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Table of Contents
1 Introduction
2 Trading Terms
3 Expiry Times
4 Broker Flexibility
6 Improving Costs
2 Optimizing Gains
1 Methods of Analysis
2 Remembering Context
5 Examples of Support
6 Examples of Resistance
7 Trends
8 Uptrend Examples
9 Downtrend Examples
Over the last decade the Internet has become a much more
commonplace extension in the lives of everyday people, and this
phenomenon has not been lost on the financial markets. Recent years
have seen significant increases in the number of individual investors
flowing into the online trading community and emerging trends in binary
options are a clear example of this.
Most of the allure come from the fact that trading in the financial
markets can be an exciting and highly profitable experience, which has
become accessible to anyone with a computer and a desire to learn the
about the industry. While there are many available choices for people
looking to get into trading in the financial (futures, bonds, or spot forex, for
example), one of the easiest and most rewarding choices can be seen the
binary options markets as the trading process in these instruments is easy
to understand and does not take much work or research to get started.
In its most basic sense, binary options trading requires to forecast the
directional value of a specific asset. That is to say, investors must have
some idea of whether prices will go up or down over a certain period of
time. It really is that simple. But at the same time, market forecasts need
to be conducted in order to ensure long term profitability and consistent
trading results.
In this eBook, Binary Options for Beginners, we will walk you through
the process of trade analysis and market forecasting so that you can have
a firm foundation when you begin trading with binary options.
Trading with binary options is similar in many ways and can appeal to
many people for the same reasons. Binary options are simple to trade.
Anyone can enter into this business and make long term gains. But we
must always remember that trading in the financial markets in not
gambling, and that there is always the possibility to lose money if we are
not well prepared and work to design a solid trading plan.
But with a little time and research, investors can implement the well-
established strategies that have been time tested by seasoned traders in
order to create reliable gains over the long term. The aim of this eBook is
to help you understand these strategies, achieving long term success in
the binary options world.
binary option is based on one of two outcomes - the price of an asset goes
up, or it goes down. Before any trades are placed, investors must have
some idea of what will be seen in the future value of an asset. Will the
price of Gold go up or down? Will the S&P 500 increase or decrease in
value. This logic applies to all types of assets (stocks, currencies,
commodities, etc.). The central factor the investor must focus on is the
future direction of an asset’s value.
For this reason, there are no huge trades - and none that are “semi-
profitable.” Trading in binary options is an all or nothing game. The profit
and loss is set before the trade is executed, as both sides agree on the
profit and loss parameters before the options contract is executed.
Trading Terms
Expiry Times
If the stock falls in value during this period, the investor loses money.
But here, there is no person or regulatory body that demands the stock be
sold back within a certain period of time. The actions of buying and selling
the stock are determined only by the investor - with no requirements made
in terms of holding periods. In binary options trading, this is not the case.
Broker Flexibility
But since all traders do not operate on the same scheduled, brokers
have increased the flexibility of expiry times that can be attached to each
options trade. For example, traders looking to be in and out of a position
quickly can choose option times that range from 60 seconds to one day.
Medium traders might select option times that range form one day to one
week, while long term traders will likely choose expiration times that range
from one week to one month.
There is a wide variety of time frames that can be used for options
trades. Shorter term time frames include 1-minute to 1-hour options, while
longer term time frames can include options trades that are based on
changes during a weekly or monthly period. Experienced traders
approach short and long term time frames in different ways but what is
important to remember at this stage is that each options contract will have
a set period of time that is relevant to each position.
But while determining your risk might seem difficult, the actuality is
that the process is almost totally automated through your trading station.
Once you select your asset, expiry time and trade size, you will
immediately see how much your trade can win or lose before you commit
to the position. Next, you simply hit the “buy” button on your trading station
and watch the trade until its expiration to see if the outcome is successful.
you simply need to choose the right direction. Your monetary gains will be
the same regardless of the total magnitude of the individual move.
To calculate your potential returns, you must look at the “return rate”
in your trading station, which will often be expressed as a percentage. So,
for example, if your return rate is 80%, you will pay $100 in order to receive
a total return of $180 in your original trading forecasts are correct. In the
alternative scenario (assuming your options direction forecast is incorrect)
you loss for the trade will be $100.
lose in each trade, allowing for heightened preparation before any money
is put at risk.
So, as we can see, binary options brokers have really simplified the
entire process for traders, making things much easier for new traders or
those that will be investing on an individual basis (without the help of large
financial institutions). In addition to this, these brokers have been able to
make substantial benefit offerings to their clients, which is a welcome
addition to what is offered viewed to be a rigid industry.
Now that we understand how binary options work, we will next look at
the available asset choices that can be traded using binary options. This is
important because nearly every type of asset can be traded in this realm.
Common choices include stocks that are traded publicly. Examples can be
seen in stocks like Apple, Facebook, IBM, or Microsoft but also in the
broader indices that house these individual stocks. Examples in this case
include assets like the S&P 500, the DAX in Germany, the FTSE 100 in
England or the CAC index in France.
But the world of binary options expands into other areas, as well, with
commodities and currencies also showing in some of the most popular
cases. Examples of commodities that can be traded include items like
Gold, Oil, Sugar, or Coffee, while examples of currencies include the Euro,
US Dollar, British Pound, Japanese Yen, or Swiss Franc. Many brokers
will also take suggestions for new assets to trade if your chosen product is
not currently available.
But perhaps the primary benefit of trading these assets in the form of
binary options is the fact that investors can gain exposure to the price
moves without actually taking physical ownership of the asset. This can
help trader to avoid storage fees and additional service charges. This
makes it much cheaper to trade binary options (relative to other forms of
investment), which, over the long term, will help to improve your profits.
● The One Touch Option - The One Touch Option allows traders set a
specific price level (for a stock, commodity, currency, or other
asset)and receive a payout if that level is reached.
● The No-Touch Option - No Touch options allow the trader to profit if
an asset’s price fails to reach a specific level before option expiry. In
Optimizing Gains
Investors that are able to successfully trade the options markets will
use the flexibility in contract types that is made available by brokers and
use different types of binary options depending on the underlying
conditions that are present in the market. These different option types will
allow you to minimize risks and maximize gains, so in order to optimize
your profit potential, it is very important to understand the price behavior
that is likely to be seen in a given market and then to choose the binary
options form that will best correspond to the market activity that is
predicted.
Before any trades are placed in these markets, investors should have
some idea of how options are valued. These valuations include factors
such as current market prices (of the underlying asset), market volatility,
intrinsic value (the amount of money the option will be worth if immediately
exercised and converted to the underlying asset), expiry time, interest
rates and dividends (for certain asset types). Using these factors, there
are several pricing models which can be used to determine fair values in
the options markets.
The most commonly used is the Black-Scholes model, which
assumes that the price of an asset flows in relation to constant price
variation seen in the market, the time value of money, the strike price of
the option and the expiry time. Essentially, the main drivers in options
pricing are seen in these economic factors. As asset prices rise, prices of
CALL options tend to rise (while costs of PUT options fall). Conversely,
when asset prices drop, the reverse scenario is seen in the pricing of CALL
and PUT options.
At this stage, you are probably asking yourself how analysts and
investors make their forecasts and predictions for which direction a stock
(or other asset) will likely travel in the future. Of course, this is one of the
most critical aspects of any trade and without the ability to determine it
these forms of analysis, it will be impossible to consistently trade in a
successful manner over the longer term.
In this section, we will first look to outline the important factors of the
more traditional method of investment analysis, which would be seen in
Fundamental Analysis.
fundamental analysis is not a real investment. But with such a broad topic,
it can seem difficult to get a handle on what this form of analysis aims to
achieve, exactly.
First, we look at the most common asset class: stock shares. Here,
investors will be focusing on economics at the micro level, as the individual
characteristics of a specific company will be the primary area of importance
for options traders. Specifically, here is a list of factors that must be
researched before stock options trades are placed:
would lead to the reverse with prices likely to drop and investors looking to
purchases new PUT options.
● National GDP
● Manufacturing productivity
Technical Analysis
Here, we will look at some factors which explain what technical price
analysis is, and what it is not. Only then will binary options traders be able
to tame this markets approach and use it to achieve gains when real
trades are placed. Below is a list of some of the central aspects of the
discipline:
The first critical aspect of the discipline comes with the understanding
that price activity is always viewed in terms of its temporal context, that is,
its time frame. Here, we will look at some different chart values (using
similar assets) to see how price can behave in different ways, depending
on this context.
Here is a 5 minute chart, showing recent price changes in silver. The
black bars in the chart indicate that prices moved downward during the 5
minute period while the white bars indicate that prices moved up during
that specific 5 minute period.
What do you notice in the chart above? Are prices rising or falling during
this period?
It should be clear that prices are lower at the end of they chart than
they were at the beginning, so, from this chart, we can see that prices are
showing declines and downward momentum. But what does that really tell
us about this asset? Should be buying CALLS or PUTS for silver based on
this information?
At first, we might think PUTS are a better choice, given that prices
are declining. But first, let’s take a look at some other chart examples for
the same asset.
What can we see looking at this chart? Prices end the period almost
exactly where they began, giving us a much more uncertain picture. Let’s
talk a look at an even longer time frame and try to get a sense of the
bigger picture.
Now, of course, here we can see silver in a very different light, with prices
increasing rapidly since the end of 2006 (seen at the beginning of the
chart). But with all of this seemingly conflicting information, how could we
possibly construct a trade?
Remembering Context
At this stage, we will hold off on specific trading plans. Here the main
idea is simply to understand that context matters and that what might
appear to be the reality from one perspective might change very quickly
The one hour chart shows us silver prices over roughly 3 weeks and
the weekly chart shows us prices in silver over the previous 4 years. So,
overall direction in these examples gives us three different scenarios even
though we are dealing with the exact same asset. But while this might
seem discouraging, factors like this will not prevent us from constructing
high probability trades.
Next, we will look at some common terms and tools that are used by
practitioners of technical analysis to get a better sense of the way price
activity is commonly viewed. Here, we will define some of the foundational
aspects of technical analysis so that we can explain how trades can be
constructed in the final sections. The key terms we will be covering on the
following sections include Support and Resistance, Up Trends, Down
Trends - and all of these will prove vital for placing trade entries in the final
sections.
Examples of Support
Below are examples of support (shown in blue lines) in a chart showing the
S&P 500:
These blue lines show areas where buyers have helped propel market
prices higher. Below is a similar example in the EUR/USD currency pair:
Finally, so that we can see that the term applies to all asset classes, we
will see similar examples of support on the commodity of oil:
Examples of Resistance
These blue lines show areas where sellers have helped push down (or
resist) market prices. Below is a similar example in the EUR/USD currency
pair:
The main point you will need to remember is that there are previous
pricing areas where buyers or sellers entered the market, which creates an
increased possibility that prices will exhibit the same behavior (either rising
or falling) if prices reaches those areas again in the future.
Trends
Uptrend Examples
Finally, using a stock market example,we will look at an uptrend in the S&P
500, this time from a daily perspective:
So, when looking for uptrends, the main point to remember is that they can
be seen on any time frame or in any asset class. The most important
requirement is that higher highs in price are visible along with higher lows.
Downtrend Examples
In the final sections of this ebook, we will look to tie all of this
information together and use everything we have learned to execute binary
options trades in the market. At this stage, the most important thing to do
is to take a step back and try to get a sense of the bigger picture.
Think about what binary options traders are trying to determine when
their analysis (be it technical or fundamental in nature) is conducted. Then
think about the information (price charts and recent economic data) that is
available to you as a trader. All of the information you will need to make
profitable trades is contained right here.
In this case, we are looking at a 4 hour chart in the S&P 500. The first
green arrow shows that prices have found willing buyers at the 1320 level
in the past (creating our support level). Prices rallied here the first time,
and as prices fall back to this level once again, technical traders will look to
initiate CALL options given the probability that prices will move higher as
they did in the past. Since we are using a 4 hour price chart, we will move
down one time level (to an hourly time frame) to initiate our trade.
With binary options in the S&P 500 typically paying out 80%, a $100
investment in this trade would have created gains of $80 in just one hour.
In this case, the higher highs and higher lows led an a 30 minute CALL in
oil. Let’s see how prices unfold as time moves forward:
In the example above, we were able to identify that the trends in oil were
positive and likely to move higher in the future. This rationale was used as
the basis for 30 minute CALL options, which unfolded in a favorable
direction and created profits, in a short 30 minute span of time.
With the stock index downtrend now clearly defined, we will look for
entry levels for our PUT option. In this case, we will use the latest high,
seen in the 8635 area on the chart, as an place to enter into out PUT
option. In addition to this, we would have the benefit of entering into our
PUT option at a higher level, increasing the probability that prices will fall in
the future (prices cannot stay at elevated levels for very long).
Since we know that the odds are in favor for the trade (given the downside
momentum and the excellent price entry), let’s now look at how price
activity would have unfolded in the trade:
When we are making trades in the binary options market, the primary
goal is to look for clear trends in the market so that we can increase our
odds for profitability once a trade is placed. From these examples, we can
see that finding charts that show clear trends (either uptrends or
downtrends) will give us a much better chance of determining how prices
will move in the future. Once we have this directional forecast, we can
then choose whether to enter into a CALL or PUT option for the asset we
are trading.
Here, we will look at the ways monthly jobs data influenced the S&P
500 in the US:
how markets responded immediately after the data was released. Clearly,
markets were encouraged by the data and buyers came flooding into the
US Stock market.
But how could binary options traders have profited from this
information? Well, given the encouraging news (fewer people looking for
work signals a stronger economy), traders could have entered into CALL
options in the benchmark stock index in the US, the S&P 500.
Since this information was new to the market, investors needed time
to respond (buy stocks) and binary options traders could have capitalized
on this time difference by taking CALL options on the expectation that
prices would move higher throughout the day. When trading economic
news releases 1 day options tend to be the most popular choice because
the news sets the tone for the entire day.
In this case, binary options traders could have entered into PUT
options on this currency, based on the expectation that markets would
continue selling the Australian Dollar because of new evidence showing
economic weakness.
example of this can be seen with the weekly inventories report for oil. This
report shows the total levels of oil storage and production in the US (which
is the world’s largest consumer of oil.
At the base level, these forms of chart analysis rely on market terms
such as “support,” “resistance,” and “trend.” These price elements can
give traders critical information when looking to construct new trading
ideas. Support levels allow traders to see when the market has stepped in
to influence prices and push them higher. This situations create excellent
opportunities to enter into new CALL options.
Trends can also be used. If traders are able to locate price charts
showing clearly defined higher highs and higher lows, an uptrend is in
place (an excellent opportunity for CALL options). If lower highs and lower
lows can be found, a downtrend is present and PUT options should be
taken. But even when traders find themselves reluctant to use price charts
to construct trades, other opportunities can be found when major economic
reports are released to the public. Here, fundamental strategies can be
used to make price forecasts and create new trade ideas.