You could earn a quick profit by trading in binary options. However, you could also lose your money just as fast. Here is a guide on how it works.
What is it?
Rather than investing, Binary Options Trading is a type of gambling, where you trade on an asset increasing or decreasing in value within a set time.
How it works
When you perform a trade in binary options, you decide how long the trade will last. Then if you are right, you are told what your possible return will be.
This implies that you earn a fixed amount if your trade wins, unlike investments.
There are three possible outcomes:
- If the asset’s value is the same, you get your money back
- If you are right, you earn a profit
- If you are wrong, you lose the money that you traded
Some companies give potential returns that would double your money. But the greater the potential return is, the riskier the trade.
What you can trade on
You can trade binary options on several assets, including:
- Currencies (forex): Currencies are always traded in pairs, e.g. USD/AUD
- Indices: e.g. DAX30 (Germany), the FTSE 100 (UK), and S&P 500 (US)
- Commodities: e.g. energy and metals
- Stocks: This is the value of the shares of company
Pick a type of trade
There are various ways to trade binary options, and how you make money from them differs:
- Range: You bet on whether or not a market price will close within a set range. If at the end of the time you are right, you make a profit.
- High/low: You bet on whether the market price at expiry will be higher or lower than the market price you started with.
- No touch: This is the opposite of one touch. You bet on the price not reaching the target within the time.
- One touch: You get a target price, which can be higher or lower than the starting price. You bet on the price reaching the target within the time.
- Ladder: You make several bets at once, with different expiry times. This means you could get partial payouts if some of the bets go in your favour.
- Pairs: You bet on the price of two assets, e.g. gold against silver. If you think gold will outperform silver, you bet up. If you expect silver to perform better, you bet down.
Depending on the company, you could decide to trade in binary options that last just for 60 seconds, or as long as several months.
Is it regulated?
All UK-based binary options companies are regulated by the UK Gambling Commission, instead of a financial regulator.
This is because trading in binary options is a manner of gambling, instead of an investment.
Binary option companies that are located overseas do not require a Gambling Commission Licence to trade, so you should try and avoid them if possible.
See also: How to Trade in Binary Options