Binary options: focus on a complex financial product

Trading is becoming more and more popular with private investors as well. In relevant specialist magazines, you currently read a lot about particularly one new financial product: Binary options.

Binary options are becoming more and more popular and of course, there are reasons for that. For many investors, the main argument in favor of binary options is their simplicity.

Indeed, this option type is particularly easy to understand and trade. Basically, there are only two possibilities. You bet on rising or falling prices. The digital option, that is what a binary option is also called, has a fixed expiry time which decides on win or loss. If you bet on “price rises” -in order to make profit- the option needs to note higher at expiry time, compared to the initial course
– vice versa if you bet on “price falls”.

With binary options, you invest indirectly, that means you bet on an underlying financial instrument. This can be a currency pair such as EUR-USD, a share, a stock index, or even commodities, such as gold, silver or crude oil. So you have a wide field of application and you are able to diversify very well with binary options, apply them for hedging strategies or for idle speculation.

Even if trading is dead easy with this financial product, it requires a lot of knowledge, discipline and more or less complex strategies in order to really make profit. Read on to find out what matters or check out this Swedish site www.binaraoptionerhandel.com or this binary options site from the Netherlands www.binaireoptiehandel.net.

Technical or fundamental analysis

Before you even can start trading, you have to decide which trading approach to take.
This can either be the technical or the fundamental analysis, but also a combination of both.

The technical analysis mainly deals with evaluating charts and chart patterns. It is sometimes said about this analysis to be hocus pocus, but if you take a closer look at it, you can easily see that the technical analysis works. Indeed, this analysis is based on psychological principles that reflect in charts in an abstract way. And as you might already know: the stock market is mainly pure psychology.

On the other hand, with the fundamental analysis, the focus is clearly different. It generally deals with certain key figures, either of business or national economic nature, and their effects on the respective security paper.

Money-Management

Another important aspect is how to manage your trading assets, that means how much risk you are willing to take. Very many beginners do not spend much time thinking about that at all and often lose their entire bankroll, because if you are not able to handle risks, it is not possible to earn money in the long term. You should only bet about 0.5 % up to 3 % of your assets with a single trade. This does not mean that, when you trade with €10,000, for example, you can only take single positions for €300, no, but you should not lose more than €300 per trade. So, you definitely can open a position for €5000, as long as you make sure you do not lose more than €300 with this trade.
If you have enough discipline and consequently implement the simple principles, you can never lose your entire assets and there is enough scope for studying and learning the trade.

Profit expectation

How high is the profit expectation really with binary options? People advertize with spectacular figures of 80 % profit per trade! Can that be true?

The figures are correct. However, you need to consider that we are talking about “all-or-nothing” trades. Either you win or lose the whole bet. That is why you always can only bet a fractional amount of your trading assets (not more than 3 %!).

Let us just take a look at a small example. A broker pays you 80 % per won trade. Your trading assets amounts to €10,000 and from the past 1000 trades, you know that you meanwhile win about two thirds of all your trades with your strategy. You keep applying the money management with discipline and therefore, you do not bet more than € 300. Your profit expectation per trade is
(2/3 * 0.8 * € 300) – (1/3 * 300) = €60. This means, you win €60 per trade on average.
This is only a statistical figure and of course, you could lose 10 trades in a row. But in the long term, this does not change the profit expectation.

Conclusion

Binary options are a new and very simple financial product which is also the reason why they are very popular. However, you should not let yourself be fooled since making great profit is relatively hard. This can mainly be traced back to the fact that you need a relatively high profit probability
in order to be successful in the long term. Therefore, you need the right strategy which, unfortunately, we cannot tell you at this point.

References:

http://en.wikipedia.org/wiki/Binary_option
http://finance.yahoo.com/q?s=EURUSD=X
http://binaraoptionerhandel.com/
http://binaireoptiehandel.net/
http://www.amazon.com/Technical-Analysis-Financial-Markets-Comprehensive/dp/0735200661/
http://www.investopedia.com/university/fundamentalanalysis/