What is binary options trading

Binary options trading is trading with binary options. Binary options are a type of financial instrument that are based on an underlying financial instrument. Different brokers offer binary options based on different financial instruments. It is common to find options based on stocks, currencies, commodities and indices.

There are several different types of binary options that works in slightly different ways. When you buy a classical binary option you are speculating that the underlying instrument will have a market value above or below a certain point at a certain time in the future. If you are right you make a large profit. Often 80-90%. If if you are wrong then the option matures outside the money and is worthless. You have lost your investment. It does not matter how much over a certain value the market value for the underlying instrument is at the time of maturation. Your return is always the same regardless of whether the value is 1 cent or 100 dollars above the predicted value.

Binary options can be a good way to earn a lot of money on short term market movements but most people (90%) lose money when they first start trading with binary option. This is often due to not taking the time to understand the instrument and how the options work. If you allow yourself time to understand the trade before you start trading for real money then you will have a lot higher chance to succeed.

Understanding binary options

It is very important that you understand binary options before you start trading with them. If you do not understand them then there is a risk that you will feel scammed. Binary options are not traded over the open market. Instead the binary options broker acts as underwriter for the options and when you buy an option you buy it from the broker. There are no other parties involved. It is a contract between you and the broker. The broker makes money if the option matures outside the money IE if you lose money. The broker lose money if the option matures in the money IE if you earn money.

All options are designed to make the broker money. They only create options that gives them an edge. If you only buy random options than the broker will always win. The trader do however also have an edge. This edge allows you to make a lot of money if you use it skillfully. This edge is that you are allowed to pick which options you chose to buy and which you do not buy. You need to learn how to predict the market movements for the underlying instruments that the binary options you trade with are based on. By skillfully choosing which options to buy you can defeat the brokers edge and make money. The trade have a lot in common with sports betting where a random bet always favor the sports book but where a skilled punter can consistently make a lot of money.

It is important that you understand that you trade against the broker and that the broker has an edge before you start trading. How big the edge is will vary between brokers.

High risk

Binary options is a high risk financial instrument and you should never invest more than a small fraction of your total portfolio value in binary options. I recommend that you invest less then 5% of your worth in binary options. This will be enough to earn a lot of money if you are good at it and will not ruin you if you are bad at it and lose your money. Never keep investing more money if you find that you are unable to make money trading binary options.

Binary options trading is not for every one. It requires a certain person that is willing to devote the time and effort to succeed.