Almost every Forex trader would have at least come across the term “Binary Option” or “vanilla Option”. This was some time ago considered by most people as one of the “quickest way” to make money from financial instruments –Currencies, stocks, commodities etc. and as time went by most of those people came to realize the truth about binary. In this article, I will explain what binary options are and some other vital information that are needed to understand this Binary Option.
What are Binary Options?
Binary Options is a bet that a specific stock, index, currencies or commodity will reach or exceed a specific price within a specific time. When trading binary options you must take into consideration three things –the particular market, the direction and when it will get there.
This triple complexity makes buying binary options a deadly game because all these three decisions must be right for you to make a winning or a considerate amount of profit. It is more of a derivative so it takes the liquidity and volatility of the parent market, that is to say a binary option on EURUSD will be totally based on how the currency EUR and USD perform, in terms of trading volume, liquidity at that given time, economic news and others factors.
Are Binary Options Risky?
Binary Options offer leverage—the ability to control large positions with a small outlay of cash. Binary options allow traders to make money fast when they are right, but if the market reverses, you walk away with nothing but a loss of your initial stake.
ALSO READ: What is Money Management in Forex Trading?
Unlike in other financial market, Forex for example, when there is a loss it is not limited to the amount staked but rather to the totally amount deposited.
Many beginners trade binary option either because they don’t have enough money or because of poor knowledge and preparation or simply because they aren’t mature enough to start trading remember that to be constantly profitable in binary option, a trader must pass through the “3 loops holes” without missing any; you must choose a particular market, the direction it with go within a time frame.
Many at times we see lots of people trading binary option; these are people who will never admit that they are losers in trading forex, stock or probably in commodities. These people switch to binary options instead of dealing with their own inability to trade, “thinking that binary option is a short cut and that they can walk round their problem of [losing in forex and other financial market]” they have this believe that they somehow control the market with their fancy indicators.
Any trader will know that the market can range for hours or more and can trend massively for just a few minutes before reversing. Nobody can certainly say where Mr. Market will head to in the future, despite we use the past data (psychological levels of traders shown on the chart) but we can never be always accurate. Mr. Market is like a kite, it flies to where ever the wind takes it.
Who Can Trade Binary Options?
Binary Options can be traded by anyone but they should not be used as a substitute for the real thing- forex, stock or index market. Often times we see people who brag about being profitable only to start losing thereafter because they cloud their judgement forgetting that binary option is a derivative of the original market. Successful traders sometimes use binary options to reduce risks or protect profits; serious traders trade binary options rarely and only in special situations.
In summary, trading binary option is quite good but it shouldn’t be seen as a substitute as I have earlier said, professional traders who trade binary option do so because they are trying to offset their risk. I personal do not trade binary options because I consider it to be more of betting than trading when done frequently; remember a binary option trader must pass through the 3 loops holes.
Binary option do not offer a good trading opportunity and it is more like betting than trading, in binary option, when you call/buy or put/sell you stake a certain amount of your trading capital maybe $10 or less because of the large difference in the Bid-Ask price.
Spread might consume 10% of your profit sometimes, the spread might as well cover more than 30% of your profit and if your right, you get of $9 with a spread of 10% or you get a profit of $7 with a spread of 30% so you see that if your right you get a certain percentage of your profit and if your wrong, you lose the money that was staked.
Binary options has become quite popular even more popular than stock because it is seem to people to be a safe haven or rather a Holy-Grail because there is a fixed amount (stake) that is either lost or a certain percentage won but in whatever market you may find yourself remember the risk associated with it, examine if its suitable for you.
There are quite a lots of book published on Binary Option, so much that I can’t give any recommendation. But, to understand the core of Binary Option I will advise you read “Lawrence MacMillan’s Options as a Strategic Investment” it is more of a mini encyclopaedia.