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The Fundamental Principles of Binary Options

The Fundamental Principles of Binary Options

Binary options are a relatively new trading experience which has attempted to make the world of options trading available to everyone. The concept is simple and distances itself from the complex and expensive world of traditional options trading by allowing traders to invest in low-cost options and with returns guaranteed at around 80%.

What are Binary Options?
Binary options allow money to be made by simply choosing whether the price of an underlying asset will be higher or lower than the current ‘strike’ price after a chosen amount of time. Similar to traditional options, the expiry time will determine whether the binary option has closed in or out of the money. This is the reason why they are also known as “all-or-nothing” options and this simplicity is also one of the reasons that they are attractive to trade. The expiry time, as well as the amount of money that a trader wants to invest in each option is highly flexible. Binary options can be purchased with anything from as little as 60 second’s expiry to one month.

What makes them Different from Forex?
Binary options are different from other forms of trading for several reasons. First, the profit and losses are predetermined before each investment. This means that binary options traders know exactly how much they are set to win or lose before entering a position. Winnings tend to be around 80% of the initial investment and losses can be between 85-100% of the investment depending on the broker. Secondly, because the losses are pre-determined, binary options traders don’t require stop-loss or take profit levels in their trading. The binary options will simply move “in the money” or “out of the money” depending on whether they are “call options” (long) or “put options” (short) as they move above or below the strike price. Binary options therefore do not rely on the degree to which they go beyond the entry price but can close fully in profit just one pip above or below the entry, of “strike”, price.

Choosing an Expiry Time
Binary options expire either “in the money” or “out of the money”, and in a few cases at the precise price that they were entered. The expiry time is essential to the options being profitable as a movement “out of the money” a few seconds before expiry will result in the a loss even if they have been “in the money” for almost all of the time before this. Binary options traders have a wide range of times to purchase options and use similar techniques to forex and stock traders to predict if price will be higher of lower at any one time. Although many brokers allow options to be closed prior to their expiry for a lower profit, the full profit can only be realised using the original expiry, or using a “rollover” feature offered by some brokers to extend the binary options’ life.
To further understand binary options and the different trading methods, I suggest you try the binary options school available on Banc De Binary

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