Binary options often attract traders on the Forex market or stock exchanges. While traditional option contracts are quite clear, the term “binary” is not always fully understood. Let’s try to understand this instrument and get a basic idea of it.
- Why are options called binary?
- Types of binary options
- Strategies and indicators for trading binary options
- Features of trading binary options
- How to choose the expiration time of a binary option
- Optimal time frame for trading binary options
- How the expiration time of a binary option depends on the trading strategy
- Misconceptions and mistakes of beginners in trading binary options
What Is ‘Binary’?
This duality is what gives them the name ‘binary,’ meaning consisting of two elements. As a trading asset, various instruments can be used: currencies, stocks, commodities, and others. The time to execute such a contract varies from minutes to several months, with profitability reaching up to 70-95%. In short, the principle of operation of any type of binary options can best be described as a ‘bet.’
Types of Binary Options
Trading binary options involves five main types:
Type 1. Binary Option ‘Cash or nothing’ / ‘All or nothing’
This type of binary option is the most popular among traders. When purchasing, it has a certain profit percentage and price. This amount is the transaction volume, and this is what the trader risks. Before purchasing a ‘Cash or nothing’ binary option, you need to make a forecast about whether the selected asset will rise or fall, then purchase a Put / ‘Put’ or Call / ‘Call’ option accordingly.
If at the end of the execution, the trader is correct, they earn a pre-determined profit amount, usually 70-85% plus the initial contract value. If the forecast does not materialize, they lose the invested amount entirely. Sometimes the broker offers a return of 10-15% in case of a loss, but this should not be considered a rule, rather, it is just a bonus to boost morale.
Type 2. Binary Option ‘Asset or nothing’ / ‘Asset or nothing’
The ‘Asset or nothing’ binary option is almost indistinguishable from the above ‘All or nothing’. It can also be bought and sold, setting a specific level, above or below which the price will be at the time of execution, and also receive the stated profit or lose money. The difference lies in the determination of profit, which is expressed in the value of the selected asset.
In fact, since profit calculation is automatic, many traders do not even see the difference between ‘Cash or nothing’ and ‘Asset or nothing’ binary options.
Type 3. Binary Options ‘One touch’ / ‘One touch’
‘One touch’ differs significantly in terms of execution and trading strategy from the previous ones. Having the same cost and profitability, such a financial contract also involves a certain price level. Knowing it, the trader must predict whether the price will reach this level within the given period and place a bet. It doesn’t matter what the contract closes at, the important thing is that the asset touches the fixed level.
Type 4. Binary Options ‘No touch’ / ‘Unreachable’
Opposite in name and meaning to the ‘One touch’ binary option is ‘No touch’. The difference is only in the trader’s forecast about whether the price will reach the level specified in the contract. If they believe it won’t, they should buy a ‘No touch’ option to profit. If the asset doesn’t touch the level at the time of closing, the trader gets the agreed profit. Otherwise, they lose the contract value.
Type 5. Binary Options ‘Double one touch’ and ‘Double no touch’ / ‘Double one touch’ and ‘Double no touch’
These are the most complex and therefore less popular types of binary options. Essentially, they are a modified version of ‘One touch’ and ‘No touch’ options—strategies and execution are identical. However, two fixed levels are set for achieving profit, which the asset must reach or avoid before the option’s expiration time.
Based on personal preferences, the offers from binary option brokers, and the market situation, it is more profitable to trade different types of binary options. Nevertheless, traders mostly prefer ‘Cash or nothing’ as the most accessible and easy to understand.
Strategies and Indicators for Trading Binary Options
To get a fixed income, you need to specify either a level below or above which the price will be after the time you specify, or indicate a mark near which the asset’s price will be soon, and place a bet. Your forecast options and trading strategies are closely related to the types of binary options.
To correctly predict the direction of the asset’s price movement and buy a binary option, most traders use forex indicators. In essence, there are no special indicators for binary options. Most traders use signal and arrow indicators adapted for binary options trading. Popular are both built-in indicators in the broker’s terminal and user-made indicators that allow for quality analysis of the asset—trend direction and strength, possible turning points, etc.
In addition, trading robots are successfully used in binary options trading.
How to Trade Binary Options?
Binary options trading and forex trading are based on the same principles:
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FAQ
Why are options called binary?
Binary options are called binary because they have only two possible outcomes: a fixed profit or a total loss.
What are the types of binary options?
The main types include ‘Cash or nothing,’ ‘Asset or nothing,’ ‘One touch,’ ‘No touch,’ and ‘Double one touch’ or ‘Double no touch.’
How do binary options work?
Traders predict whether an asset’s price will rise or fall within a set timeframe. If the prediction is correct, they receive a fixed profit; otherwise, they lose their investment.
