What are binary options in simple words?

The emergence of binary options as a form of earning money on the Internet has caused some fear and skepticism among traders. This is due to the fact that few people understand what binary options are and how this financial instrument works and why you can make money on it on the Internet. After some time, traders appeared who were able to understand what binary options are, what they are in simple words and how to conduct successful trading with them.

Next, in simple language, we will look in detail at everything related to binary options, how they work, what they are, why and when they were created.

Content:

• Binary options – what are they?
• Historical background on binary options;
• Binary options, digital contracts, fix contracts: what's the difference?
• Types of binary options;
• Features of binary options trading in simple words;
• How to trade binary options;
• How to choose a binary options broker;
• Binary options: reviews from real people;
• Pros and cons of binary options;
• Forex or binary options: what to choose?
• Conclusion .

Binary options – what are they?

In simple words, a binary option is a financial instrument that allows you to make transactions with trading assets with a certain contract lifetime.

To understand what binary options are in simple terms and how they work, you should consider a simple example. Essentially, this instrument is a kind of bet (not to be confused with a casino), that is, if a trader understands that within some time (say, 15 minutes) the price of a stock, currency pair or cryptocurrency will rise, he can buy the corresponding option (Call or Put), which will automatically close after the specified period ( expiration time ). Let's imagine that a trader conducted an analysis and came to the conclusion that the EUR/GBP currency pair will rise over the next 15 minutes. Then he buys an option to increase CALL (“Higher”) with an expiration of 15 minutes, and if this currency pair increases by at least 1 point from the moment the transaction is opened, the trader will receive a profit of up to 95% (depending on the binary options broker ). Therefore, in cases where a trader or investor’s forecast is correct, he receives a certain profit for his bet. If the price after purchasing the option moves in the opposite direction and, upon expiration, closes at least 1 point below the opening price of the binary option, then the trader loses all the money invested in the transaction.

If you compare binary options and trading on any other market, the difference is in the type of transactions. By buying a share, for example, on the stock exchange, you, as a trader, make money on the difference in rates, and at the same time you can hold the deal for any amount of time. In binary options trading, each trader is limited by a fixed transaction time, but the price is almost irrelevant. When purchasing binary options, some components of the transaction are immediately known:

1. The future profit is immediately known if the forecast comes true;
2. The future loss is immediately known if the forecast does not come true;
3. The end time of the transaction is immediately known.

Thanks to this, there is no need to set “take-profit” or “stop-loss”, and it is also not always necessary to carry out a long analysis, unless we are talking about time frames for binary options from daily and higher.

Unlike betting, for example, on sporting events, binary options provide an opportunity to minimize risks and increase the number of profitable transactions. But to do this, you need to understand how this tool works and study the rules of money management and risk management .

Some traders consider binary options trading as a type of casino game, and some even believe that binary options are a scam or a casino . But in reality, this opinion is wrong and often leads to losses. The success of transactions with binary options directly depends on risk management, capital and the effectiveness of the forecast, for the preparation of which you have to use the tools of technical analysis or fundamental analysis . This means that in order to make a profit from trading this instrument, certain knowledge and skills are required, since otherwise it is impossible to constantly earn money by trading binary options .

Historical background on binary options

As the history of the emergence of binary options says, the first prerequisites for the formation of this financial instrument appeared in Ancient Greece, whose sailors agreed in advance with buyers on delivery times and prices of goods. Later, around the 17th century, Europeans introduced a similar practice. But the main impetus that provoked the emergence of binary options was made by the Chicago Mercantile Exchange, which began operating in the 70s of the last century. From that moment on, the financial market in its modern form began to take shape.

Ultimately, this led to the emergence of exchange options, from which binary options appeared in 2008 - a convenient tool for trading that allows traders to earn money even with minimal initial capital. In addition, today binary options brokers often increase the size of traders’ deposits by providing various bonuses, gifts , or holding tournaments and competitions. All this and much more determined the popularity of such digital contracts.

However, you need to understand that this tool does not allow you to disperse your deposit within a few days and with minimal investments, as this can lead to partial loss or complete loss of the deposit .

In order for binary options to constantly generate income, it is important to learn and use a systematic approach in choosing reliable binary options strategies that take into account risks.

Binary options, digital contracts, fix contracts: what's the difference?

Binary options, after their overwhelming popularity in 2013-2018, have attracted the interest of not only novice traders, but also many regulatory authorities. Therefore, in America there was a tough fight against this type of financial instrument and the government began to try in every possible way to equate binary options with gambling (in particular, casinos), thereby banning the activities of many brokerage companies. This has led to the fact that many popular binary options brokers have become banned in America and only official exchanges that are regulated by the SEC (US Securities and Exchange Commission) or at least the CFTC can provide trading in digital contracts .

Some traders from Russia and the CIS countries think that binary options may be closed in Russia in 2023 , but this will not happen, since there is no law prohibiting the possibility of trading these contracts, since this type of financial instrument is not considered gambling. In addition, all binary options brokers are registered in offshore zones, which makes their control even more difficult.

Regardless of the legislation, all European brokers and some brokers from the CIS countries and Russia are reinsured and rename their financial instruments from binary options to digital contracts, fix contracts (fixed contracts) or fixed time trades, but the principle of trading remains the same and the trader remains the same It is proposed to predict the direction of price movement in a predetermined period of time.

For example, the binary options broker IQ Option, in addition to classic options, offers trading in FX options and Digital options, the Olymp Trade broker has renamed all its options-related financial instruments to Fixed Time Trades, and the Alpari broker offers trading using Fix Contracts.

Now, understanding the whole situation related to brokers and the legislation of different countries, we can say with confidence that the difference between binary options, digital contracts, fix contracts and fixed time trades lies only in their name, but not in the principle of operation.

Types of binary options

There are quite a few different types of binary options, but only a few of them are used most often by traders. Brokers may also provide different options for digital contracts, so before you start trading binary options, you need to understand the features of each type of option. At the same time, on most binary options trading platforms, Up/Down and Up/Down contracts are traded.

As of 2023, 16 types of binary options can be distinguished:

1. Higher lower. This type of options is the most famous, and it is absolutely present in any modern broker. We will look at it using the example of the PocketOption broker. Its essence comes down to predicting the price “Above” or “Below” the price at the time of opening the option purchase. To make a profit, it will be enough if the price changes even by 1 point:

2. Rise/Fall. This type of option is also called a strike option, and such an option is also available in Pocket Option. Its essence comes down to predicting whether, at the end of expiration, the price will be above a certain barrier (target price), or below. Please note that you can choose the strike price (price barrier) yourself, and the percentage of payouts for such an option will depend on how far the strike price is from the opening price of the transaction and the payout can be even more than 100%:

3. Ends inside/Ends outside. To make a profit in this option, you need to predict where the price will be at the end of the transaction - inside or outside a certain range. This type of options is available on the Alpari broker platform, but it is worth noting that only the option type is available there – “Ends inside”:

4. Call spread/ Put spread. The principle of operation of spread options is similar to the previous option, but here you need to indicate whether the price at expiration will be higher than the level proposed by the broker or lower. The profit can be up to 90%:

5. Express options. This type of options is considered one of the most popular among novice traders, since in a very short period of time it allows you to earn a large percentage of profit in one express trade. The essence of express options comes down to selecting several assets at the same time, after which you need to indicate the direction for each and select expiration. The total profit can be more than 200%:

Note: with the Alpari broker you can select a maximum of 3 different assets, but the express orders of the Pocket Option broker do not have such a limit, and accordingly, the profit can be more than 700% for one transaction.

6. Turbo options. Turbo options can work differently depending on the trading conditions of the chosen binary options broker, but one thing remains constant about this type of options - they are very fast trades that do not last longer than one minute. For example, in Alpari, turbo options always have a fixed expiration of 5 ticks (a tick is the minimum change in the price of an asset), and the payout percentage does not exceed 60%, since in this way the broker reinsures itself by offering very fast transactions to its traders:

Note: turbo options from the same broker Pocket Option are different from Alpari options and have an expiration of 30 or 60 seconds, and the payout percentage exceeds 55%.

7. Touch/No touch. These options work on the simple principle of touching or not touching a certain price, which you can set yourself. That is, you can specify a certain level (by moving it on the chart above or below the current price), and then choose whether the price will touch this level during expiration or not. With the Deriv broker, these options can be traded with an expiration of 1 day or more, but the closer the selected level to the current price, the higher the payout percentage (if “Will not affect” is selected, since the chance that the price will reach within 24 hours to this close level is much higher):

8. Match/Difference. This type of options can be called quite complex, and it is definitely not suitable for beginners, since the trading process will be more like fortune telling in the absence of experience. When trading this type of binary options, you must indicate what the last decimal price (the first digit after the decimal point) will be at expiration. As a result, you choose a number from 1 to 10, after which you can select an expiration from 1 to 10 ticks (a fairly fast transaction) and indicate whether your forecast will coincide with the real price or, on the contrary, will differ. Please note that it is very difficult to predict the decimal price in such a short period of time, but if the forecast matches, you can get more than 800% profit:

9. Even Odd. The principle of operation of this type of option is similar to the previous one, and it is also necessary to predict the quote after the decimal point, but you need to choose only two options - an even decimal quote or an odd one. Expiration is also offered very quickly, and the payout percentage is the same:

10. More less. The same principle applies to this type of option, but now you need to indicate whether the price will be more than your forecast (a number from 1 to 10) or less. The larger the number when choosing the “More” option, the greater the percentage of profit you can get, and the same for the “Less” option, but in the opposite direction. Expiration is also allowed from 1 to 5 ticks, and the profit can be more than 300%:

11. Will stay inside/Go outside. This type of binary options is very similar to Inside/Out options, but the difference is that by selecting “Remain Inside”, profit will only be made if the price at the end of expiration (minimum 1 day) remains within the selected range, and it will not touch any of the boundaries. In the case of the “Will Go Beyond” option, profit will be made if the price ultimately goes beyond the range on either side or at least touches one of the boundaries:

12. Reset Call / Reset Put . This type of options can also be considered complex, since it requires predicting whether the price after a selected amount of time will be higher or lower than the entry price for the trade after the time is reset. That is, if the Reset Call option is selected and the expiration is 1 minute, and the price at the time of purchasing the option is 1.2020, then after 30 seconds (half of the expiration) a new price will be fixed (since the quote will be in motion), and to make a profit it is necessary to at the end of expiration at 1 minute, the price was strictly higher than the price that was fixed 30 seconds after purchasing the option. Reset Put options operate in exactly the same way, but the final price must be strictly lower than the price after half expiration:

13. High tick/Low tick. This type of options always has a fixed expiration of 5 ticks, and its essence comes down to predicting which of the 5 ticks will be the largest or smallest. For example, you can indicate that the first of five ticks will be the highest and then by choosing to buy the “High Tick” option, profit will be made if the first tick is the highest, and accordingly you can also select “Low Tick”, and then to make a profit the selected the tick should be the lowest. Profit on these options can exceed 200%:

14. Up only/Down only. In this type of options, everything is simple, and you need to predict whether the subsequent number of ticks you select will go only up or only down. You can specify a minimum of 2 ticks, and a maximum of 5, and the more ticks, the higher the payout, which in total can reach 3,000%:

15. Maximum-Close/Minimum-Close/Maximum-Minimum. One of the most complex types of binary options, since profit in this case is calculated from the price of the maximum, minimum and closing price, or from the difference between the price of the maximum and minimum. The minimum expiration is allowed in 1 minute, and the minimum multiplier is from $1, and as a result, if we take, for example, the “Maximum-Close” option, then the profit will be received if the price rises, and it will be equal to the difference between the maximum price and the price closing during the expiration period, multiplied by 1 (selected multiplier). The cost of potential loss is calculated in the same way and will be received if the price falls. The other two types of options work in exactly the same way:

16. Asian. This last type of options works on a principle reminiscent of Reset options, but in this case, profit will be made if, when purchasing the “Asian binary option up”, the price at the end of expiration will rise and, as a result, will be strictly higher than the overall average value of quotes during expiration . “Asian Down Options” work in exactly the same way, but the price must be directed downward. The minimum expiration is 5 ticks, and profitability can be up to 96%:

Please note that not all types of options listed above can be found at every broker, and some of the options, for example, at the same broker Deriv, are available only on synthetic indices that are not exchange-traded assets.

The most popular types of options are:

1. Higher lower;
2. Rise/Down (strike options);
3. Express options;
4. Turbo options.

It is also important to note that for beginners it is generally better to refrain from using any types of options other than “Higher/Low”, since they are the easiest to learn and predict.

It is also worth noting this type of orders, such as pending transactions, which are available at the binary options broker Pocket Option. These orders can be used with the classic type of “Higher/Lower” options and, thanks to pending transactions, you can open orders that will work in the future at a certain price or at a certain time. This approach is convenient to use when trading on news or when you are not there, but need to open a deal.

Features of binary options trading in simple words

Binary options trading is carried out on special trading platforms, the type of which is selected taking into account the trading conditions of the broker. Traders open transactions to purchase binary options through their broker's online platform. Currency pairs or shares of foreign companies are often used as the main trading asset. Also, some brokers provide the opportunity to enter into options contracts on cryptocurrencies, futures, indices, commodities and other trading assets.

There are three distinctive features of binary options:

1. Social trading;
2. Trading using free signals online;
3. OTC trading.

Social trading (or copy trading) involves placing funds under the control of another trader or traders, and when they make a trade, the same thing happens in your trading account, but without your participation. That is why this method is still considered relatively passive income, since you do not make any transactions. An example is social trading with the broker Pocket Option :

And such a service is also provided by brokers Binarium and FiNMAX .

Signals for trading binary options can be found both at most binary options brokers and on our website in the section - free online signals :

Such signals allow beginners to get comfortable with binary options trading, and more experienced traders can use them as additional signals or to save time.

OTC trading , to put it simply, is trading when trading sessions are closed, as well as on weekends, which include not only Saturday and Sunday, but also holidays:

Such trading becomes possible thanks to brokers who, using specialized algorithms, reproduce market movements as close as possible to reality. But it is worth noting that OTC quotes are not exchange quotes and have nothing to do with the real market. Therefore, when trading on weekends, you should be very careful, since sometimes it is almost impossible to predict price movements due to algorithms that no one except the broker can influence.

How to trade binary options

Trading binary options is not easy, but it is not difficult either, and with an understanding of how the markets work, as well as with constant practice, you can learn how to make a profit from any asset.

That is why beginners should definitely start learning trading from a demo account , as this allows them to understand how binary options work and how trading is carried out, and most importantly, all transactions are made on the same assets that real traders trade and In this case, you risk absolutely nothing.

In the image below you can see that the demo account provides virtual $10,000, and at the same time you can safely make even large transactions with an amount of $1,000 without fear of losses:

But it is important to note that you should not abuse trading large amounts on a demo account, since in this case, when you switch to a real account with a deposit of, for example, $100, any, even the most profitable transactions will seem insignificant, which will most likely lead to constitutes a violation of risks and an overestimation of trading volume, which ultimately will lead to the loss of the deposit.

When trading on a demo account, you, as a trader, will need to have something to focus on. For trading, you can use various binary options trading methods , one of which is trading binary options strategies. Of course, you can use trading indicators , but strategies are considered a more effective way.

There are a huge variety of strategies and trading systems, and it will be impossible to show them all, so you can familiarize yourself with some proven strategies and indicators from our videos, and then we will give an example of the most famous and simple trading strategy using Moving Averages :

Returning to our simple strategy, Moving Averages (aka “moving averages”) average and smooth the price, which allows in some cases to receive accurate signals and even price levels from which the price can bounce.

The rules of this strategy are very simple, and to work on it you can use both binary options broker terminals and the well-known MetaTrader 4 terminal . In the terminal, you need to add two Simple Moving Averages to the chart with a period of “12” (blue) and “33” (red). The rules of this strategy are simple, and you need to buy a Call option (“Higher”) when the red “moving average” crosses the blue one from bottom to top, and a Put option (“Lower”) is bought when the red “moving average” crosses the blue one from top to bottom:

How to choose a binary options broker

A broker is an intermediary (dealing center) that provides access to the financial market. Such companies provide comfortable conditions for concluding transactions, offering assets, technical and other tools, and trading terminals. The websites of major brokers contain educational materials on binary options. A number of companies conduct seminars and webinars.

Due to the high popularity of financial markets and binary options, in particular, fraudulent brokers are constantly appearing on the Internet. They can use different types of fraud , and in order not to fall into the hands of criminals, when choosing a company for cooperation, you must be guided by the following rules:

• Make a list of conditions that are comfortable for cooperation with a broker, and choose a company only based on providing the best trading conditions;
• Check with the broker for licenses and certificates issued by regulatory authorities, since a broker with a license may be more promising and safer;
• Study the trading platform that the broker offers and when studying, be sure to try trading on a demo account, and also try as much as possible to study the functionality in order to understand whether the terminal works well;
• Communicate with the support and understand how effective it is and how quickly it responds, since quick and clear answers are important in the trading process, especially when force majeure situations occur in the market;
• Study the user agreement of the broker you are interested in;
• Avoid companies that offer large bonuses and the opportunity to quickly (within days or weeks) earn huge profits;
• Study the ratings of binary options brokers.

It is equally important to study the reviews of real traders who previously collaborated with a specific broker, which we will talk about later.

Binary options: reviews from real people

Many people new to trading, as well as those who already have experience in the financial sector but have not traded digital contracts, want to study people's reviews of binary options, and this is the right approach that we always talk about. It’s worth noting right away that a lot of reviews about trading binary options with different brokers can be found on our website in the section – rating of binary options brokers . You can also find real reviews about binary options there from both beginners and experienced traders.

In addition, many reviews of binary options traders can be found on the Internet, since there are many services designed specifically for the exchange of opinions and comments.

You can also often find comments and reviews about binary options trading on thematic forums, where we found four reviews with which we completely agree. In the first post, the user says that making money on BO can be simple and uncomplicated, but the main thing is to be prepared and choose a strategy or trading method that will be completely clear to you:

Another trader, in his review of binary options trading, said that such a financial instrument is not suitable for him personally due to psychological factors associated with expiration, although he has no problems with trading on the Forex market:

It is important to note here that this is also a key factor in making a profit when using digital contracts, since not everyone will suit the exact style used in binary options. In this case, we are talking about expiration and the fact that in any other market a transaction can be closed at any time and receive a very small loss, when this does not work out in BO.

A slightly similar real review of binary options came from another user, who also said that this trading is not suitable for everyone, but not because of the psychology of trading, but because it will be necessary to study a lot of materials, including books on trading and other theoretical information:

The latest review about binary options trading says that BO is not a scam, but without development and constant training nothing will come of it and those who are looking for a quick way to make money on this market will only lose:

Based on the results of the real reviews about binary options we have seen, we can conclude that a prerequisite is studying the market and constant practice, and only then trading with real money.

Pros and cons of binary options

Before you start trading binary options, you should understand what advantages this financial instrument brings, and also what disadvantages such trading can provide. First, let's look at all the advantages of binary options:

• Profit and loss are known in advance. One of the important advantages of binary options is that when working with this instrument, the risks and the amount of potential income/loss are known even before opening a transaction;
• The time of the transaction is known in advance. The trader independently sets the time interval, after which the transaction is automatically closed. An exception may be early closing at the request of the trader himself, but not all brokers allow closing the option before expiration;
• 24/7 trading. Due to the fact that various currency pairs and cryptocurrencies are used as assets for binary options, trading can be done around the clock. And thanks to OTC quotes, you can trade not only 24 hours a day, but also 7 days a week;
• Income depends little on price. Of course, price is important in any asset, but unlike other markets, in binary options the profit does not depend on price movement and is enough for the price to change by only 1 point;
• Development of discipline. In classical trading, a common problem for many traders is closing transactions early, which results in scanty profits, but losses are often overstayed. In binary options, it is not possible to close a trade at any time, and therefore, in a sense, this can develop trading discipline, since after buying an option you can only wait.

Now let's look at the disadvantages of binary options:

• The time of the transaction is known in advance. Unfortunately, this plus is also a minus, since it is not so easy to predict the time during which the price will be higher or lower than the initial price. In the case, for example, with the Forex market, after analysis we can conclude that the price will reach a certain level, and this can happen either in 1 day or in a week, but this will not be so important, since the main thing is that the price has reached there. In the case of binary options, this approach will not work and it is always necessary to take into account not only the price, but also time;
• Binary options are an over-the-counter asset. When trading binary options, you are not buying real exchange assets, as is the case when trading shares on the stock exchange. Therefore, you should not use huge amounts of money in trading, hoping that you are buying a share in the business;
• The loss per trade is often greater than the profit. Binary options work in such a way that the profit per trade can reach 95% depending on the trading asset, while in case of a loss, the entire 100% investment in the trade will be lost. This makes binary options difficult for beginners, since it is imperative to be able to calculate risks and properly manage money, and only in this case will it be possible to receive a stable profit.

Forex or binary options: what to choose?

Both binary options and the Forex market use the same trading assets, but the trading principle itself is different. Therefore, in order to decide whether to choose binary options or Forex for trading, you need to understand what is more important to you as a trader - the possibility of faster transactions with fixed profits, losses and time, or almost unlimited both profits and losses, but at the same time longer transaction times. And here it is necessary to pay attention to the psychological factor.

Most likely, many will say that it is worth choosing Forex, since there is an opportunity to receive unlimited profits, but few will pay attention to the fact that such transactions can sometimes last for days, weeks and even months. And therefore, not every trader will be able to psychologically withstand price fluctuations that can occur after a transaction is made, whereas in binary options all that remains is to wait, which means you won’t be able to miss out on profits if the forecast is correct. In Forex, a transaction can be closed ahead of schedule and a good profit will be lost, which often happens to beginners, and sometimes even to professionals. Therefore, if you are inclined to “cut” your profits, then you should pay attention to binary options.

An example of this market situation can serve as a more clear example:

As a result, you can see that during a Forex transaction it would be necessary to wait much longer, and also the price would have to travel much further, and it is important to take into account that the same EUR/USD pair can not pass 70 points so quickly every day. At the same time, please note that despite the fact that binary options in this sense are many times more convenient and profitable, the price theoretically could have passed 2 times more in the same time, which means the profit would have been 2 times greater with lower risks .

Therefore, in order to decide what to choose – binary options or Forex, you need to understand where exactly you will be most comfortable trading.

Conclusion

In this article, we tried to explain in as much detail as possible the question of what binary options are in simple words, so that every beginner can understand whether he should start trading digital contracts.

Also at the end of this page you can try demo trading in a special widget to understand how binary options work.

If you still have any questions, you can ask them in the comments, and we wish you success in trading and big profits!

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