Despite the fancy name, binary options simply means two-option trading. You trade on future asset prices through predicting “call” or “put” options within a set timeframe. A “call” option means you believe that an asset’s price will rise. A “put” option means you believe that an asset’s price will fall.
One of the strong draws of binary options trading is that there are many assets to trade on. You can trade on individual stock prices, stock indices, foreign exchange rates, and the prices of commodities in universal demand.
Choose Your Asset Well
Spreading your capital across numerous assets may seem like a surefire way to minimize risk, but you are likely to minimize your profits. Take time to properly research your asset.
Say you choose gold to trade on. Since it is a commodity in universal demand by central banks and jewelry producers, you figure it’s a good starting point.
Say you began trading in April. You know that the Akshaya Tritiya, the largest gold-buying festival in India, is coming up soon. So you trade on a call option that the overall price of gold will pass the $1,300 mark around festival time.
However, you miss out on the droughts that leave the rural regions with less of a budget for gold. The price stays low, and the option expires. You should know your asset well enough to trade on its prices, and that means finding an effective strategy.
Finding A Binary Options Trading Strategy
You cannot only depend on forecasts to predict a call or put option. The fastest way to gain experience is to learn about binary options strategies: technical or fundamental.
The technical trading strategy looks at the rise and fall of the asset prices over a certain period. The trends for gold, for example, show that the price has been steadily decreasing for the last five years. Furthermore, prices are consistently low in December or January, while they spike higher in April and May, and August and September.
The fundamental trading strategy, on the other hand, studies pieces of information that affect asset prices. For example, someone relying exclusively on the technical trading strategy would only know that gold prices tend to rise in April. An investor relying exclusively on the fundamental trading strategy, on the other hand, would know that part of the reason is the Akshaya Tritiya.
The most effective overall strategy would be to combine both according to your preference. Some investors understand the trends better the more quantitative the approach. Others need to see the connections between news articles and price changes to be able to trade profitably.
Exercise Financial Responsibility
However, there is no point to using binary options for profit if you do not approach it with a long-term financial strategy that will provide you with a firewall against trading risks. To begin with, do not simply pour all of your capital into trading. You need to have enough kept back to buffer against possible losses.
The rule of thumb is to invest no more than 5% in any single asset, and no more than 15% across the market, at any one time. That way, you can buffer your losses and effectively profit with your successes, without finding yourself out on your ear.
Have you ever traded with calls or puts? What was your experience?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.