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How Much Money Should You Risk On Binary Options?
The following lesson discusses how much of your portfolio you should risk on binary options trading.
Understanding Risk Allocation
Risking money on any investment requires substantial thought and should be considered within the scope of an asset allocation. As with any investment, investors should only risk money that is considered discretionary, and not needed for food, shelter or any necessity. With this in mind, and investor can considered how to allocate their investment relative to other types of investment and create a diversified portfolio of investment assets.
Asset allocation is a methodology that generates a portfolio using different types of instruments, as well as, specific strategies that are used to create returns. This process involves distributing capital to a portfolio targeting different asset categories, such as stocks, bonds, commodities and alternative investments such as binary options.
The methodology creates a mix of assets that are invested based on an investors risk reward profile. By using binary options an investor can minimize the risk of having a number of assets that are correlated an under-perform during adverse market conditions.
What Determines Asset Allocations?
Generating a portfolio were the product mix is stable is usually determined by an investors risk tolerance. To achieve the returns an investor is looking to generate he/she should create a basket of assets that are uncorrelated to one another. Using multiple different types of financial instruments can allow an investor to succeed in multiple market environments. Binary options are generally uncorrelated to other assets as risks and the rewards are predetermined.
Allocating funds different asset classes as well as different types of financial instruments will provide both the conservative investor as well as the risky investor the ability to achieve his goals. There are very few instruments that have predetermine returns, which is why using an instrument like binary options will help diversify a portfolio.
Allocation analysis allows investors to create a mix of assets that will perform over time. Historically, major asset classes have been uncorrelated, which means their movements do not perform in tandem. Binary options are not categorized as buy and hold assets, and therefore can be allocated as a separate asset class, despite the fact that the underlying assets are similar to the ones that might be held in a portfolio.
Asset allocation as an exercise is very important because it can determine an investor will meet their financial target. If a portfolio is conservative, the upside is limited. If a portfolio on the other hand is very risky, investors could lose substantial amounts of capital during adverse market conditions.
Principles of Allocation
Applying asset allocation principles to an investment portfolio will not only decrease the effects of adverse market movements, but it will help you take advantage of the inherent opportunities when an adverse market condition appears. Not only will a trader be protected if they are exposed to multiple assets, but they can take advantage of low prices of a market collapses.
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Allocation is forms of risk management, which will not only assist in generating solid market gains, but will also, mitigate market risks. There are numerous types of processes that are used to allocate a portfolio. Allocation can range from a discretionary style in which an investor uses guidelines to allocation capital, to statistical analysis where investors use a covariance matrix to find the best historic portfolio.
A diversified portfolio should be structured in a way to create a portfolio that is diversified in multiple ways. Not only does an investor want to spread risk into numerous categories such as stocks, bonds and alternative investment such as binary options, but also diversify risk within a specific category. The key is to identify investments in segments of each asset category that may perform differently under different market conditions. Binary options brokers generally provide a broad array of assets which can provide the diversification a trader needs to build a robust binary options strategy.
Asset allocation and diversification are the keys to generating wealth over a long period of time and investors should venture to understand the theories behind successful allocation in an effort to maximize gains and minimize risks.
For an investor that is looking to add an alternative investment such as binary options they should consider using a mix that is approximately 20% of their portfolio allocated to alternative investment such as binary options.
More About Adam
Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.
Binary options robots
This article is a guide on what binary options robots are and how they are used in the market to get trading results. But before we go ahead, there is need to do some self-examination here.
What are your trading results like? Are you oscillating between success and failure in your binary option trading? Would you prefer a more consistent approach to trading? Would you like to literally make money while you sleep? Binary options robots offer a way out for traders who want consistently profitable trading. If you are unsure of which trading strategies to use in your trading, you may want to consider using binary option robots.
A binary options robot is a software that has been programmed to analyze the market and perform automated trades based on certain preset strategies or principles. The binary options robots are designed with proprietary algorithms that are used in determining which trades to make. Binary options robots are rule-based and as such do not make some of the errors seen in trading that comes 100% from human input.
Binary option robots offer consistent high returns for binary option traders. They can often be integrated with the trading platform and all the trader has to do is set up and deploy them accordingly. The trader can then relax and monitor the performance of the robots while watching the profits rolling in.
Binary options robots use their in-built algorithms to search for trading opportunities and also execute the trades. Binary option robots have a huge advantage over human traders. In fact, most elite traders develop their own robots to trade according to a set of rules instead of applying manual discretion in selecting trades.
The most important advantage of using binary options robots is the discipline that they bring to the mix. A human trader may refuse to enter into a trade out of fear of sustaining a loss, even though the market situation conforms with the entry rules in his trading strategy. As a result of this fear, that trader could end up losing potential profits. Conversely, greed can make a human trader leave a position running longer than necessary. Binary option robots show neither greed nor fear and they adhere to the algorithm regardless of the market condition.
Furthermore, binary option robots execute the trades as soon as the signal is received. This is a key element in binary options trading, where trades are timed and one second can make all the difference between profit and loss. Many traders subscribe to a binary option signal service provider but the disadvantage tends to come from the latency that occurs between the time the signal is received and when the trading is executed. In trading, time is of the essence as market conditions change. Entry or exit at wrong times can lead to major losses. With binary option robots, such occurrences are avoided as the signal detection and the trade execution are done simultaneously.
Another advantage is that binary options robots allow you to diversify your trading by trading a variety of trading styles and strategies: risky or risk-averse, currencies or commodities. Diversification enables your trading to be both profitable and consistent. Some signals services can give a high win rate today but once several people start using this strategy, the strategy becomes outdated and the win rate collapses. By diversifying your strategy through the use of binary options robots, you would be able to get high returns on a consistent basis without the fear of one strategy becoming ineffective.
Binary options robots come with either free versions or paid versions. The free versions are usually a trial version with less features. As a trader, you should first test with this free version preferably with a demo account. If you are satisfied with the performance, you can now upgrade to the paid or VIP version. There has been an evolution in the use of free versions of binary options robots, as these are now provided for traders with limitless use, provided a commitment is made to use certain platforms to execute the trade signals.
There are many binary option robots that claim to help you make profits with an automated trading strategy. It is not possible for any individual trader to test them all. As a result, we have come up with a list of the top trading robots available. You can test these services with a demo account and make a decision on which one to use.
The unique selling proposition of OptionRobot is the ability to set trading preferences. It is an autotrading software that generates trading signals and also executes them in the trader’s account, which is linked with a compatible broker platform. The robot functions well with binary option platforms like Banc De Binary, Stock Pair, Tradorax, CherryTrade and GoOptions.
The robot is customizable to meet any trader’s risk acceptance criteria. Current users have claimed a win rate of between 60-80%. This is above the needed break even win rate for binary options trading which is usually 55%.
One reason for OptionRobot’s increasing popularity is that it does not require a previous knowledge of binary options trader. Even a total newbie can sign up and start using this trading robot to make instant profits.
In order to use Option Robot, all you have to do is open an account with a compatible broker and fund your account with a minimum deposit of $200. There is no download necessary. You simply go to the dashboard and select “ Start Auto trading”. Binary option traders can customize the settings of OptionRobot to select the asset for trading, amount for trading and expiry time. Traders can also select trading systems and indicators to suit their risk profile.
When using automated trading strategies, it is critical to continually monitor the win rates as certain market conditions can break the functionality of the robot and have an adverse effect on its success rate.
OptionRobot offers three binary options trading strategies (Classic, Fibonnacci and Martingale) and with the use of the best indicators like MACD, RSI, Stochastic Oscilliator and Coommodity Channel Index, it is able to generate trading signals that offer a high return on investment to its users. Traders are allowed the luxury of setting the trading strategy of the indicator from the three options provided.
OptionRobot is free of charge if you deposit funds with any of the several associated brokers on whose platforms the robot can be used. It is best to use only the minimum required capital to try out the service before going all in.
This binary option robot is linked to the CTOption platform, and therefore serves as a readily available means of executing trades on the CTOption platform in an automated fashion. In other words, a new trader on CTOption can simply open an account and activate the Binary Replicator on the trading account. This binary options robot comes in a free version and also a paid version known as the Binary Replicator Pro. Details of the robot’s performance are spelt out on our sister website on binaryoptionsrobots.co.
Algobit produces signals for binary options trades that can be executed on the OptionBit platform. Those who prefer to use the Tradologic style platforms of which OptionBit is a prime example, can get trades done on their behalf using the Algobit robot which is linked to this platform.
This trading robot promises a win rate of up to 90% depending on market conditions. Although you have to sign up for a free account in order to get any further information on them, analysis has shown that they provide a great service.
They have the lowest minimum trade amount among services offering automated binary options trading. Each trade can be entered with as low as 5%. It is no surprise that lots of traders have been able to double their investment in a short period of time by using Binadroid.
Binadroid combines three of the most successful trading methodologies (Technical analysis-Use of charts to study past price trends. Sentiment Analysis-An analysis of the views of expert traders and thought leaders on particular assets. Fundamental Analysis- An interpretation of statistical and economic results as well as news analysis.). The result is a robust trading system that has a high chance of generating profits.
This robot has an advantage over others because it can trade for you even when you are not logged in to your trading account. Historical win rates have been higher than 65%.
It is best to use binary options robots on platforms that allow traders to evaluate them using a demo account. Some of these robots come with a trial period. Even with reputable services, you still need to test as past performance is not necessarily a perfect indicator of future performance.
Binary option robots help traders who prefer a more hands free approach to trading to make profits. If you prefer consistent, rule-based trading, then subscribing for a trading robot service could help you make returns on your capital.
Currency Correlation for Binary Options Explained
Tools, tools, tools! Hand me some nails please. Hammer too! What good are nails without a hammer? Now hand me that currency correlation… Wait. What? Don’t know what correlation is? Well, good thing you found this article then because it’s one of the most important things a trader must be aware of when trading currencies, one of the four fathers of binary options. Anyway, don’t expect UP and DOWN arrows… no, no, that’s not how correlation works so keep reading only if you are serious about trading.
If I were to hit my head on a wall I would get a headache for sure. There’s a direct correlation between my action and the headache that follows and this idea holds true in the financial market as well. Of course, the euro or the dollar will not go around bashing their heads against walls, but correlation exists and you must be very aware of it because it’s an important part of trading. That being said, let’s begin.
What is Currency Correlation?
Have you ever noticed similarities between the movements of currency pairs? Yes? Then you probably saw currency correlation at work. Take a look at EUR/USD and GBP/USD and you will be amazed to see they follow each others movement. If one goes UP, the other follows. Same for moves to the south. Of course, they are not mirror images of one another but the overall direction is the same. When two pairs move in the same direction, they are positively correlated, just like EUR/USD and GBP/USD or EUR/JPY and USD/JPY. However, there is another type of correlation which… you guessed right, it’s called negative correlation. When two pairs are negatively correlated, they move in almost completely opposite direction: if EUR/USD makes a higher high, almost certainly USD/CHF will make a lower low of similar size. In other words, if EUR/USD goes UP, USD/CHF goes DOWN. To keep it simple: positively correlated pairs move overall the same and negatively correlated pairs move in opposite directions. However, they will not move 100% identical or opposite.
Think about it like this, the chart patterns made by one of them will be inverted by the other. In other words, if the EUR/USD shows a Double Top, USD/CHF will make a Double Bottom. If EUR/USD moves Up, USD/CHF moves Down. There are a couple of reasons for this: first of all, notice the position of the USD in the two pairs under discussion. In EUR/USD the dollar is the second currency in the pair while in USD/CHF it is the first. Whenever the second currency in a pair strengthens, the pair goes Down and if the first currency strengthens, the pair goes Up. With that in mind, if EUR/USD goes Down, it means the USD strengthens but if it strengthens, that means USD/CHF will go Up because as I said earlier, if the first currency in a pair strengthens, the pair will go up. Yea, I had to read it again to make sure I didn’t make a mistake and I am sure it can sound complicated if this is the first time you’ve read something like this.. but the ordeal is not over so take a break if you want because I’m going to explain the second reason.
The two pairs we are talking about are composed of three currencies: EUR, USD and CHF. As you might have guessed, the third currency has something to do with the pair’s movement as well. To understand its role, you will have to take a look at EUR/CHF or to take my word for it: that pair has minimal movement and this means that the EUR/CHF rate is very constant. What I am going to say is not the most correct or accurate from a financial point of view, but it will help you understand: because their movement is so slow, you could say that EUR is CHF and vice versa, they are equal, they are the same. So actually when we are comparing EUR/USD and USD/CHF we could say we are comparing EUR/USD and USD/EUR. If the third currency in our pairs has no relevance (almost), then all there is left is the position of the currencies in the pair. Since the USD is the last currency in one pair and the first in another, it is normal that the two pairs will move in opposite directions almost always.
And because all this turned out to be more complicated than I thought, I am going to tone it down a bit for those of you that are not used with all this technical talk. What we know so far is that some pairs move in opposite direction. Also, some of them move in the same direction, so we need to pay attention to what pairs we are trading. Think about this: if you have a Call on EUR/USD and a Put on USD/CHF and you win the Call, you will most likely win the Put as well. Remember if EUR/USD moves Up, USD/CHF moves Down. If you have two Calls (one each pair), you will most likely lose one of them and win the other. This opens the door for a lot of money management and hedging techniques: if you want to maximize your potential profit, you can open opposite trades on currency pairs with opposite movement (we call these negatively correlated pairs). But you must remember that this also increases risk; it’s great if the pairs move in your direction but otherwise, you can end up losing both of them. Looks like I didn’t kept my promise of making it simpler… well, blame it on correlation. Maybe the summary that follows will help. Keep in mind that pairs which move the same way are positively correlated and pairs that move the opposite way are negatively correlated.
Correlation Coefficient – Don’t Worry, there’s No Math Involved
Now that you have an idea what correlation is, you might be wondering how to know exactly which pairs are correlated, how high the correlation is and if it’s negative or positive. Well, don’t worry, you don’t have to memorize currency pairs and their correlation values; all you have to do is follow this link: http://www.forexticket.com/en/tools/01-01-correlation and check out the tables presented there. Usually correlation above 80 is considered strong and positive (pairs move similar); correlation below -80 (minus 80) is considered strong negative (pairs move in opposite directions). You will also notice that the time frame of the chart affects the correlation coefficient. For example two pairs can be strongly correlated on an hourly chart but not so much on a 5 minute chart. Another thing to note is that correlation changes over the course of time so it would be a good idea to check the link above regularly.
Some Rules For Trading Currency Correlations
- Same direction trades on positively correlated pairs increase potential profit and increase risk
- Opposite direction trades on positively correlated pairs decrease both potential profit and risk
- Same direction trades on negatively correlated pairs decrease both potential profit and risk
- Opposite direction trades on negatively correlated pairs increase both potential profit and risk
Why does Currency Correlation Suck?
Maybe you wondered what’s the connection between the title “Double or nothing?” and currency correlation, maybe it has something to do with gambling? Well let me explain: if you trade in the same direction on two positively correlated pairs (these pairs move similar) and one of them goes against you, what do you think will happen to the other one? It will go against you as well… so you lose Double. I bet before you knew about correlation you didn’t find an explanation why both your trades went wrong. Now you know However, if you open opposite trades on negatively correlated pairs (i.e. a Put on EUR/USD and a Call on USD/CHF) and one of them goes against you… guess what: you will probably lose them both. Money in the pocket of the broker…
Why Currency Correlation doesn’t Suck?
Let’s say you want to limit your risk. With the use or correlation you can do that by opening opposite trades on positively correlated pairs or trades in the same direction on negatively correlated pairs. Say you open a Call on EUR/USD and a Call on USD/CHF; since these are negatively correlated pairs which usually move in opposite directions, chances are that you will win one of the trades, hence limiting the potential loss.
Wrapping it up – To Use or Not to Use?
No matter if you choose to use it or not, correlation exists. It’s a feature of the market and more than that, it is not a matter of whether correlation sucks or not. It’s all about being aware of it and knowing that it can double your profits as well as your loses. However, being aware is 100% the job of the trader. So if you want to be aggressive, use correlation to double your profits or use it to hedge a position if you want to be more conservative. It’s all up to you.
Correlation can help you get out of a hairy situation, can maximize your profits but it can also be your enemy because it can make you lose more than you originally intended. In other words, it can be both Friend and Foe, depending on your understanding of the market and risk appetite. If you want to risk more, increasing your profit potential at the same time (or the other way around), correlation can help you do that. For this article I only used a few pairs as an example, but most pairs are correlated to some extent with other pairs they share currency with.
Currency Correlation, Account Diversification and Binary Options Copy Trading
Currency correlation is an important factor for anyone trading forex or forex based options. Even binary options, even when you are copy trading. If you are not aware of currency correlation let me enlighten you. Some currencies and currency pairs are tied together, when one moves so does the other one. It is most common between pairs including one of the same currencies like EUR/USD and EUR/JPY but can also exist between seemingly unrelated pairs such as the EUR/USD and CHF/HKD which have been shown to move in tandem over multiple time frames. What makes currency correlation really confusing is that some moves move together, but in opposite direction.
Unwanted Correlations Add Risk For Binary Copy Traders
The reason why it is important to understand these correlations in terms of account diversification and copy trading is that you don’t want to double up on trades that are essentially identical, and you don’t want to make trades that are likely to cancel each other out. It is all to easy to jump from chart to chart, looking for signals, and forget that sometimes these charts have a big impact on each other. You may find identical signals occurring on multiple pairs and there is a reason for it; they are basically the same trade, moving on the same fundamentals and the same catalysts. You may at first think it a good idea to trade on 2,3 or 4 signals because you are spreading your risk around but if those trades are all looking for the dollar to strengthen you are really increasing your risk. If the dollar strengthens you win 4 times, but if it weakens you lose 4 times.
Adding risk is reason enough to be wary of correlations but there’s another reason to fear it; cancellation. Cancellation is when you trade on two pairs that move in opposite directions of each of other like the EUR/USD and USD/CHF. These two pairs, and many like them, will move in opposite direction of each other. Placing a call or a put on both at the same time has a higher chance of resulting in one win and one loss than it does in two wins or two losses. Trading like this ultimately will result in losses for binary traders because of the risk/reward ratios of trading. You never win as much as you lose on a trade by trade basis, it takes a win rate greater than 50% to be profitable.
Copy Trading Binary Options
Copy trading is supposed to help make trading easier but when you consider correlations and how they can affect your account you may not agree with that sentiment. Blindly following someone, or a couple someones, can result in major losses and currency correlation is only one method. You can try to avoid them through diversification but there is nothing to stop your traders from trading the same pairs, or pairs that cancel each other out, so you really have no control over your risk. This is why it is important to fully understand who and what you are copying, and to use copy trading as a tool for your trading education, not as your overall strategy.
The first step to avoid these risks in your account is learn as much as you can. Education is always the key. The more you learn the better able you will be to choose the right copy trading platforms and services, the more you learn the better able you be to choose the right traders to follow. As your education grows you will eventually learn to make good trading decisions and even make your own trades which should be your goal. If it isn’t you aren’t serious about making money trading binary options.
Social Trading Is The Answer
Once again the answer to the question, the solution to the problem so to speak, is social trading. Where copy trading is nothing more than following signals or auto-trading software, social trading takes signal trading to the next level through education and interaction that allows you to make proper decisions about your account and currency correlations. A few of the benefits include knowing who you are following versus following some avatar on a website, knowing the strategies employed, picking only the trades you want to follow/not all the trades a trader makes and the support of other traders like yourself. Yes, you can just copy the trades of other traders but you at least have the opportunity of picking and choosing which trades to follow. The bottom line though is that correlations can kill your copy trading account faster than a broker will call you back after signing up on their website. Open your first Social Trading Account with CommuniTraders Today!
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.”
- 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.
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