The (Bite-Sized) Ultimate Guide to Binary Options

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A one-stop guide for everything you need to know about the world of binary options.

2Table of Contents | Binary Options Guide

Introduction to Binary Options: 3–7

Key concepts for beginners: 8–21

What are assets: 22–26

Types of Analysis: 27–33

How to set up a free demo account: 34–38

Industry Regulations: 39–45

Introduction to Binary OptionsBINARY OPTIONS GUIDE

4Introduction | Binary Options Guide

Binary options are known by many names, including digital options, fixed odds trading, binary trading and binary betting.

When you buy a binary option, you are betting on whether the price of an asset will fall or rise in the future.

It’s called ‘binary’ because there’s only ever two outcomes – win or lose.

5Trading or Gambling? | Binary Options Guide

Binary options are at times referred to as both trading and gambling.

The reason being that binary options stand on the border between the world of stock market trading and the world of gambling.

Binary options and stock market trading deal with the same subject matter – assets and the market value of those assets.

6How Easy is it? | Binary Options Guide

In comparison to other types of stock market trading, it is simple, this is how the brokers market it.

However, compared to other types of gambling, for instance a slot machine, it’s much more complicated.

This raises a debate itself, in whether binary options are more akin to investments or really just a fancy way to gamble.

Binary options, however, become easier the more you learn.

Once you get a hang of the vocabulary and the basic trends to watch out for when trading, you’re good to go.

Another advantage of binary options is that you can make money when the economy is doing well and when it’s struggling.

7Is it Legal? | Binary Options Guide

Of course! In the UK binary options have been legal and regulated since 2012

This means brokers must possess a certain license and follow a strict charter imposed by the regulator.

The license is a very important guarantee and something which should be checked before you sign up.

In the UK as well as using sites with licenses issued by UK authorities, you can also use any sites with licenses issued by any EU country, as they must conform to the same regulations and laws.

Key Concepts for BeginnersBINARY OPTIONS GUIDE

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Broker | Binary Options Guide

To trade or gamble with binary options, you’re going to need an online broker.

Binary options brokers provide an electronic platform for betting/trading to take place.

If you browse various binary brokers, you’ll see that the binary options look different depending on the software they use.

To make matter worse, terminology varies between brokers. But don’t let this put you off. While the words and appearances may vary, the key elements remain the same.

10What is an Asset? | Binary Options Guide

An asset is simply a resource of economic value. Examples of assets include: gold, oil, shares in a company and currency pairs. The asset shown in Figure 1 is the currency pair – EUR/USD. To read more about assets, look out for our future article: What are Assets?

11What Does a Binary Option Look Like? | Binary Options Guide

In Figure 1 (right) you’ll see a screenshot of a binary options trade from Binary.com, with key features labelled. Binary.com is a well respected broker that’s regulated by the UK gambling commission, and has been around for 15 years. It was first established under the name BetOnMarkets.com in 2000. We’ll be referring back to this screenshot, throughout the article.

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Rise/Fall | Binary Options Guide

As you can see at the top left of Figure 1, Rise/Fall is selected.

Rise/Fall is the most common type of binary option and is also known as the High/Low option or Up/Down option.

It involves answering the question – will the price of this asset be higher or lower than its current price, after a specified period of time (e.g. 15 minutes)?

13Spot Price | Binary Options Guide

The Spot Price is the current price of your

chosen asset. Spot Prices are constantly changing,

and trying to predict what this price will be in the future is what binary options betting is all

about.

14Price of the Option | Binary Options Guide

Once you’ve chosen which option you want to purchase (aka which bet you want to place) you pay the price of the option to your broker.

As you’ll see, when we discuss probability later in the guide, the price of the option is directly related to the probability of the option being successful.

The price you pay for the option will be your maximum potential loss for your bet. In other words, if your bet is unsuccessful, you won’t lose any more than the sum you paid for the option. With some brokers, you may receive a small refund if your bet is unsuccessful.

15Time-Frame | Binary Options Guide

Time is a key concept in binary options trading, as when you’re trying to predict whether an asset’s price will rise or fall, it’s always with respect to a particular time frame.

Being able to choose the start of your bet is very useful as it allows you to take advantage of influential events in the wider world.

16Entry Spot/Exit Spot | Binary Options Guide

To determine whether your bet has been successful, the spot price at the start of your time window – which is sometimes called the entry spot – will be compared with the spot price at the end of the time window – which is sometimes called the exit spot.

17In the Money/ Out of the Money/ At the Money | Binary Options Guide

If your bet is successful it’s sometimes described as being in the money.

When your bet is unsuccessful, you’re out of the money.

There’s a 3rd possibility. What happens if the exit spot is exactly the same as the entry spot?

Brokers sometimes describe this situation as being at the money.

Brokers will have a particular policy that they’ll refer to if you end up “at the money”. Make sure you check what your broker’s policy is for “at the money” options before placing a bet.

18Early Exit and Extension | Binary Options Guide

Certain brokers – including binary.com – allow early exits.

An early exit is when you exit your bet before your pre-specified time for a reduced percentage return.

This is a useful option if you find that the market has taken a sudden turn for the worse, and you want to lower your chances of finishing “out of the money”.

Some brokers – such as Banc de Binary – allow trades (or bets) to be extended. At Banc de Binary you can do this up until 10 minutes before expiry.

This function is useful if the price of your asset is moving slower than you thought it would, and you want a bit more time to see if it will make a profit.

19Payout and Profit | Binary Options Guide

You need to select your payout – this is the amount of money you’ll recieve if you win. Payouts could range from £1 to £100000, depending on the broker.

Your payout includes the price of the option, and you can work out the profit you’ll make by subtracting the price of the option from your total payout.

20Odds and Probability | Binary Options Guide

When you calculate the odds and probability of some event taking place, you’re using two instruments that gauge how likely it is that an event is going to happen.

Knowing this information will help you assess the level of risk associated with placing certain bets.

The price of the option is directly related to the probability that the bet will be successful

The percentage return is directly related to the odds that it will be successful

21Key Concepts Conclusion: Binary Options Guide

In conclusion, by grasping key concepts such as “spot price”, “profit”, “return”, “odds” and “probability”, you’ll be in a much better position to trade wisely.

Remember, however, that understanding the figures quoted by binary brokers is not the whole story.

Consider horse racing. Some people make decisions about which horse to bet on simply by looking at the odds.

But experienced horse race gamblers take other things into account, such as the track record of each horse, and the weather on the day of the race. You can do the same thing with binary options.

What Are Assets?BINARY OPTIONS GUIDE

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Commodities | Binary Options Guide

‘Asset’ is a financial term which simply means a resource of

economic value. Assets are the things that are worth money within a trade. There are four main types of asset that you will encounter in

binary options; commodities, indices, stocks and currency.

A commodity is a raw material which can remain uniform across all producers and therefore can be traded on an exchange.

Commodities fall under three categories; energy, metals and agriculture products. So examples of commodities could be crude oil, gold, or wheat.

Commodities are a good place to start for novice traders because there isn’t too much terminology to get to grips with.

The most traded commodities are gold and oil. These are a good choice to place binary option bets on because there’s a whole wealth of knowledge about certain trends and correlating factors.

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Stocks | Binary Options Guide

Stocks is the general term used to describe the ownership certificates of any company. Shares refers to the ownership certificates of a particular company.

However the distinction between the two is usually ignored, and most of the time the two terms can be used interchangeably.

When you place binary option bets on stocks, you’re essentially assessing the company’s success and whether this will make for a rise or fall in the market.

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Indices | Binary Options Guide

Indices is the plural of index.

An index, in general, measures the value of a section of the stock market and therefore denotes a country’s economic state.

Famous indices include the American Dow Jones Industrial Average Index (DJX) or the British Financial Times Stock Exchange Index (FTSE).

It is basically a compilation of the largest tradeable stocks in a country or sector. Indices fall or rise based on the individual performances of the stocks which make up the index.

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Currencies | Binary Options Guide

Currencies are always traded in pairs. The first currency is called the ‘base currency’, and the second is called the ‘quote currency’. The ‘quote currency’ refers to the amount of that currency which can be purchased with one unit of the ‘base currency’. Currencies are traded on the Foreign Exchange Market (Forex).

Forex recognises major currencies and these include the British Pound, US Dollar, the Euro, Japanese Yen, the Australian Dollar and the Swiss Franc.The major pairs for these currencies is to be traded against the US dollar.

27Fundamental Analysis | Binary Options Guide

Fundamental analysis is used to work out the likelihood of a rise or fall of the price of an asset. By looking at the economic conditions affecting the market one can make informed predictions about the rise or fall of a given asset. These conditions are informed by:

1. Geopolitics

2. Economic reports

3. Politics

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Geopolitics | Binary Options Guide

Geopolitics is the study of geographical aspects to predict international politics and relations. This is one factor that is crucial to fundamental analysis when trading commodities. You can easily identify which countries are exporting the largest amounts of certain commodities, for example oil.

Both Mexico and Canada are large oil exporters to America. This means that watching what news is coming out of both countries is important, not only to oil prices, but also to how this affects the currency of all countries involved.

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Politics | Binary Options Guide

In a similar vein, international relations can have a major effect on the price of assets.

Elections can have large impact on the markets if potential new leaders are suggesting new economic plans.

Political stability encourages confidence in the markets, so any uncertainty can cause disrupt.

This can affect stocks, indices and currency prices.

30Economic Reports | Binary Options Guide

Article, stocks and indices should not be traded everyday. This is because it’s important to watch

economic data when trading these types of assets. With stocks, it’s

important to look at the company’s quarterly earnings reports.

Public companies are required to release earnings reports four times

a year. These reports show if a company is exceeding its expected profit, or failing to reach targets.

This can help predict trends within that company, as people are more

likely to invest in a thriving company.

However, as a binary option trader, you have the chance to also profit

when the company is failing to meet its projected profit.

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Gold Prices

Gold has a special relationship with stockbrokers compared to other commodities, meaning the fundamental analysis can be treated differently.

Stockbrokers are drawn to investing in gold when things are looking a bit rough in the markets.

Gold is something that retains it’s value, as it doesn’t go rusty or tarnish.

This means that when the economy seems unstable, it’s something people can invest in and know that they won’t lose out.

32How Commodities Correlate With Stocks

A very safe correlation is that between the price of a commodity itself and the price of stocks within the companies who distribute it.

So, for instance, if the prices of oil rise, it’d be pretty wise to place a bet on a rise in the price of Shell’s stock.

The correlation here is pretty much common sense; if oil is more expensive, Shell is making more money, people want stocks in a successful company.

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Technical Analysis

Technical analysis involves studying charts and graphs that show asset price movements.

It’s believed that by careful analysis of asset price behaviour from the recent past, you can spot trends and patterns that will enable you to predict what an asset’s price will do in the future.

In fact, when it comes to asset price movements, there are no new trends.

Trends are always repeating themselves, because the market moves in predictable cycles.

This is the guiding assumption behind technical analysis.

Setting Up Your Free Demo AccountBINARY OPTIONS GUIDE

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Types of Demo Account

Accounts that require real-money deposit (some platforms take a commission if no real money is played before withdrawing)

Accounts with an expiration date Accounts with no restrictions

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How to Sign Up

Once you’ve weighed up the pros and cons of different broker sites and selected a broker you want to use, you’ll need to sign up to begin to trade. Some brokers refer to demo accounts as ‘virtual trading’ or ‘virtual money accounts’.

Unless you’ve selected a broker who requires an initial deposit, demo accounts can be set up just by giving a few personal details such as your name and your email and then creating a password.

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Check Your Statement

After you’ve created an account, it’s useful to check your account statement to see how much virtual money you have to trade with.

Some brokers offer unlimited virtual funds, whilst some offer a set amount.

It’s also handy to familiarize yourself with accessing your statement as this is where all trading activity will be shown and how you can keep track of your wins or losses.

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Start Trading

The final step is to start trading!

Demo accounts have no restrictions on what type of trade you make, so make sure you check out our Types of Trades article to see what you think suits you best.

But what makes a good trader and how can you can maximise success?

Industry Regulations: Avoiding ScamsBINARY OPTIONS GUIDE

40Know Who You’re Dealing With | Binary Options Guide

Look up the company in question and find out all the basic information such as the physical address and name of the underlying company.

Many scam brokers will conceal this information for obvious reasons: if their outfit is a scam, they would rather you didn’t come knocking on their door for your money back.

Look up a company’s URL with easywhois. If they relate to this site

in any way its possible they are using some form of protection.

Always be suspicious of sites wishing to conceal their true identity!

41Are They Regulated? | Binary Options Guide

Binary options are perfectly legal providing the site you use has the relevant licences for the country where the company operates.

This is because on non-regulated platforms, client money is not necessarily kept in a trust account, as required by government financial regulation, and transactions are not monitored by third parties in order to ensure fair play.

Always ensure that the broker you are dealing with is regulated by a major regulatory body- if you are a citizen of an EU state then it is essential the company is regulated by a body within the EU itself.

42Consider the Bonus Conditions | Binary Options Guide

Consider the Bonus conditions:

Almost all binary options brokers will grant you a cash bonus depending on the amount you choose to deposit with them.

This incentive can go as high as 100% of your initial deposit and might sound great at first, but it is vital for you to understand why it is given to you: it’s to make the whole thing more appealing and to induce you to deposit more.

43Read the Terms and Conditions | Binary Options Guide

It may sound tedious, but if you value your money you will read the entire Terms and Conditions document and you will need to accept all terms and conditions before you can open an account.

Once accepting these tricky T’s & C’s there’s no going back.

44Learn from Other’s Experiences | Binary Options Guide

Perhaps the most important aspect of speculating online: take your time and visit specialized websites such as ours, which are highly informed regarding the ins and outs of the business and will provide you with unbiased reviews of binary options brokers.

The key word here is “unbiased,” because there is a multitude of websites which offer positive reviews in return for money.

45Which Depositing Methods can you use?

Credit Cards / Debit Cards – Nearly all brokers allow you to deposit via VISA, MasterCard and Maestro.

Wire Transfer – Commonly, brokers will allow you to use wire transfers to deposit into an account. However, often wire transfers can take up to 5 business days in order to complete.

E-Wallets – A lot of brokers allow money to be deposited using e-wallets, the most common of these being using Skrill/Ukash or Neteller.

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