while wrong prediction will result in the loss of your investment.

Binary trading essentials:

Expiration Time

Binary options may have various expiration times, depending on the option type traders are able to set contract duration from several minutes to hours limited by the end of the trading day.

Strike/Expiration Price

These are prices at the start and the end of a contract respectively. The difference between these two prices defines whether an option matures in-the-money or out-of-the-money.

Call/Put Option

Unlike Forex/CFD trading, orders placed are known as 'call' and 'put' options. You would choose a call option if you expect the asset price to be higher than the strike price at expiration, and a put option if you expect the asset price to be lower than the strike price at expiration.

Payout/Refund

If your forecast is correct at the expiration time, you will be paid a fixed amount, typically ranging from 70% to 90% of the amount invested. If your prediction is wrong, you will lose all or most of the amount you invested in the trade.

HOW TO TRADE BINARY OPTIONS

To start binaries trading you need to open a Live account with Dukascopy Bank. The process involves providing personal information, verifying your identity, and making an initial deposit.

1. Select an instrument

After setting up your account, the next step requires choosing the currency pair you want to trade. Your choice of instrument should match your trading strategy and knowledge of the market.

1. Decide the expiration time

Binary options contracts offer a range of expiration times, from minutes to hours. Choose the duration of your trade according to your market analysis and trading strategy. Short-term trades may offer quick profits but come with increased risk, while long-term trades require patience and in-depth analysis.

1. Determine the trade amount

Decide on the amount of money you want to risk on the trade. It’s essential to manage your capital wisely and not risk more than you can afford to lose. Effective risk management is key to long-term success in binary options trading.

1. Predict the Price Movement

Your primary task is to predict whether the asset's price will rise or fall by the expiration time. If you believe the price will go up, you place a call option. If you think the price will go down, you place a put option.

1. Execute the trade

Place your trade on the binary trading platform provided by Dukascopy Bank. You will see the potential payout and the amount you stand to lose if the trade doesn’t go in your favour. Once you’re satisfied with your decision, confirm the trade.

1. Expiration and payout

When the expiration time comes, you will be paid a fixed payout if your forecast was correct. In case your prediction was incorrect, you will lose the amount you invested in that trade.

WHAT ARE THE RISKS?

Trading binary options involves a number of risks that traders must be aware of before engaging in this form of options trading. Understanding these risks can help traders develop strategies to mitigate potential losses and make more informed trading decisions.

High risk of loss

One of the primary risks of trading binary options is the high probability of losing the initial investment. Since binary options are an all-or-nothing type of financial instrument, if the prediction is incorrect, the trader loses the entire amount invested in the position. For example, if a trader invests $100 on a call option predicting that a currency price will rise but the price falls instead, the $100 is lost entirely.

Market volatility

Binary options trading relies heavily on predicting short-term price movements of an asset. Financial markets can be highly volatile, and price movements can be unpredictable. This volatility increases the risk of making incorrect predictions and losing money. Even small price movements can result in a loss when trading binary options, which is why it is crucial to understand the market dynamics and the factors that influence asset prices.

Fixed Payouts and Losses

In binary options trading, both the potential payout and loss are fixed at the outset of the trade. While this provides clarity on potential profits and losses, it also means that traders cannot benefit from significant price movements beyond the fixed payout. For example, even if a trader correctly predicts a substantial increase in an asset's price, the profit is capped at the predetermined payout, limiting the potential returns compared to traditional trading.

Limited Strategic Options

The simplicity of binary options can also be a drawback. Unlike other forms of options trading, binary options offer limited flexibility in terms of strategies. Traders can only bet on whether the price of an asset will go up or down within a specified timeframe. This binary nature restricts the ability to implement more complex trading strategies that might mitigate risk or enhance profit potential.

Psychological Pressure

The fast-paced nature of binary options trading, with expiration times ranging from minutes to hours, can create significant psychological pressure. Traders may experience stress and anxiety, leading to impulsive decisions and a higher likelihood of making mistakes. Managing emotions and maintaining discipline is crucial in this high-risk trading environment.

BINARY OPTIONS TRADING EXAMPLE

Let's explore a couple of examples of how binary options trading might work with currency pairs:

HOW TO OPEN A BINARY OPTIONS TRADING ACCOUNT

1. Click to open a Live account and provide basic information about yourself.
2. In the section, choose and select the required funding currency.
3. Submit the application and pass the ID verification process.
4. Fund your account and start trading.

You can also try a demo account for practising binaries trading.

Dukascopy binary trading platform

Dukascopy provides traders with a versatile trading experience through its Binary Desktop and Mobile platforms. These platforms support both traditional and touch binary options strategies.

By offering both options, Dukascopy provides some flexibility for traders with different risk tolerances and strategic preferences. However, it's important to remember that binary options, including touch binaries, carry inherent risks.

SUMMARY

Binary options trading offers traders a unique and accessible way to speculate in the financial markets. With a clear structure and straightforward mechanics, binary options are appealing for their simplicity and the ability to predict the potential payout or loss from the outset. The different types of binary options, including touch binaries, offer flexibility and opportunities for both short-term and long-term strategies.

However, it is important to approach binary options with a thorough understanding of the risks involved and to employ effective risk management techniques. The high risk/reward ratio can lead to substantial losses if not managed correctly. Therefore, educating yourself about the markets, using reliable trading platforms and developing sound strategies are crucial steps to becoming successful in binary options trading.

By carefully selecting a reputable broker, such as Dukascopy Bank, and using the resources and tools we provide, traders can enhance their trading experience and increase their chances of success. As with any form of trading, continuous learning and practice are key to navigating the complexities of the financial markets and achieving consistent profitability in binary options trading.

Q&A