Binary options may not have the best reputation around, but even an average trader can make a decent living trading from home. However, in order for this cool business idea to work, you need to know how to trade binary options successfully. There is no foolproof way of doing this, but employing some sort of strategy can sure go a long way. This is a business, just like any other, and if you treat it as such, you can be a success story yourself.
Binary Options 101
The thing about these options that has made them so popular is that you don’t actually have to own a financial asset like a stock or commodity to make money on them. Instead of spending money on overpriced financial assets, and making a tiny fraction of your investment, why not profit on those same assets, without any liabilities whatsoever?
You need to predict the direction of a price movement of a stock, commodity, index or a currency pair, and place a binary option on that outcome. You do not own any of the underlying financial instruments and are therefore not liable for anything. You invest finite sums of money and your investment is all you could possibly lose. Basically, you’d be making a living off financial instruments you probably could not afford to own in real life. And when you see how much you can earn on them without any liability, you probably wouldn’t want to, anyway. Let’s see how it’s done.
#1 Use analysis – technical, fundamental, or both
Most traders use either fundamental or technical analysis – or preferably both – to predict future price action. Those who rely on fundamental analysis are looking at the big picture. Instead of the stock of a large company, like Apple, they look at the company itself, its value, business plans – the overall situation. If they focus on currencies, like the USD/JPY pair, they look at the US and Japanese economies for clues.
Technical analysis involves analyzing the instrument itself and looking for patterns in price movement. Basically, it involves analyzing charts to predict how the price will act in the future. Normally, this would make little sense, but since all the traders on all the markets are doing this and trading accordingly, if most of them conduct the same analysis on the same numbers, they’ll reach the same conclusion. And once they start trading, the price automatically goes in the same direction.
If the analysis says the price is going to fall, everybody will start selling and it ends up falling anyway; or if it says the price is about to hike, everybody starts buying and the price goes up. With these options, things are even simpler, because your losses are capped and you are trying to predict what these traders might do, so using the same tools as them can go a long way in achieving this. The most common technical analysis tools are the Bollinger Bands and Moving Average.
#2 Use trading algorithms and signals
Instead of analyzing all that data by yourself, you can always rely on other people doing the heavy lifting. Apart from analysts and their predictions, you can also get a good piece of software that would crunch the numbers for you and tell you where the price for a certain instrument will go. Otherwise, there are trading signals that are set to recognize potential trading opportunities and get your attention so you don’t have to sit all day in front of a computer in order to get some good deals. You can and should only trade when it suits you.
#3 Copy someone else’s trades
This is perhaps the easiest way, as many brokers simply allow a feature where you can simply copy the moves from a trader of your choosing. They have a list of professional traders, their win-to-lose ratio, the number of people following them etc. Find the one with the best stats, set the investment amount and check in from time to time to see how things are doing. However, the downside is that sometimes professionals get it wrong, too. When they lose, so will you – but if you don’t know how to trade binary options successfully, you’ll win a lot more this way and from the very start, too.
These three approaches to binary options trading may not be the only ones, but are by far the most widely used and most effective. Finding and formulating your own trading strategy is also an option, but this is up to you. In any case, most brokers offer a free demo account so if binary options aren’t your thing, you don’t have to lose any money trying to find out. So what are you waiting for?