Binary options trading is incredibly straightforward, operating on a simple premise with a yes/no result: will an underlying asset be above a certain value at a specified point in time? An affirmative outcome allows the trader to make a significant return, but is it that simple? It’s important to fully understand what we mean by binary options and to acknowledge their advantages and disadvantages.
Read on for a simple breakdown of the benefits and drawbacks to binary trading, as well as a detailed step-by-step guide, insightful strategies and useful tips to inform your trading. Then, compare the best binary brokers for day trading in the UK for 2020, using the list of top brokers.
Binary Options – What are They?
Binary options are attractive because of their speed and simplicity, but how do they work? A binary option is a financial instrument that can be traded on any given market, without the need for complicated calculations. When you deal with binary options there are just two, clearly identified possible outcomes. This offers you full visibility of the potential risks and rewards before the trade is made.
In essence, trading binary options works almost like a prediction. Keeping up to date with news, current trends and statistics, among other factors, may allow you to make more accurate predictions on whether the value of the asset will rise or fall at a specific point in the future. This prediction will always have a right or wrong outcome, never anywhere in between, and this is why binary trades are widely known as ‘all or nothing’ trades.
Binary options are a derivative and can be traded on a multitude of markets, providing many options to choose between. You could choose to trade on a stock price, such as Etsy Inc or Vodafone, or commodity value, such as any of the four precious metals or energy. You could also opt to trade on cryptocurrencies or foreign exchange rate.
A Short History
If you really want to reap the full-time benefits of trading binary options, you will need to carry out comprehensive research on its fundamental origin so as to have a vast knowledge and detailed understanding of it; because it will save you a lot of money in the long run. The digital or binary options have been trading for decades now, though it was initially meant for the rich and wealthy group with some other large financial institutions that were able to afford it was giving the privileges to trade the security. However, a historical change took place in 2008 when the United States Security and Exchange Commission granted access to the options exchanges to start trading it to the public.
The arrival of the internet and the advancement of information technology have allowed the world that is now a global community to trade the ‘binary’ Options; With the way it is now, knowing the simplicity and easy method of trade entry for the regular daily traders; added with it easy to understand analysis, will definitely cause an increase in demand for the binary option.
Types of options
There are numerous types of options you can choose from, the groceries below contain some of the most popular types of binary options.
Let’s take a look at the different option types available to you:
Up/Down – As a trader, you simply need to predict if the price will be above or below the current price when the contract comes to a close. Considered to be the simplest option, up/down is also known as high/low, over/under, and above/below.
Range – With ‘in range’ and ‘out of range’ trades, the range is set ahead of the trade. You then need to predict if the market price will fall in or out of this boundary.
Touch – Unlike up/down and range option trades, touch options are not premised on the market price being at a certain level at expiration. Instead, for ‘touch’ trades, you decide if the market will touch a determined price at least once during the contract period. With ‘no-touch’ trades, the market price must not touch the strike price.
Ladder – Whilst similar to up/down trades, ladder trades involve several price levels which are located equidistance from each other and normally are staggered such that they require a significant price move. The percentage payout will be small if the likelihood of the prediction being true is high, but ladder options can also generate returns of over 100%.
If you’re looking to trade binary options, you need to understand what is meant by expiry times. The expiry time is the point at which a trade will end and determines whether your trade has been successful, or not. Expiry times are a hugely important aspect of binary options.
Binary options trading is attractive because its expiry times are shorts, allowing traders to generate a profit quickly and make several trades in one day. Some expiry times range from 30 seconds to 300 seconds, whilst long-term expiry times can last as long as years.
But is it legal?
Put simply, yes. Binary options are legal. The reputation of binary options has been negatively impacted by scams and fraudulent brokers, which can take advantage of uninformed traders looking to make quick money.
In some regions, increasing regulation has led to the withdrawal of binaries from the retail market. The EU, for example, placed a ban on binary options in 2018 to protect consumers. It is still possible to trade if you are a professional trader, and binary options trading remains legal in other regions, such as Australia and India.
To avoid falling prey to illegitimate companies, it’s important to be aware of the risks and to be alert to signs of dodgy brokers. The promise of ‘quick money’ should be viewed with caution, as should brokers who cold call and offer automated trading. As soon as alarm bells begin to ring, you should tread carefully and leave that broker. Especially as there are a huge number of trustworthy brokers available.
Whilst fraud exists, regulators are making efforts to reduce the risk to traders through monitoring and scams have been reducing in recent years.
Binary Options or CFD Trading?
CFD (Contract for Different) trading, though similar to binary options, has one crucial difference – the potential for limitless risk. If the market moves significantly in your favour, this sort of trade can magnify profits. However, if the market moves against you it’s easy to incur huge losses.
With binary options, the potential gain and loss are predetermined and fixed. If prices rise significantly, due to volatile markets, the percentage you retain won’t reflect this margin. In easy terms, the risk is fixed with binary options, but the profit potential is limited.
Why Should you Trade Binary Options?
You need to understand the benefits and drawbacks of trading binary options to assess if this is suitable for you. Read on for the advantages and disadvantages of this style of trading.
The benefits of trading with binary options are vast. Below is a roundup of the top advantages:
- Known risk and reward – Binary options allow you to know exactly how much you will win or lose from the trade upfront, giving you greater control than many other types of trading. The certainty of this makes binary trading both attractive and simple.
- Quick profits – Binary options expiry times are typically extremely fast, meaning you’re looking at a quick payout. Shorter expiry times also mean you have the opportunity to trade more options in a given day.
- Flexible choice of markets – Binary options can be traded on any market, giving you the freedom to trade outside the constraints of a specific market.
- Simplicity – Binary options trading requires you to predict just one factor, making it incredibly straightforward. This simplicity of the trade makes it a low-barrier option for those looking to trade full-time.
- High return potential – The high returns involved in binary options, compared to another trading, are one of the reasons it’s become so popular. When a binary options trade is successful, the trader can earn up to 90% on a single trade.
- Accessible – Looking to trade at night, at the weekend, or at any time for that matter? With binary options, trading happens at all hours across the world, offering you full flexibility.
Like any other trading instrument, binary options do come with some disadvantages:
- Losses – Though there’s the potential to make a high profit from trading binary options, there’s still risk involved. Significantly, for a given trade, potential profit and loss are unequal. This means that while a loss might see you lose your entire stake, a win might give you a profit of only 60%. To break-even, you, therefore, need to sustain more wins than losses.
- Limited trading tools – Trading analysis tools are often unsatisfactory, although movements are being made by brokers to improve this and offer truly helpful tools. Luckily, these charts and graphs are also available elsewhere online.
- Limitations to risk management – Binary options brokers often set minimum amounts which a trader needs to trade in the market, and this makes it easy to quickly lose capital. To illustrate this, you may be allowed to open an account with $200 but you’ll struggle to find a broker that will permit trades below $50. Losing four trades will quickly see you lose significantly.
- Reduced trading odds – If the odds of your trade succeeding are high, the payout percentage will likely be radically reduced. So, while there’s the potential to benefit from trades with extremely high payouts, this is only available for less predictable trades, usually when the expiry date is set to further away from the date of trade, and higher risk.
How Does Trading Binary Options Work?
Looking for an easy guide to trading binary options? Simply follow the steps below.
Step 1 – Choose a broker
Finding a broker that meets your needs and will give you the best possible trade is one of the most – if not the most – important choices you will make in your journey to trading binary options. With so many options available, you have to know what to look for. Consider these factors to help make the process of choosing easier.
It’s normal to expect some fees, but if you’re looking to trade binary options full-time, you’ll want those fees to be small so that you can maximise your return. It’s beneficial to carefully review the fee structure when choosing a broker as commission fees and other costs can quickly pile up. Ideally, you’ll want to look for a broker with no withdrawal fees or withdrawal minimums. Remember that all trading brokers have to make money and it’s important to choose a broker that’s transparent about how they’re doing this.
A minimum trade requirement is standard across all brokers, although these can vary significantly. If you’re a first-time investor looking to try binary options, a broker with a low minimum deposit requirement will likely be of interest. Many brokers will require deposits of $50 or $100, but low minimum deposits can start at $5. It’s worth doing your research where deposits are concerned but, if you’re looking for a low deposit requirement, GCI and JC are good places to start.
Whilst the majority of brokers are legitimate, scam companies do exist. For many traders, regulation is a priority. It’s important to ensure your chosen broker is regulated by Government agencies that safeguard the public. Lookout for licensing information, such as CySec, CFTC and FCA.
Traders have the opportunity to access the market through mobile apps and web-based binary options platforms. You’ll spend a significant amount of time on this platform so it’s important that it’s easy to use and provides you with all the charts, tools and patterns to fit your trading style and analysis. Which charting features and levels of interactivity are available to you on your chosen platform?
To help you make informed trade decisions, you should make sure to check reviews and conduct a detailed comparison of the platforms available to you. MT4 provides a good source of charting options, as do Keystone and Nadex.
As mobile phones and tablets continue to have more advanced computing capabilities, more and more people are choosing to use these devices to make their trades on the go. If this appeals to you, you’ll need to include a comparison of cross-platform capabilities when reviewing various brokers. Compatibility is also key to consider, as you’ll want to be sure the tools you need will work on your device. There’s a lot of variation in the software available, but great trading apps are offered by IQ Options and BDSwiss.
An easily accessible customer support service is essential. If you run into a problem you want to be sure you can access reliable support, as not doing so could cost you time and money. To get the best trading experience, look for brokers that offer 24/7 support by live chat, e-mail or telephone. Trading with 24Option gives you access to 24/7 support in 14 languages, while E-trade also provides quality support.
If you’re looking to trade in a specific asset, you might want to consider looking for a broker that specializes in that asset. For example, if you know you want to focus on trading currencies, you’ll want to familiarize yourself with relevant economic indicators and might choose to trade with FOREX.com. While the ‘best’ broker will come down to personal preference and the individual trader, it’s important to check reviews and do your research.
For investors who are new to trading binary options, a demo account is a great way to learn the ropes. With a demo account, you can try numerous assets and learn the various processes involved, without financial risk. Better yet, many demo accounts don’t require a deposit.
It’s common for brokers to compete for your trade by adding extras to set them apart. Whilst some of these can be useful, such as training materials, free webinars, lessons and trials, you shouldn’t let extras alone tempt you in your decision-making.
Now that you’re equipped with these factors, it’s important to say that the ‘best’ broker doesn’t exist. Choosing a broker is a personal choice which requires you to consider a multitude of factors and where they rank on your list of priorities. Now you’re ready to do your research.
Step 2 – Choose a Market
Binaries can be traded on any given market, so it’s a good idea to narrow your choices by either opting for an asset that provides promising returns, or that you understand well. With many options to choose between, including stocks, commodities and currencies, it’s important to do your research well.
Step 3 – Choose an expiry time
Expiry times are a hugely important aspect of binary options trading. If you’re looking to trade short-term, it’s likely to be expiry times that range between 30 seconds and end of the day that interest you. Making more trades in a day offers you greater opportunity to make a return, but this needs to be balanced with risk. All things considered; expiry time choice comes down to personal preference.
Step 4 – Decide the Size of Investment
You need to assess how to make numerous trades, whilst protecting yourself from losing all of your money. While a greater investment gives you the opportunity for a higher profit, remember that you stand to lose your entire investment if the market moves against you. As a trader, you’ll need to come up with an effective money management system to guide you through binary options trading.
Step 5 – Choose an Option
The options we explored above – up/down, range, touch, ladder – are all open to you, but how to choose? Simply, you want to pick the option that gives you the best chance of making a profit. You want to consider factors that will put your investment at risk and consider the tools available to you to assess which options are safer bets. Once your decision is made, check and confirm the trade and wait for your payout!
A Recap Video
The video below, from IQ Option, provides a good overview of how to trade binary options:
Should I have a Strategy?
Trading binary options strategy is imperative. Strategies will differ depending on the trade, but the strategy is important for two reasons:
1. The strategy allows the head to rule the heart, removing the interference of emotion in important trade decisions. With the focus clearly directed at data analysis, the dangerous impulses of ambition and greed are set to one side.
2. A strategy enables the trader to repeat successful decisions and to generate consistent returns.
How to Build a Strategy
In building your strategy you’ll encounter two key steps: creating a signal and deciding how much money you want to trade.
Step 1 – Creating a Signal
With binary options trading, the signal indicates the direction the price is moving or is going you to go. This is crucial for your prediction. It will help you to make a decision prior. Signals can be created in two main ways:
- Technical Analysis: Charts, Patterns and Indicators
Many traders will use charts and patterns to build a strategy based on their findings. The trick is to spot patterns in your charts that reflect patterns seen in previous trades, allowing you to use that information to predict future price movements. Popular charts you may have heard of, are candlesticks, Heiken-ashi, and line charts. The tools for technical analysis are incredibly important in conducting thorough market research, so these features are important to look for when choosing your broker.
Once you’ve identified your patterns, you can use indicators to guide your decisions. These can show you which binary option you should choose and when to choose it.
There are a whole host of indicators, patterns and tools you can use to help you make your predictions. These include:
- Price action
- MACD indicators
- Support and resistance levels
- Options close to expiry
- Stochastic oscillators
It’s also possible to use the news to inform your strategy, and disregard technical indicators completely. Staying in the know is a relatively easy way to understand what events and developments might impact market change and allows you to get ahead of the rest of the market.
If you think using the news better suits your trading style, you’ll need to look out for company announcements as well as global news. Prices can be massively affected by even small news. Tuning in to a variety of sources will give you the best chance of staying ahead of the game and you can do this by watching the TV, listening to the radio, browsing online or using news apps on your mobile devices. When it comes to trading information, the more useful news sources are:
- Business Insider
- Financial Times
- Yahoo Finance
Step 2 – How much to Trade?
It can be overwhelming trying to figure out how much to invest every time you want to make a trade. If you’re a beginner, it’s a good idea to keep things simple and trade the same amount every time until you’ve got to grips with the process and your strategy. Here are three strategies which are great for experienced and beginner traders alike.
- Percentage Strategy
This system is ideal for new traders as it should protect you from losing more than you can. Popular with all traders, it’s premised on you asserting the percentage you’re happy to risk. Many traders set this at 1-2%. For example, if you have $20,000 in your account and have a risk value of 1%, strategy dictates that in a single trade you can trade $200. You may want to increase that margin if you’re starting to have consistent payouts and are able to absorb a higher degree of risk.
- Martingale Strategy
Used commonly by most binary options traders, this intention of this strategy is to recoup losses from a previous trade, by doubling your next investment. If this next trade is successful, you’ll have recovered your losses. For example, if you trade $50 unsuccessfully, you’ll trade $100 on the next trade. With this strategy, it’s possible to lose a large amount of money very quickly. It’s important to have a strategic approach while trading and a maximum amount you’re prepared to invest.
- Straddle Strategy
A straddle strategy is where a trader makes two separate and opposite trades on the same instrument. It’s used by traders of all levels but is a situational strategy and only to be used in the right circumstances, typically in volatile market conditions.
Buying both call and put options, in conditions where the price is set to fluctuate significantly, can enable you to make profits from both trades. You won’t be able to buy both call and put options at the same time and will buy one option initially. You can then use technical analysis or the news to inform your purchase of a second trade, if needed. This will then allow you to cover both outcomes.
Bots and Algorithmic Trading
If you’ve developed a strategy that suits your trading style and is bringing you success consistently, you might want to look into allowing an automated system to apply it for you. Whilst you need to remain attentive and focussed, even if you’re using a system, using a robot to do the majority of the work will allow you to potentially make more trades.
Robots can be pre-programmed to rely on signals, and you can generally build a program easily that uses your own entry points. Many brokers offer auto-trading and if this is something that interests you, be sure to check reviews when making your choice of broker.
Again, if you choose to use an automated system, you need to remain aware and focussed. Technical errors can and do happen and you’ll want to be ready to fix any issues, if they arise.
Time variables are a hugely important consideration in building a strategy. If you’re looking to trade 15-minute binary options, you may want to look for a strategy which suits this time variable specifically. Be sure to take this into account.
Strategy – A Summary
Successful trading hinges on finding a suitable strategy. Remember, this will be personal to you and the instrument you’re trading. You will need to manage your investment effectively and use technical analysis and/or attentiveness to the news to create signals for your trading.
It’s always a good idea to test out a new strategy by using a demo account first.
It’s vital to improve your binary options education if you want to trade successfully. Invest in knowledge for higher payouts. Markets are constantly changing and to be a top trader, you’ll need to commit to continuing your binary options education. There are resources aplenty to help you with this. Some of these are listed below.
Books – If you’re keen to learn at your own pace, books are a failsafe and accurate option. There are loads to choose from, many written by experts with decades of trading experience. There are many excellent entry-level books in the ‘For Dummies’ series on this topic, such as ‘Trading Binary For Dummies’ by Joe Duarte and ‘Technical Analysis For Dummies’ by Barbara Rockefeller. Though there are lots of online books available, when you’re looking for an eBook you’re best choosing an electronic copy of a printed title, to avoid misinformation and bias.
PDFs & Instruction Guides – There are loads of online and easily downloadable PDFs which give simple guidance on binary trading. Abe Cofnas’s PDFs on trading binary options are a popular choice.
Video Tutorials & Seminars – Visual learners might find video tutorials more engaging and they’d be in luck, as there’s a multitude of tutorials online. Seminars are another popular choice if you have specific questions or tools you’d like answered and explained.
Forums & Chat Rooms – An unlimited source of information, chat rooms are a hub of real-time information and the perfect place to hang out and interact with binary options experts.
Newsletters & Blogs – A great way to stay in the know, newsletters and blogs are definitely a key educational resource to consider as you broaden your knowledge.
Copy Trading – Copy trading allows you to replicate the trades of other individuals, learning from their strategies and decisions.
Keeping a Trading Journal
Asides from making filing your tax returns easier at the end of the year, keeping a journal is a great way to track your successes and losses. This will enable you to look critically at your trades and develop strategies for future success. Keep detailed records to make it easier to explain why your options did and didn’t work, whether this be through specific journal software or an Excel document.
Strategy can help to sideline your emotions, but you need to put in some work to keep these under control and allow your strategy to rule your decisions. Your strategy has been carefully developed with attention to technical analysis and considered calculations, whilst your emotions are impulsive responses with the potential to enable expensive errors. Keep it together, stick to the strategy and accept that while you won’t win every time, you’ll do better if you remain consistent.
Regulation for binary options trading is increasing as its popularity grows. Read on to discover the accessibility of different regions and their rules.
In the US, binary options trade on the Nadex exchange and the CBOE. These are the only licensed operators for US citizens but luckily, they provide a huge range of options and prices for traders.
You must have a license from the UK gambling commission to trade binary options in the UK. The Financial Conduct Authority (FCA) regulates some brokers, ensuring that their conduct is monitored and controlled. This offers you a higher level of protection. It’s important to be aware that a brokerage can be registered with the FCA, without being regulated.
Trading regulations have been complicated by Brexit. MIFID II was set to enforce rules around binaries across Europe, but it’s now unclear where the UK falls on this matter.
Rest of World
There are a huge number of trading options available to you. You could trade binary options in Pakistan, South Africa, New Zealand, Indonesia, Canada, Vietnam, Nigeria, Malaysia, India, Kenya and the Philippines. Each country has its own regulatory body and rules.
Tax regulations differ hugely depending on the region. Binary options trading is considered as gambling in some countries. This regional distinction means it’s important to consider the tax obligations before you start trading. You’ll want to know what sort of tax you may be obligated to pay, or if you’ll be exempt from paying tax. Make sure to seek advice and do your research.
Can I get Rich Trading Binary Options?
Trading binary options are unquestionably profitable and can definitely help you to make money. Many millionaires will testify to the potential of binary options to considerably increase your fortune. However, you’ll need to immerse yourself in binary options education, find an effective strategy, and the right broker to make a living through binary options trading.
Is it legal to trade binary options?
Binary options are legal, but limitations and regulations vary by region. In the US, it’s legal to trade via Nadex and CBOE. In India and Australia binary options are perfectly legal, while only professional traders can trade binary options in the EU.
Can I trade at weekends?
To trade a binary option, you’ll need an open market. As different regions have different workweeks and time zones, it is possible to trade at weekends. Forex weekend trading allows trading whenever a global market is open.
Trading on synthetic markets is also an option. This involves trading on a virtual market without an underlying market.
Are binary options banned in Europe?
No. Binary options are not banned in Europe, but they have been withdrawn from the market for retail traders. EU traders can meet certain criteria to be classed as a ‘professional’ trader, or consider brokers not regulated in Europe.
Can I use binary options on cryptocurrency?
Absolutely. Many brokers will offer binaries including Ethereum, Litecoin and Bitcoin. Trading cryptocurrencies means making a prediction on whether the price will rise or fall.