PIGGY has noted that binary options are a relatively new tool in the financial markets.
Interestingly, this new investment alternative allows for low-cost entry where all trading is conducted over a web-based, real-time platform on which one can trade with a simple click of the mouse.
Until recently, binary options were hard to obtain, but a new generation of web-based electronic trading platforms, as well as several market innovations designed to simplify the trading decision are generating excitement and activity in retail binary options trading.
A binary option is in fact a prediction of which direction the price of the underlying asset (stock, commodity, index or currency) will move by a specified expiration time.
With binary options, an investor does not purchase the asset - he or she is merely predicting the direction that the underlying asset moves.
There are just two possible outcomes. A fixed gain if the option expires “in the money”, or a fixed loss if the option expires “out of the money.”
The price of the asset is not important. The only thing that is matter is whether the prediction is correct or incorrect. It is that simple!
Three trade steps of binary options
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First, you choose a trade expiration time, this is the time you want the trade to end. It could be any period between a minute and even one week;
Second, you choose call or put. If you think the price will end up above the current price: you click the buy/call button. If you think the price will end up below the current price: click the sell/put button; and
Now that the trade is placed, you simply wait for the outcome. If the trade expires 'in the money', you make a profit. If it expires 'out of the money’, you will lose.
Process flow trade
Deciding on the Underlying Asset —Some traders elect to focus on one particular asset, or one market, while others trade several options simultaneously. Classes of assets could include commodities (gold, silver, wheat, coffee, oil, sugar, platinum), stocks (Apple, British Petroleum, Google, Coca Cola), currencies (GBP/USD, USD/JPY, USD/CAD, EUR/JPY) and Indices (DOW, S&P 500, NASDAQ, DAX, CAC, FTSE 100);
Decide on the amount to invest. The amounts you devote to trade should be dictated by your risk management plan. IQ Option has set a low minimum investment amount of just US$10;
Deciding on the desired timeframe. Binary options are short term investment instruments. The timeframes available can run from one, two, five minutes to a week, depending on the trading platform; and
Deciding on the type of trade. Above/below is the most popular type of binary options trade, most traders will use this type most of the time. Above/below options expire in-the-money when the trader correctly predicts that the price of the underlying asset will move above or below the predetermined strike price by the time of expiration.
Advantages of binary options
Simplicity — Trading binary options is very simple and straightforward, all you need to do is decide which of the two directions the asset will move, up or down;
Risk control — With binary options, the return on initial investment is fixed. From the beginning, thus the amount of possible profit or loss is well known. Which means that you will never lose more than what you expected and can determine your risk as completely as is possible;
Short-time trading (minutes, daily, hourly) — with binary options, you decide what the expiry time of the option will be. If you are a fan of long-time investments, you can choose “end of the week” and “end of the month” expiry times. However, most traders would prefer shorter timeframes;
Low minimum amounts — Binary brokers have low investment minimums, thus allowing you to start with small amounts.
Disadvantages of binary options
The main disadvantage of trading binary options is the level of "fee" that is paid to the broker. It is relatively higher than in other investment areas.
Risk management
Trading binary options is fun and exciting and money can be made. However, you must also keep in mind that like with any other options trading there is the risk of losing. When trading binary options, you should not risk too much money on any given trade.
Good money management calls for adopting a conservative investment strategy that means that you should never risk your entire capital.
You should not use more than 5% of your capital on any single trade.
Technical analysis as a tool
Trading binary options, of course, requires a thorough analysis of the appropriate market.
By means of technical analysis, the development of underlying asset can be predicted to some extent.
Technical analysis is the studying of investor behaviour as well as its influence on the price action of financial instruments.
The primary information which we must carry out our studies would be the price histories of the instruments, along with time and volume data.
All these allow us to make our predictions, depending on objective data.
In technical analysis, we use charts to predict asset price movement and develop our strategies, therefore it is extremely important that you will be knowledgeable as to the various chart types that are being used in technical analysis.
Take time to improve your technical analysis knowledge, this will help you to sharpen your strategies.
Overalll, to get started and venture into the exciting world of binary options by joining a PiggyBankAdvisor WhatsApp Group (+263 78 358 4745).
- Matsika is the managing partner at Mark & Associates Consulting Group and founder of piggybankadvisor.com. — +263 78 358 4745 or batanai@markassociatescg.com / batanai@piggybankadvisor.com.
