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What Are Binary Options?
Binary Options are a simple financial contract with a fixed ‘all or nothing’ outcome at a set expiry time. This is the ‘binary’ element to their name. They are high risk but also offer the potential to earn high returns.
A key attraction of binaries is that they offer a predefined level of return and liability. This is known up front prior to the purchase of the contract. A broker offers a predefined payout on the contract. The trader receives this payout if the contract ends ‘in the money’ i.e if the price movement has been correctly forecast at expiry. If the outcome is not correctly predicted then the contract expires ‘out of the money’ and is worthless.
Binary options are appealing as they are both simple to understand and yet offer the potential for high payouts. Most are based on a simple ‘higher’ or ‘lower’ forecast of where you expect the price of an asset to end at the agreed expiry time. All the trader has to do is select the asset, contract duration and the direction that they expect the price to move. They then decide how much they wish to wager on the outcome. A correct prediction wins the payout.
The contacts used are non-leveraged. This means that both the potential payout and liability on each contract is known up front. This means you know exactly what you stand to win and the limit of your liability if things don’t work out as expected.
How To Get Started
1 Open an account
To start trading you will need an account with a broker. Account opening is both quick and easy. You don’t need large amounts of capital to get started with many brokers accepting minimum deposits from as little as $100.
2 Pick an asset
A binary options doesn’t involve a direct investment in the asset traded. As result this means that brokers are able to offer them on virtually anything. This means it is possible to trade contracts on a huge range of different financial assets. Brokers offer contacts on major market Indices, Forex, Commodities and many global Stocks. Key companies you can trade on include big names such as Amazon, BMW, Coca Cola, Google and Nike.
3 Decide On the Direction
Once you have decided on the asset to trade you then need to decide if the price will end HIGHER or LOWER at expiry. Contracts can be set to expire over a range of different time periods. The time period you select should most closely match your prior analysis. Common expiry times include 3o minute or hourly expiry times. However in many instances contracts can be set to run from a few seconds to over several days or weeks.
4 Set Your Stake
The final part of setting up your contract is to decide how much you want to risk. This is the amount you will pay for the contact at the outset. A binary options contract can be placed from as little as $1 right up to several thousand dollars. The amount that you wager on the outcome is your fixed liability. You can only trade with money you have deposited in your account and you can never lose more than you stake at the outset.
5 Place Your Trade
That’s it! Once everything is set up and you are happy then you just need to pull the trigger to place the trade in your account. The final step is simply to wait until the expiry of the contract to see if you are correct and entitled to your payout!