Risks and earnings of binary options trading in 2020. What has changed

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Risks and earnings of binary options trading in 2020

The popularity of binary options as an investment tool is growing every year, largely due to the fact that this type of contracts allows you to control your own risks. However, even though the risks in binary trading are fixed, they still exist and will not go anywhere. In this article, we will review the main risks that a trader, who has chosen binary contracts as a specialization, will eventually encounter.

Binary options are a high-yield contract, when trading them you can receive up to 80% of the profit for each transaction. Some brokers can afford to offer higher returns on certain assets, for example, brokers from our top 5 offer up to 90% return of the invested amount. However, with such a high profitability of the tool, one should not forget that there is always the possibility of losing part of the deposit, and without proper analysis of your capital, you can completely drain the entire deposit. It happens quite often with inexperienced novices who are too self-confident in the market and mindlessly spend their savings.

Possible risks in binary trading

Traders’ forums often describe binary contracts as a fairly simple tool, with a low probability of losing their capital. However, in order for this statement to correspond to reality, it is very important for the trader to develop their own scheme for managing their capital and risks. That is, it is necessary to think in advance which part of the capital you plan to invest in each transaction. If the risk management system is properly designed, the trader should clearly plan how they will distribute their funds between not only transactions and assets, but also between brokers.

Another type of risk while trading binary options is the likelihood of making an incorrect prediction. Even with an ideally thought-out strategy that has repeatedly proved its profitability, there is always the possibility that the signal received on it may prove to be unprofitable. A situation like this is possible for any trader, whether it be a novice or an experienced market participant. In such case, a competent risk management system helps minimize the risk. It is recommended to invest no more than 10% of your deposit in one transaction, and even better to not exceed the 5% mark. Decent brokers are laying this rule of money management at the stage of developing trading conditions for their customers. For example, brokers from our top 5 have a minimum initial deposit of $ 100, while the minimum investment in one transaction is $ 5, which is exactly 5% of the total capital.

With experience, a trader will learn to trust their intuition, and with full confidence in the profitability of the transaction will be able to invest not 5, but 10% of their capital. However, for beginners this risk is unjustified. If the confidence that the transaction will bring profit is very small, it is recommended to reduce investments to 3% of the deposit.

The degree of risk while trading binary options can significantly increase depending on the type of the chosen contract. Less risky is the classic option High / Low. Today, most brokers offer them. Reliable trading platforms however, has one more variation of this type of contract – Above / Below. The riskier types of contracts include One touch, where the yield is promised to be 200, and even 400%. With such a potential profit, the risk of losing your own deposit, respectively, also increases.

Risks increase substantially when traders incorrectly choose the underlying asset, for example, if they trade during the release of important news. Many experienced traders do not recommend trading at all during such periods, since these type of publications can greatly affect market fluctuations.

Another kind of risk can be called “trading without proper preparation”. There are a number of newcomers who want to skip learning and testing their own skills on a demo account. Some want to start earning a profit faster, others think that specialized training is an expensive ambition. In fact, the lower the level of knowledge about trading and the principles of market analysis of a trader, the higher the probability that they will lose their deposit and become disappointed in themselves. As per the cost of training, it’s true that registering for a training course can result in an expensive price, therefore it is important to find yourself a broker that can offer a similar training course for a more reasonable price. Reliable brokers provide such training courses for free. In addition, a free demo account with an initial deposit of 1000 virtual dollars will help consolidate the knowledge acquired in practice.

How to reduce the risks in binary trading and make a profit?

Unfortunately, you can not completely avoid the risks while trading binary contracts. However, it is in the trader’s capabilities to minimize them to zero. For this it is enough to follow simple and effective rules:

1. Do not immediately invest all available capital. Even with 100% confidence in the accuracy of the forecast, you should not do this. In trading, greed is a bad adviser, it is important that no matter the circumstances, to not to risk more than 5-10% per transaction.

2. Carefully select your time for work. For those who like trading according to the news, an economic calendar should be an obligatory tool, where you can find out about the date of the release of important publications, which can substantially affect the strategy used by the trader.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Broker!
    Perfect for beginners!
    Free Demo Account! Free Trading Education!

  • Binomo
    Binomo

    Only for experienced traders!

3. Carefully select the underlying asset. All of the financial instruments have their own volatility. Before the final choice of an asset, you must first observe the behavior of some of them to know when their volatility begins to grow, and when it decreases. For example, the Euro’s volatility at decreases during the nighttime, and is activated during the day. On the other hand. The situation in Asian and Pacific currencies is the complete opposite.

4. You have to be prepared for real trading. After all, success is achieved not by someone who constantly “gnaws the granite of science”, but someone who was able to apply the knowledge gained in practice. Therefore, it is crucial to study the strategies and develop your own tactics of behavior.

5. Do not rely on luck. Intuition, of course, can develop with traders over time. It is not a talent someone is born with, but the result of concluding thousands of deals. For beginners, market intuition is not inherent because of the lack of experience. Therefore, they need to pay attention specifically to a thorough analysis of the market situation, and not rely on luck.

6. One of the most important aspects of risk reduction is the correct choice of a broker. With a reliable mediator, you can not only preserve, but also increase your capital. Reliable mediators like this are those, whose activities are monitored by the authoritative regulators. Good brokers have a large selection of training materials and analytical tools that will help beginners learn and improve the quality of their forecasts. The broker allows its clients to trade binary options through a huge list of assets. In order to test developed strategies, they provide a free demo account.

Strictly following the rules provided above, will allow even a novice trader to significantly reduce the risk of losing their own investments and their entire deposit as a whole.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

What You Need To Know About Binary Options Outside the U.S

What Do You Need To Know About Binary Options Outside the U.S?

Binary options let traders profit from price fluctuations in multiple global markets, but it’s important to understand the risks and rewards of these controversial and often-misunderstood financial instruments. Binary options bear little resemblance to traditional options, featuring different payouts, fees, and risks, as well as a unique liquidity structure and investment process.

Binary options traded outside the U.S. are also structured differently than those available on U.S. exchanges. They offer a viable alternative when speculating or hedging but only if the trader fully understands the two potential and opposing outcomes.

The Financial Industry Regulatory Authority (FINRA) summed up regulator skepticism about these exotic instruments, advising investors “to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches.” 

Key Takeaways

  • Binary options have a clear expiration date, time, and strike price.
  • Traders profit from price fluctuations in multiple global markets using binary options, though those traded outside the U.S. are structured differently than those available on U.S. exchanges.
  • Non-U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange.
  • While typical high-low binary options are the most common type of binary option, international brokers typically offer several other types of binaries as well.

Binary options outside the U.S. are an alternative for speculating or hedging but come with advantages and disadvantages. The positives include a known risk and reward, no commissions, innumerable strike prices, and expiry dates. Negatives include non-ownership of the traded asset, little regulatory oversight, and a winning payout that is usually less than the loss on losing trades.

Understanding Binary Options Outside the U.S

What Are Binary Options?

Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities, and foreign exchange.

These options have a clearly stated expiration date, time, and strike price. If a trader wagers correctly on the market’s direction and price at the time of expiration, they are paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.

The binary options trader buys a call when bullish on a stock, index, commodity, or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time.

The broker discloses the strike price, expiration date, payout, and risk when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.

Binary Options Outside the US

Foreign Versus U.S. Binary Options

Non-U.S. binary options typically have a fixed payout and risk and are offered by individual brokers rather than directly on an exchange. These brokers profit from the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an “all-or-nothing” payout structure.

Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC).

The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008.   The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC.

These options can be traded at any time, with the rate fluctuating between one and 100, based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration.

They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.

High-Low Binary Option Example

Your analysis indicates the Standard & Poor’s 500 index will rally for the rest of the trading day and you to buy an index call option. It’s currently trading at 1,800 so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date that supports your analysis.

You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker.

Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid + ask)/2. Each binary options broker outlines their own expiration price rules.

In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment.

If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader’s account when the position is closed.

Other Types of Binary Options

The example above is for a typical high-low binary option—the most common type of binary option—outside the U.S. International brokers will typically offer several other types of binaries as well.

These include “one-touch” options, where the traded instrument needs to touch the strike price just once before expiration to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date/time.

Meanwhile, a “range” binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if price stays within the range, while the investment is lost if it exits the range.

As competition in the binary options space heats up, brokers are offering additional products that boast 50% to 500% payouts. While product structures and requirements may change, the risk and reward is always known at the trade’s outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured in such a way that the probability of winning the payout is very low.

Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most do not. Exiting a trade before expiration typically results in a lower payout (specified by broker) or small loss, but the trader won’t lose their entire investment.

The Upside and Downside

Risk and reward are known in advance, offering a major advantage. There are only two outcomes: win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They’re simple to use and there’s only one decision to make: Is the underlying asset going up or down?

In addition, there are also no liquidity concerns because the trader doesn’t own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world.

On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses.

While payout and risk fluctuate from broker to broker and instrument to instrument, one thing remains constant: losing trades cost the trader more than they can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower.

7 Binary Options

The Basic Tools for Successful Binary Trading

Binary options are complex, exotic trade options, but these are particularly simple to utilize and understand the way they work. The most familiar type of binary option it the high-low option and it’s relatively simple to comprehend. This technique is also referred to as the fixed-return option and provides access to commodities and foreign exchange, indices and stocks.

Trading with binary options is easy, and you do not need any previous experience. Below are some basic guidelines that we have compiled to help you start trading in a few minutes.

  1. To be a successful binary options trader, you need to use more than one broker. Choose one or more from our compiled list of brokers.
  2. Register with your chosen trading platform and deposit money to start trading. The minimum deposit for some trading platforms or binary options robots is only $ 100.
  3. Select the asset to trade. Trading platforms have assets such as currencies, indices, commodities, and stocks. You can choose to trade in currencies, the popular one being EUR/USD.
  4. Decide on the amount to invest. When investing in an asset, you will see the payout or the returns for the asset, which can go up to 91%. Make your prediction on the movement of the price of the asset. If you predict the price of the asset to rise, select Call (up). If your prediction is that the price will fall, select Put (Down).
  5. When the trading closes after the given time, for example after 60 seconds, if it is a 60 seconds investment and you have made the correct prediction, then you win. An investment of $ 100 with a 90% payout means that you will have made 90 dollars in a few minutes.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Broker!
    Perfect for beginners!
    Free Demo Account! Free Trading Education!

  • Binomo
    Binomo

    Only for experienced traders!

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