Binary Options

Risk Assets and Binary Options

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Risk Assets and Binary Options

All traded assets in the world of binary options carry a certain degree of risk. However, the term ‘risk asset’ is used in specific reference to assets that display a significant degree of volatility in their market prices. The most common kinds of risk assets in general trading and in binary options include equities, high yield bonds, currencies, real estate and commodities.

When taken in the context of an investment held by an individual or institution, risk asset is used to refer to an asset that displays fluctuating prices as a result of changes in interest rates, credit risk, supply and demand, among other factors. Another common use of the term is in the case of equity in a company that is undergoing financial difficulties or is almost bankrupt. This is because any claims by shareholders rank below the interests of bond holders or creditors of the company.

Comparison of Risk Assets against Traditional Assets

In order to gain a better understanding of what a risk asset is, you need to first grasp the concept of an asset as a whole. An asset is anything that provides some kind of income to its owner. One common asset could be a rented house or apartment, which earns the owner a monthly income. Another class of asset is the stock of a company which is owned by a shareholder, such as shares in the petroleum giant, BP. So, what’s the difference between the two?

In the case of the rented house or apartment, the likelihood of the owner incurring losses is much lower than the chance of receiving rental income. In addition, the apartment owner already knows how much they will earn in advance, and even knows exactly when they will receive their money. Dealing in stocks is harder, since a person who owns stock has no way to know in advance if they will receive any income or when this may happen. In addition, there is also the very real possibility that they will actually suffer losses. This is exactly what happened to BP shareholders when a rig operated by the company was involved in one of the biggest oil spills in history in 2010.

Risk Options and Binary Options Trading

How do risk assets relate to binary options trading? Because the major distinguishing feature of binary options is the ability to profit from an asset regardless of whether the price rises or falls, if you are able to correctly predict falls in share prices, you will gain a profit, which would cover losses you suffer in case you hold stock in the same company. This is largely thanks to the large yield of binary options, which is 60 – 90% on average.

In short, risk assets can best be summed up as assets that have unknown returns in the future. The prices of these kinds of assets are highly dynamic and depend on a range of market conditions, both favorable and adverse. As a rule, the risk assets traded most by binary options traders are shares and securities as well as certain commodities.

Binary Options

Trading Currency Pairs Using Binary Options

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Trading Currency Pairs Using Binary Options

Binary options traders can use currencies as the underlying asset. Trading currency pairs using binary options is easier than trading on the forex market. The ability to trade currencies on the binary options market offers many benefits, including:

  • Simple risk management
  • Higher liquidity
  • Access to the largest financial market on the globe
  • Ability to calculate the exact income or loss
  • Ability to trade different currencies around the world

An interesting option is to merge binary options trading with forex, thereby harvesting from both markets and fully exploiting the market potentials. When trading currency pairs using binary options, a country’s currency is compared to another country’s currency to determine its value. When investors are trading currency pairs, the first one quoted is called the base currency, while the second one is the quote currency. For example, in a USD/CAD pair, the USD is the base currency while the CAD is the quote currency. One may think of a currency pair as a single unit when trading, even though one is actually simultaneously selling one and buying another.

This raises the issue of what is the best currency pair to trade using binary options. It is not easy to determine this issue. Each currency pair exhibits its own behavior and each trader his/her own personality. Basically, determining the best currency pair to trade using binary options is a matter of finding one’s own advantage in the marketplace. Additionally, it depends on the time of day and day of the week one chooses to trade. For instance, traders who want to trade the Asian currencies should go for the Yen currency pairs.

The currency pair with the highest liquidity and order flow in the market is the EUR/USD pair. In addition, this pair boasts a lower level of volatility, which makes it particularly fitting for beginners. The USD/CHF and USD/JPY currency pairs also have a strong order flow; however, they sometimes offer very little action. With the USD/CAD and AUD/USD pairs, the level of liquidity is much lower. However, they sometimes offer unexpected and surprising movements. The GBP/USD pair is very solid, and is suitable for beginners. This pair has very good movements and liquidity, but is slightly more volatile than the EUR/USD pair.

Changes in price action are triggered by breaches in resistance and support levels that cause stop looses by traders who are on the losing side of the trade. In the currency markets, breakouts are common, which makes them ideal candidates to trade using binary options. The combination of constant information and strong liquidity makes currency pairs one of the best classes of assets to trade using binary options.

Beginners who are contemplating trading currency pairs using binary options should initially focus on the EUR/USD and GBP/USD pairs. However, traders should test and retest each pair to find the ideal currency pair for them.

Binary Options Trading Strategies

Binary Options Fundamental Analysis

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Binary Options Fundamental Analysis

Binary options traders must understand the difference between fundamental analysis and technical analysis. Traders are always arguing over which school is best. This piece will look at the basics of binary options fundamental analysis and how to use this form of market analysis. Most brokers try to sell the simplicity of trading binary options by tossing jargon like economic calendars, NFP, trading events, and fundamental analysis to prospective clients. They make it seem like trading is as straight forward as checking the calendar for a significant release. However, trading on events and following an economic calendar should never be confused with fundamental analysis.

Fundamental analysis is the study of a financial instrument, such as stocks, commodities, indices and currencies. The study looks at the external and internal factors that could influence the asset’s price. Unlike technical analysis, fundamental analysis involves the analysis of financial and economic data to measure the intrinsic value of an underlying asset. This data can range from global events to company data. Many events are interconnected, affecting the price of different classes of assets and different assets.

Assets always have an intrinsic value and a market value. When the intrinsic and market values differ, there is an opening for correction when a significant news item is released. The news may trigger a change to the inherent or fundamental value of an asset, which leads to a certain reaction from traders and other market participants following the asset. Their response forces the value of the asset to swing towards the intrinsic value of the asset. Comparing an asset’s intrinsic value with its market value to buy a put or call option is the basis of fundamental analysis.

It is impossible to understand every piece of information released. Fortunately, traders can pick a few assets to trade and focus their attention on those assets, and on the fundamental events and factors that affect them. This is especially possible with the advent of the internet. However, it is also important to follow the more general worldwide and financial headlines so as to put information into a larger context. Some of the factors to consider when applying fundamental analysis include:

  • Natural events that can affect the forces of supply and demand
  • Political events that can have a significant impact on the price of different assets
  • The financial market sentiment
  • The release of economic data such as GDP, interest rates, retail sales, and unemployment

There are four different asset classes in the binary options market, and traders should understand that factors that cause a shift in the fundamentals of these assets can vary with each asset class. For example, the price of agricultural commodities will be affected by natural events such as weather patterns and disease. For stocks, traders should look at factors such as mergers and acquisitions, earning reports, company news, etc.

The binary options fundamental analysis is a useful tool, which is designed to give traders a better view of the market. It also allows them to anticipate and predict future price trends to maximize profits.

Binary Options

Make Money with Binary Options

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Make Money with Binary Options

Anyone who has a computer, reliable Internet connection and some startup capital can make money with binary options. All they need to do is find a suitable binary options broker, open an account, deposit the funds and start trading binary options. The following is a detailed guide to making money with binary options.

Finding a Broker

The most important factors to consider when looking for a broker include; payouts offered, types of assets supported by the broker, security of the trading platform, supported payment options, types of trading accounts offered and the number of years the broker has been in business. Be sure to read reviews of binary option brokers before making a decision. This will enable you to make informed decisions.

Choosing a Trading Asset

There are generally four asset classes that can be traded using binary options. These are; indices, stocks, commodities and forex among others. Interest rates and pairs of assets can also be traded using digital options.

How to Start

Starting is very easy. The first step involves picking an appropriate asset to speculate on. This can be a stock, currency pair, commodity or an index. For instance, if you have a motor vehicle, you probably keep track of crude oil prices so you can use crude oil as the underlying asset. Depending on the current and expected market conditions, you can either invest in a call or put binary option trade. The former is used when market conditions are expected to improve and prices to increase, while the latter is used when everyone is bearish on the market.

If all indicators show that prices will go up in the near future, a call binary option may be the right option. On the other hand, you can invest in a put binary option if all indicators show that prices will decrease within a given time-frame.

Whichever option is chosen, an accurate prediction will attract a huge payout, which is fixed. On the other hand, an inaccurate prediction attracts a loss refund, which is also fixed. Many brokers offer payouts of around 80% on most assets and a loss refund of around 15%.

Example

Take the coffee market for instance. Ethiopia, which is one of the largest exporters of coffee in the world, has experienced a severe drought, which has led to a drop in coffee production. A trader receives this news with delight and invests $200 in a call binary option, knowing that prices will increase because of shortage of coffee in the global market. The trade has an expiration period of twenty four hours. The broker has quoted a payout of 80% and a loss refund of 10%. After one day of trading, coffee prices have increased by over $10 per unit. The trader gets a payout of $160 plus the original investment of $200. That is how to make money with binary options.

Binary Options

Types of Binary Options – A Straightforward Explanation

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Types of Binary Options – A Straightforward Explanation

Options can be classified into two main groups:

  • American options can be exercised before they expire worthless. Most options traded today are American options.
  • European options are different from American options in that they can only be exercised at the expiration date.

Geographic location does not dictate the difference between the two types of binary options – a straightforward explanation.

Long-Term Options

Many investors prefer trading options because of their fast profits. However, some options have  holding periods of one year, two years or longer, making them more suitable as long-term investments. These options are called Long-Term Value Anticipation Securities (LEAPS). By providing opportunities to control and manage risk or even to speculate, LEAPS are mostly identical to general options. The main difference between LEAPS and general options is that the former are strictly long-term investments while the latter are short-term investments. In addition, LEAPS are not available on all stocks, but are available on most widely held issues.

Exotic Options

The basic calls and puts are usually referred to as plain vanilla options. Despite the fact that the subject of options can be difficult to understand, especially for beginners, these plain vanilla options are quite simple to understand.

Due to the versatility of options, there are many types and variations of options. Non-standard options are called exotic options, which are either variations on the payoff profiles of the plain vanilla options or different items altogether but with a degree of “option-ality”.

American Options

These options can be exercised any time before their expiration dates. Investors with this type of options in their portfolios can exercise the options any time before they expire worthless. This is why American options are more valuable than European options. The dominant part of exchange-traded options is American.

Since investors have the option to exercise their American options at any point during the life of the contract, they are more profitable than European options, which can only be exercised at maturity. For example, if you buy a company’s Call option in March 2013, expiring in March 2014, you would have the right to exercise the call option any time up until its expiration date. Had the same option been a European option, you could only exercise the option at the expiry date, in March 2014. During the period between March 2013 and March 2014, there could be instances when the share price could have been ideal for exercise, but you have to wait until March 2014.

European Options

This option can only be exercised at its expiration date. European options have a tendency to trade at a discount. This benefit accrues only to European options holders because they only have one opportunity to exercise their contracts.

Typically, European options trade over the counter, while American options trade on standardized exchanges. Both types of binary options – a straightforward explanation, are lucrative investments.

Binary Options Trading Strategies

Effective Trading Strategies: Pinocchio Bars

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Effective Trading Strategies

Want to know what is one of the most indicative tools for effective trading strategies: Pinocchio bars. Most traders are familiar with stock market bar charts. These charts show the daily price swing in a stock in a vertical format that graphs the daily range of a stock. This vertical bar has two horizontal stubs on it. The one of the left denotes the opening price point, while the one on the right shows the point at which the stock closed for the day.

As can be imagined, there is a lot of highly pertinent information packed into such a simple display. By looking at an extended series of such daily bar graphs, the price movement of the stock is even more effectively revealed. Naturally, the open and close prices do not signify the daily high and low points except in remarkable cases.  Bars that push across high or low resistance points but then fall back inside the established trading range do not necessarily qualify as Pinocchio bars but they are close to it.

What a genuine Pinocchio bar has that other resistance-challenging bars lack is a long nose. Pinocchio’s nose is only created when there is a highly significant fraction of the bar’s trading range taking place beyond the inner band of movement denoted by the opening and closing positions. By shooting way beyond a resistance level and then dropping back below it by the close, a classic Pinocchio bar is formed.

This formation is generally regarded as a false prophet of strength. The long, strong run across a resistance barrier promises one thing, while the meek retreat back across that line by the close of business shows that it is not to be regarded as a true indicator of direction. In fact, quite the opposite reaction is usually expected to occur. A Pinocchio bar heralds exhaustion of a trend, to be followed after a short consolidation phase by a march in the opposite direction in which the nose was pointed.

The way to play a Pinocchio bar is to move in the direction opposite that in which the nose is pointing. A downward Pinocchio can be taken as an opportunity to consider going long, while an upward nose offers a solid clue that a short is looking like a reasonable option. Of course new information can always alter trends of any sort, but the purpose of watching for these unique patterns is to provide for an early warning that a reversal is about to get underway.

So when it comes to effective trading strategies: Pinocchio bars may be the only trading indicator which has been known to tell the truth by offering up lies. Keep in mind that Pinocchio bars have a very short shelf life. If reversals do not occur after about ten bars of action, it is generally assumed that the indicator was a false Pinocchio.

Binary Options Trading Strategies

Binary Options Trading Strategy – Martingale & Principle of Kelly

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Statistical Approach Strategy – Martingale & Principle of Kelly

Statistics has been applied to virtually all areas of study including population planning, disaster risk reduction, electronic system design, and many more. It makes a lot of sense to take a statistical approach to trading as well given the high degree of randomness in the markets. Investors can start with two of the most basic concepts of this nature: binary options trading strategy – martingale & principle of Kelly.

Principle of Martingale

This was a very popular tactic among French gamblers in the 1700s. Simply put, it encourages people to double their bets every time they lost a game where there is a 50% chance of winning. Assuming that the conduct is fair and the average winning percentage holds, those who employ this strategy should be able to recoup their losses. However, the ideal results may take time to achieve and require an exponential bet. It is only advised for gamblers who have plenty of money to spare. A nearly unlimited amount of funds and a mountain of patience are required to execute the plan.

Principle of Kelly

This concept was originally developed by engineers who wanted to solve a long distance communications problem due to noise. Somehow, the horse racing gamblers caught wind of it and successfully applied it to their bets. The financial world followed soon after and the Kelly criterion is now an established method of diversifying assets. The principle can be summarized in one simple equation: K% = W — [(1 — W) / R]. The variable W denotes the winning probability while R denotes the win/loss ratio. The Kelly percentage, K%, points to the ideal position size for the equities included in the portfolio.

The typical way of computing for K% starts with a study of the past 50 to 100 trades made. Since the historical data will be used, this assumes that the trader will continue on with the same strategies with roughly the same conditions. Then the winning probability is calculated by checking the number of profitable trades and dividing this by the total number of trades in the sample. The result should be a number between 0 and 1. Next, we calculate the win/loss ratio by finding the averages of the profits and the averages of the losses and dividing the former by the latter.

It is normal to find a Kelly percentage of around 5% to 10%. For a 5% outcome, the investor should take in 20 equities in his portfolio to minimize risk. For 10%, there should be 10 equities involved. Although this principle was developed for communications signals, simulations of it use for financial trading have shown that it does indeed yield reliable results. If you are trying to rationalize your portfolio, use tried and tested binary options trading strategy – martingale & principle of Kelly.

Binary Options

6 Expert Traders Opinions on 60 Seconds Options

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6 Expert Traders Opinions on 60 Seconds Options

Binary options are taking the trading community by storm. Its enormous popularity has led to incredible growth and countless innovations. For instance, brokers are offering a whole lot more than the regular HIGH/LOW options that have become synonymous with binaries. There are touch, no-touch and tunnel options that play around with the idea of a strike price. There are also 60-second options that pose a limit to the expiry time. This last one has become quite controversial as critics are not convinced of its promise of rapid profits. Here is a summary of 6 expert traders opinions on 60 seconds options.

Can You Make a Profit?

One of the biggest selling points of 60-second options is the high payout percentage. Traders can collect 80% or more of the stake if they win. This is significantly more than the typical payout for regular binaries. However, this payout still forces people to have a success rate of about 60% to exceed the breakeven point and take home some profits. Since the most that random luck can provide is 50% success, anyone wishing to make money on this must come with a plan on how to achieve the required rate.

Is 60 Seconds Enough?

The problem is that existing strategies were developed for deals that go on for a considerably longer period. Applying them to 60-second options is going to limit their effectiveness. Remember that charts for the same asset can look very different at every zoom level. With a timeframe as short as one minute, the price charts are susceptible to noise. These are random fluctuations due to the buying and selling that occurs within the trading day. The spikes and dips do not amount to anything but they obscure the real trends and make it difficult to perform any sort of technical analysis.

Is It Trading or Gambling?

There is a lack of dependable analytical tools which can be used consistently for 60-second options. This fact makes them risky investments. Some critics have even gone so far as to say that this is not trading but gambling. Trading, though partly influenced by luck, can be guided by scientific methods to achieve a desired outcome. In other words, it requires incredible skill and only the highly trained individuals succeed in this endeavor. Gambling relies mostly on chance as the result of the random signals at minute intervals. There is little to no probability that anyone can get consistent results.

Conclusion

The 6 expert traders opinions on 60 seconds options reveal a deep skepticism about this scheme and for good reason. They feel that these would attract people who are into get-rich-quick schemes but it is mostly the brokers that will profit from the trades. The full interviews can be found on the site called Binary Options that Suck.

Binary Options

Using One Touch Options

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Using One Touch Options

One touch options are a type of option that gives traders a payout once the price of the underlying security touches or goes past a predetermined price barrier. This type of contract allows traders to set the level of the price barrier, the expiration time, and the payout once the price breaches the barrier. Using one touch options comes with more inherent risk; however, there is no denying the temptation of rates of return of as high as 600%. Being high-return, high-risk options, some traders tend to shy away from this type of trade. However, traders should not overlook them. Instead, they should execute such trades along with a solid strategy when market conditions are favorable.

This type of options allows for only two possible outcomes: the price breaches the barrier and the trader collects the maximum payout, or the trader loses the full premium if the price fails to breach the barrier. One touch options are perfect for traders who believe that the price of an asset will go past a certain level but are unsure whether the higher price level is sustainable. Since this type of contract has only one price barrier, it is usually cheaper than the double one-touch option.

Traders can only trade one touch options during the weekends when markets are closed. Also called touch/no touch options, their expiry window runs through the week, expiring at market close on Friday. If at any time during the week the price of the underlying asset breaches the barrier, the contract would immediately close and the trader would receive the full payout due. Sometimes, the broker predetermines the target levels based on historical data and market conditions.

Traders who opt to use one touch binary options need to predict two key factors: the direction of the underlying asset and the volatility. First of all, they need to determine whether the value of the chosen asset will rise or fall before the predetermined expiry date and time. If they determine that the value will rise, they should place a call option; however, if they predict a fall in value, they should purchase a put option on the asset. Traders also need to understand how volatility affects the price of an asset. This will help them to determine to what level the price will rise or fall in response to changes in the market.

One Touch Option Example

Assume that a trader is particularly bearish on Gold and believes that there is a reasonable chance that the price will fall to test the $1,200 level the following week before bouncing up a bit. These beliefs lead the trader to purchase a put touch option for 2 units for a total of $100. This option will have until the following Friday to touch the target level of just under $1,200. Since the gap at the time of purchase is fairly large, at around $50, the rate of return will also be large at 400% on the $100 investment. If at any point during the next week the price of gold touches the $1,190 level, the trader will earn a 400% profit. However, if the trader turns out to be wrong, then he/she would be flat out of luck.

Although using one touch options is fairly easy, it is still more suitable for experienced traders who know how to read the market.

Binary Options

Is Binary Option Trading Legal?

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Is Binary Option Trading Legal?

Is binary option trading legal? This is one of the most important questions a new trader should ask. Here is the short answer: Yes, binary option trading is legal.

Also known as digital options, this type of trading has been around for years. Historically, trading was done in person through over the counter transactions but in the year 2007, the Options Clearing Corporation suggested a change of rules to authorize binary options trading in major financial markets. The suggestion was signed into law a year later. While this already answers the question about binary options’ legality, it seems that there is much confusion whether binary option trading is legal or not.

It’s not so much of a question of legality though, because the confusion of new traders or those who want to engage in binary options trading root from the appearance of too many binary option platforms located offshore.

Can brokers located outside of the US trade with residents from the said country? The answer is no. In fact, it is against the law to solicit or ask US residents to engage in binary options not located in the United States. There are exemptions of course because there are offshore platforms that trade on an exchange listed with the US Commodity Futures Trading Commission (CFTC).

One has to note though that while there are legal online-based platforms out there, there are a handful of online-based binary option platforms that do not comply with US regulatory requirements. Others on the other hand do not comply with regulations of regulatory agencies in their specific country or region.

According to the CFTC, the internet has been experiencing a surge in terms of online-based binary trading platforms in the past few years. This surge resulted to grievances from a number of individuals who reported about fraudulent websites that offer binary options trading online.

Typically, an Internet-based trading platform asks customers to put forward a sum to buy an option call or a contract. While this is normal, some brokers overstate the returns and even advertise such just to encourage new traders to trade with them. The biggest problem however is the refusal of unregulated binary option trading platforms to reimburse funds or credit the accounts of their clients. The CFTC says, when customers of fraudulent trading websites attempt to get back their funds or get the money they won in a trade, these websites often cancel withdrawal requests and ignore their clients in general. Another complaint is that websites like these even steal the identities of their clients. It has been reported that a number of trading sites have been collecting customer information for unspecified uses. Some websites were even accused of manipulating results to ensure that nobody wins a trade. So is binary option trading legal? Yes it is. It is just unfortunate that there are trading platforms that are just there waiting for people to deposit money to them and never to be heard from again.