This article is designed to educate traders on the steps to take when trading binary options. But we will not stop at just enumerating the steps to take, but will go a bit further to place in your hands some timely information that will enable you to make the entire process error-free so it all works to your benefit.
So how can you trade binary options? It is all outlined in these few simple steps:
1. Broker Selection
There are many brokers in the binary options marketplace, unlike the situation just four years ago when you could count on the palm of one hand, the number of brokers in the marketplace. Brokers either use proprietary platforms developed by their software design teams and configured with unique features and trade types peculiar to their brokers, or they may decide to use the less expensive route of using a turnkey solution which enables the providers to configure features of the platform to the broker’s specifications.
Thus selection of a broker is indirectly an exercise in the selection of a trading platform. The choice of platform will influence what trade types are available for trading, and this will determine how the trader pursues the binary options trading career. A trader for instance may be skilled in the boundary trades, but may not be so successful with the 60 seconds option. Therefore, the trader will be best served looking for a platform that fulfills the need to trade boundary options over and above the 60 seconds option. Apart from the obvious issue of selecting a broker that will not disappear with the trader’s money, this is the role broker selection will play in the trading process.
2. Choosing the Trade Contract
There are several trade contracts. However, it is not compulsory that the trader must be a Jack of all trades, because invariably such a trader will end up being a master of none, literally. It is better to choose one or a maximum of two trades, and to perfect them. On the trade platform, choosing a trade contract will present the assets that can be traded with the chosen trade type at that particular time.
3. Selecting an Asset
When the asset list comes up with the selection of the trade type, the trader can then choose an asset from the list. Four asset classes are traded: stocks, commodities, currencies and stock indices. These asset classes have their individual characteristics and traders should choose assets based on which asset class they are conversant with. For instance, a forex trader may decide to trade only currency assets since they would be familiar to trade. Others may decide to trade purely stocks and indices. It all depends on the trader’s preference.
4. Investing in the Trade
Investment amounts should not be entered carelessly and arbitrarily. It is important to keep the risk to the trade within acceptable limits. A trader must not trade more than 3% of his account as the investment amount. Such limits will keep the account viable in case of a trade loss. The investment amount should therefore be 3% of the account capital maximum. If the trader has $2,000 as account capital, the total exposure from all open positions should not be more than $60, which is 3% of $2,000.
5. Trade Execution
Before executing the trade, always check to see that all the trade parameters have been entered just the way you want. It is not unusual at this stage to discover a few errors; wrong trade type chosen, incorrect investment amount entered, etc. This is where you make the corrections before you execute.
You should also preview the payout for the trade before you enter. This will tell you if the trade is worth entering into or not, especially when you use platforms such as those of Binary.com or AnyOption, where there are trade types with a variable payout structure.
Structure of the Binary Options Market
The binary options marketplace is a relatively new financial market. The market was deregulated in 2008 to make it open and accessible to retail traders. In this market, the way profits are made is a bit different from the other markets. Instead of profits being earned solely by the asset moving the trader’s favour by a number of pips, there are several ways money is made in this market. The end point is that the trader gets a payout which is made up of the invested capital and the profits from the trade. Not only must the trader be able to predict trade outcomes, he must be able to do this within the time allotted for the trade.
In the binary options market, we have the following participants:
The dealers/brokers, whose job is to match buyers and sellers of the two opposing sides of a trade contract. Notice that in this market, we do not speak strictly of buyers and sellers, because no assets are exchanged. It is the contracts based on the price and behavior of the assets that are traded. The dealers make money on commissions charged on the trades from both sets of traders.
The traders. Traders are split into two camps: those on one side of the transaction, and those on the other side of the transaction. Traders on one side make money and are paid from the money committed and lost by those on the other side.
The balance of payments in the market is such that there are always more losers than winners, so payment of the winnings to successful traders should NEVER be a problem. When traders start having withdrawal issues with brokers, then something else is going on. It is important for all players in the market to understand how the market works. It pays to know a little about a financial market you are committing your money to.