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Binary options trading has become increasingly popular over the last decade. Day traders in particular access these markets with ease from their computers. Another draw is that entrance requires relatively little capital. This article will delve into the basic rules of the game, how market exchanges work, and several ways to strategize for the greatest profit potential. Along the way, you'll also learn the jargon used in binary options trading that you need to understand to be successful.

Part 1 of 3:

Understanding the Rules of the Game

• However, unlike other options, you can only make or lose up to $100 per options contract. [1] X Research source
• An underlying asset in binary options trading can be a specific company's stock; a commodity like gold; a stock index like the S&P 500 Index; Bitcoin; a Forex pairing, which is the value of one foreign currency against another; or a news event, such as whether the Federal Reserve will increase or decrease rates. [2] X Research source
• "In the money” and “out of the money” simply refer to whether you answered the proposition a) correctly and are “in the money” or b) incorrectly and are “out of the money.” [3] X Research source
• The expiry date is the time or date at which the binary option expires, and the price is examined to see if it increased or decreased. It can be anywhere from five minutes to over a month after you placed the trade.

• Your profit, then, is calculated like this: $100 (total amount you can make on one trading contract) - $37.50 (the price you paid for that contract) = $62.50 minus fees. You're in the money. [4] X Research source
• So, for every winner, there's a loser on the other end. It's a zero-sum game.
• A call option is essentially when you predict that the underlying asset will increase in price. Even if an underlying asset only increases by a tenth of a cent you still win in binary options trading.
• A put option is when you predict that the underlying asset will decrease in price. Here again you win even if the underlying asset only drops by just a tick.
• The bid price is the maximum price that a buyer or buyers are willing to pay for an underlying asset. The ask price is the minimum amount a seller or sellers are willing to receive for an underlying asset. A trade or a transaction results when the two agree on a price. [5] X Research source

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• If the bid and ask are in the likes of $85 and $89, respectively, market makers are assuming there's a high probability that the proposition will result in a yes.
• If the bid and ask are near $50, that's saying they're not sure.
• If the bid and the ask are more like $10 and $15, they're indicating they think the answer will be no. [6] X Research source

Understand you don't own the underlying asset. Binary options trading merely involves speculation on the price of the underlying asset. It does not mean you own the asset itself. For example, when you buy a binary options contract you don't own stock in Google or own a certain amount of gold.

• Thus in binary options trading there is more assured reward and a capped risk. Your profit or loss isn't determined by the price of the underlying asset at the time of expiry as it is with other options. [7] X Research source

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Exercising Options

Learn about exercising options. There are two types of binary exercising options: the American style and the European style. American-style options can be exercised (or settled) at any time prior to expiry. European-style options can only be exercised on the date of expiry or the last business day prior to expiry. With both in binary trading, you can change your position if you think your initial answer to the proposition will be wrong at expiry to a) cut your losses or b) lock in an early profit. [8] X Research source [9] X Research source [10] X Research source

• You can make direct trades on each. Each has its own, very specific rules. Make sure you read them first. [11] X Research source

• Check to see if the platform has registered with the Securities and Exchange Commission (SEC) by checking its Electronic Data Gathering, Analysis, and Retrieval system (EDGAR), which you can access here: [1].
• Determine if the platform itself is registered as an exchange by looking at the SEC's website on exchanges located here: [2].
• Find out if the platform is a designated contract market by checking the U.S. Commodity Futures Trading Commission's (CFTC) list here: [3].
• Finally, check the registration status and background of any firm or financial professional by checking these two websites, the Financial Industry Regulatory Authority's BrokerCheck and the CFTC's fraud advisories: [4] and [5]. [12] X Research source

• The Cantor Exchange doesn't charge per trade. It does charge $.90 per contract at settlement if you're in the money. There's no charge at expiry if you're out of the money, and a $.45 charge if you're at the money. This means there's been no change in the price, so you neither win nor lose.
• Nadex charges both trading and settlement fees. Trading fees are assessed twice – once to open and once to close a trade. It charges $.90 per contract up to 10 contracts; there are no fees per contract after that, so your total trading fee for each side of the trade is capped at $9.00. It charges $.90 per contract settlement (up to 10) that's in the money. There are no fees if you're out of the money.
• The CBOE fees vary.
• Other platforms that trade through these exchanges charge fees, too, generally on top of the fees each exchange charges. Read the fine print carefully when using these platforms.

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Maximizing Profits Strategically

• For example, if you're trading on the release of employment data in Canada, you can't go off of predictions that it will, for instance, rise. You also need to look at the types of jobs that were added, how many hours workers put in, who's getting the jobs, etc.
• These will help you assess whether the price of the underlying asset – employment – rises or falls. Employment might rise, but the trading price may go down because of these other factors.

• Typically it involves looking at this all from a historical perspective to make predictions about future trends. [13] X Research source
• The underlying suppositions in technical analysis are: the price of an asset is a reflection of all you need to know about that market; prices move according to trends; and history repeats itself.
• It's concerned with internal factors – price and past performance.
• Look at the New York Stock Exchange's advance-decline breadth indicator, the Arm's Index and the Trader's Short-Term Index when examining market movement over time. [14] X Research source
• Use these indicators for trends in high and lows: Moving Averages and Parabolic SAR (stop and reverse).
• Examine the Relative Strength Index (RSI), the Commodity Channel Index (CCI) and stochastics oscillators to assess momentum.
• Study Bollinger bands, standard deviations and the Average True Range indicator for insight on volatility.
• Analyze the On Balance Volume (OBV), the Chaikin Oscillator, and the Rate of Change Volume (ROCV) indicator for market volume.

• When the ratio is low, you have a bearish market in which people are fearful. High ratios indicate the opposite.
• All major exchanges publish their own versions of these ratios. They focus on equity, indices, retail activity and so forth.
• Your goal is to find the ratio that applies to the underlying asset you're considering trading on and use it to direct your answer to the proposition. [15] X Research source

Sniff out fear. Because people pull out when they're nervous, markets drop faster than they rise. Exchanges recognize this and even publish volatility indexes that you can use to help in your decision-making. You can also actually trade binary volatility options on the Chicago Board Options Exchange Volatility Index (VIX). [16] X Research source

• The first way is by buying or selling a market's direction at strike prices that are out of the money. This means they are cheaper. If you're the buyer and the strike price – the price of the underlying asset when the option is purchased – is higher at expiry, you win. If you're the seller and the strike price is below at expiry you win.
• The second way is trading binaries that are in the money in what you believe will remain a flat market. The initial cost will be more, but if your prediction is correct and the market remains flat you will make a small profit. [17] X Research source

• The higher the ask size the larger the supply of that underlying asset there is that the market maker wants to sell. [18] X Research source
• A large supply means you may have more leverage in paying a lower price for the option. Remember, you don't have to pay the ask price. You simply need to exceed the current bid and hope it's accepted before you're outbid.

• It uses both fundamental and technical analysis to determine your trade and is considered by some the most effective way to make money when trading binary options.

Hedge existing positions. Buying binary put options on stocks you already own but think may drop in price a bit could offset losses in those stocks if they did, indeed, fall. This wouldn't protect you if the stock dropped significantly. It could help though if the dip was small-to-moderate. [19] X Research source You can also hedge on losing binary positions by using shorter-term expiry binaries such as a five-minute binary. Placing a put option in the direction of the loss can help you recoup your other loss as long as the asset continues moving in the losing direction.

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Introduction Pocket Option Affiliate Link

How do I choose the best broker? Alex Kwan
Certified Public Accountant

Alex Kwan is a Certified Public Accountant (CPA) and the CEO of Flex Tax and Consulting Group in the San Francisco Bay Area. He has also served as a Vice President for one of the top five Private Equity Firms. With over a decade of experience practicing public accounting, he specializes in client-centered accounting and consulting, R&D tax services, and the small business sector.

Certified Public Accountant Expert Answer

First, engage with brokers offering demo accounts to practice trading using virtual funds. It's an invaluable tool to familiarize yourself with their platform and fine-tune strategies without financial risk. Second, focus on brokers that present competitive payout percentages. These figures should be transparent and tailored to various assets and time frames. Understanding these dynamics is paramount for aligning with your unique trading approach. Finally, scrutinize the diversity and accessibility of assets facilitated by the broker. A robust selection of assets not only broadens trading opportunities but also signifies the broker's alignment with global financial trends and their commitment to a comprehensive trading experience.

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