This post is going to cover a couple of topics in order to give you a full picture about binary options. I’ll advise you to read everything. If you’ve any questions AFTER reading this post, feel free to leave them in the comment section below or discuss them on our Discord server at https://discordapp.com/invite/b24knx. Also be aware that this post doesn’t include any strategies but covers the essential basics on binary options. If you are looking for a simple, but profitable, strategy for binary options you should check out my “Binary Options Strategy“.
Disclaimer: Any opinions, news, research, analyses, prices, or other information offered by us here in this Binary Options article, is provided as general market commentary, and does not constitute investment advice. boaa group Limited will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
What are Binary Options?
There are many different variations of (binary) options out there, but the most common are high-low binary options. With those you place a bet on the future price of the underlying asset, which can be a currency pair like EURUSD or a stock like Apple or Microsoft. For example, you could place a bet stating that in five minutes the exchange rate EUR/USD is going to be higher or lower than it is right now. If you are right, you’ll receive a fixed payout which may be around 60 to 90% of your initial investment. Well and if you are wrong, you’ll lose your investment.
As mentioned there are other types too. You could buy an option stating the exchange rate for EUR/USD is going to stay within a specified range for a certain period of time, or that it will hit a certain upper or lower value within a certain timeframe. Which kind of options you are able to trade depends on your broker. After testing Alpari and IQ Option I decided to stick with the later, so all screenshots provided and methods mentioned are going to be referenced to IQ Option, their software and their products.
In other words, all options are bets on a certain result by a specified time and all options shown in my posts are executed at IQ Option.
Note: You may also want to read my IQ Option Review.
What’s the difference between Binary Options and FOREX trading?
The main difference between trading FOREX and (binary) options is the risk involved within a single trade/option. Assuming you are pretty sure that the price for EUR/USD is going to drop within the next hour below the current value, you could either open a short position or buy a PUT option. Now let’s say you are right, but during those 60 minutes the prices rallies up first. If you had a short position it might have already hit your Stop-Loss or if you are not familiar with proper money management might have even triggered a margin-call busting your account. Whereas with the option you’ve never had more than the initial amount you invested at risk.
Also if the price only moves a little below the current price your profit in FOREX would be marginal, since your profit there depends on the difference between the price you paid at the time you opened the short position and the price you got when you finally closed it. Whereas your binary option doesn’t care about that at all, as long as the price is below the original price you’ll get your fixed 60 to 90% payout.
But there is another advantage, brokers like IQ Option allow you to sell your option before it expires. So if the price already moved in your favour, but due to indicator changes or other factors, you assume it won’t stay that way, you could sell it for less profit or to reduce your losses.
Let’s look at the following PUT option I placed on EUR/USD while writing this post. Don’t worry about all the confusing details, and indicators, those are explained in my “Binary Options Trading Strategy“.
If you look at the image above, you’ll see that the price didn’t move in my favour, or at least not they way I anticipated it most of the time. Also the price I anticipated wasn’t hit either. So if this was a regular short position and not a binary option, chances are that it would’ve hit my Stop-Loss somewhere on the way. But because it was an option all that mattered was the price at 09:30 AM (Berlin/Germany), which was below the current price and therefore resulted in a 90% on my initial 24,00€ investment.
What kind of Money Management do I need to trade Binary Options?
It doesn’t matter matter if you are trying to be a professional FOREX trader, poker player or simply try to make a living with sport betting, the most important thing you need is a solid money management, in order to avoid busting your account. This ensures that even if you are on a losing streak, it won’t cost you all of your money, and leave enough money left to recover those losses.
The rule of thumb here that I’d advice you to, is to stick to a 1% rule. Meaning that you’ll never risk more than 1% of your accounts balance on a single option.
Also consider correlating risks, for example if you place a CALL option on EUR/USD and another on EUR/GBP. If both of those options are worth 1% of your accounts balance, then you are actually risking 2%, since in both cases weakness in EUR would cause your options to expire causing a 2% loss of your accounts balance. To avoid these situation I’d advice you to only place one option at a time, this will ensure that, while your strategy works, you are taking home more than enough profit, and in times it doesn’t it will reduce your losses.
How much money do I need to start trading Binary Options?
Based on the rule of thumb above you could start with as little as 100$ (even less in theory), but due to the minimum option value of 1$ at IQ Option I’d advice you to start with at least 250$. The reason is quite simple, if you invest 100$ and lose your first trade your next trade should only be 0.99$ but that’s not possible, therefore starting with 250$ allows you to have a few losing options in the beginning.
I also want to mention, if you are not quite sure yet, you can also just sign up for a free demo account and try my “Binary Option Strategy” there without actually risking your own money. I actually encourage you to do so, if you’ve no experience with trading at all. Once you are convinced the strategy is working and you are confident using it, you may go ahead and switch to a real money account.
How much money can I make with Binary Options?
Well, that one’s not so easy to answer, and depends on a lot of different factors. For example depending on where you are and when you’ll be free to trade there might be different assets interesting, since the stock exchanges and therefore also the FOREX markets aren’t open 24/7.
The second most important factor is the amount you are starting with. If you start with 1.000$ and place one trade per day you may be able to end up with 172.76$ in profit within one month (equals 20 trading days). Which is probably not enough to pay for your bills, but still equals an 17.28% increase (before taxes) on your investment. This is, assuming your strategy is right 100% of the time, which is almost impossible.
Nevertheless if you would start with an initial investment of 10.000$ your monthly payout would already allow you to live a comfortable life in South-East-Asia. But as said, that is assuming you understand the basic principles and ensure you always trade according to your money management.
Now that you’ve learned the basics about binary options, it’s time to learn your first “Binary Options Strategy“. Also, as mentioned in the beginning, feel free to leave comments and questions below.
- 26.01.2018: Added link to IQ Option Review