Binary Options Trading

What Are Binary Options?

Binary option trading is a financial trading method with only two possible outcomes. That is why the name “binary” is used. A trader trading in binary options will have to predict the trend the value of an asset will take by the time the position of the asset expires.

A trader will receive a predetermined payout if his binary option expires in-the-money, and he will lose a predetermined amount of his initial investment if the option expires out-of-the-money.

The degree to which the option is in-the-money or out-of-the-money does not matter as it does with a traditional option. All markets—currencies, stocks, commodities, and market indices—can be underlying assets for binary options.

Unlike traditional options, binary options do not have set prices–the trader decides the amount of money he wants to risk and invests that amount when he buys the option. The time of expiration for binary options are set at different time intervals throughout the day, such that at any time a trader can purchase an option that will expire in 1 month, 1 day, 1 hour or even 5 minutes. The shorter duration of the contracts makes binary options more suitable for short-term, intraday trading than their traditional counterparts.

  1. Binary Options are financial instruments that can generate a stable revenue with a proper risk management. The Investor has to predict if the price will rise or fall.
  2. The possible outcomes are 80-70% for a wining trade and 0% for a losing trade. Some leading brokers  pay up to 10% even if the trade is unsuccessful.
  3. With Binary Options you access the markets with minimum investment. With proper trading strategy you can generate a stable income.

Binary options are an easy way to trade Forex, Indexes, Shares, and Commodities. They have three distinctive elements you need to keep in mind: the underlying asset, the time, and prediction. All you have to do is to predict if the price of an asset will go up or down in a specified period of time.

For example a typical binary options trade would be predicting what the price of EUR/USD will be in 1 day from now – Higher or lower than the current one. So traders who predicted right will get a return of usually 80% of their initial investment and 0% if they guess wrong. Brokers like  return to the traders up to 10% of their investment even if their trade is not successful.

If you estimate that the price at the time of expiration will be higher than the current price, then place a CALL. Conversely, if you think the price will go down, place a PUT.

You can win up to 85% of your initial investment if you have predicted right, i.e. your option expires “in-the-money” or lose 100% of your investment if the price moved against you, i.e. your option expires “out-of-the money”. In some cases you might be paid 5% to 15% back (Return Loss) depending on the broker.

What are the risks involved with binary options trading?

Compared to other financial trading, the risks involved in binary options are pretty low. A trader will know from the outset the amount he is investing & he won’t lose anything more than that.

Is it complicated?

Not at all. In fact, binary options trading is one of the simplest forms of financial trading currently available in the financial market. If you think that the price of an asset will go up then you have to select the up arrow in most platforms & if you think that the price of an asset will decrease then you would have to select the down arrow. You will see the results almost instantly.

How to Trade Binary Options in Kenya?

The basic steps to follow in binary options trading are:

  1. Find a good broker: the internet is full of binary options brokers but not all are safe. Before opening an account check out some reviews about the brokers and read the documentation available on their site. Pay attention to payment methods and commissions and fees that may apply for trades and withdrawals.
  2. Open an account and make a deposit: the minimum deposit varies depending on the broker and commonly starts from just $100. A decent first deposit for an amateur trader is around $500, this bankroll allowing you make enough trades just to understand how it really works without risking too much . The most popular deposit methods are credit/debit cards and wire transfer.
  3. Buy options: in the trade area of the online platform is a list with the available binary options for each asset. For ready-made options you only need to enter the amount to be invested, choose PUT or CALL and click to buy.
  4. For customized options you also need to choose the asset and select the expiry time (e.g. 5 min, 1 hour, etc.).
    Note: PUT is for the option in which you predict that the price at the expiry time will be lower than the price at the time of purchase and CALL is for the case in which you predict the expiration price will be higher than the price level at purchase.
  5. Verify the outcome: when the option reaches the time limit it expires. There are two possible outcomes: “in the money” – if your prediction was correct and“out of the money” – if the option was unsuccessful. If the option expires in the money, the payout is made instantly and you can see the money in your current balance. Several brokers offer a refund for “out of the money” options that can be as high as 15% so even if you lost you still receive a small amount of money for your option.
  6. Withdraw you earnings: once you earned a significant amount of money and you want to see it into your bank account you just ask for a withdrawal. The money should reach your personal account in few days but remember to check out the broker’s policies.

Choosing a Binary Options Broker

The first step of trading binary options is signing up with a binary options broker. There are many incredible binary option brokers out there, but if you’re trading options in Kenya, I suggest you go with one that accepts Mpesa. This is especially so if you’re new to online dealings and you don’t have online payment processors such as Payoneer setup.

There is no such thing as “best binary options broker”. There are many good brokers in the industry, but it’s not possible to determine the best one. Because Binary Options have become quite popular in the last few years a lot of brokers have opened up and now their number has become close to 100. Therefore it is important to select a reliable and professional broker with whom you can open an account with and trade comfortably.

Here are some important factors you need to consider when choosing the best binary options broker for you.

1. What option types are available?

Check out what Option types your broker offers. The most popular ones are: Up/Down (High/Low), 60 Seconds, One Touch, and Boundary (Range). While the more advanced option types are: Options Builder and BinaryMETA. See if the broker has the option type you want to trade and which fits your investment strategy.

Also, see what expiry times are offered, the standard expiry time is 1 hour. Depending on your strategy you might prefer shorter expiry times (30min, 1 hour, etc.) or longer expiry times (1 week, up to 1 month).

2. Does the broker offer a bonus?

Almost all brokers offer Bonuses to new clients. They do this in order to attract new clients and stimulate them to trade more. They usually give you a bonus of certain percent, for example 30% or 50%, of your first deposit. Sometimes brokers will give you a bonus up to 100%. Each broker has its own terms and conditions on how you can withdraw your bonus from your account. For example some brokers ask you to trade your deposit + bonus amounts four times, so if you deposited $200 and received a bonus of $50, you need to trade $1000 before you can withdraw funds form your account.

Check out what bonuses your broker gives and what are the terms and conditions in order to later withdraw it.

3. What payouts does the broker offer?

Each broker decides what Payout rate they give for winning trades or ‘in the money’. Payouts range between 60-90% depending on each broker. You can see this information on the broker’s website, before you make any trades. You should also consider if the broker offers a ‘rebate’ or ‘loss back’ if the option is a losing one or ‘out of the money’. Most brokers offer 0% loss back, so if your option is a losing one you will lose all of your investment. There are some brokers that offer 10-15% ‘loss back’, so you will be able to get back a part of your investment and limit your losses.

4. Are there any educational materials?

Most brokers offer educational materials to their clients, such as free e-book, educational articles, and Videos explaining how to trade. If you are a beginner trader it’s important to learn the basics about binary options and about trading. Therefore you should read the educational materials provided by your broker. Also, a few brokers offer free demo accounts, which allow you to make trades with virtual money.

In addition check out if the broker offers any Daily Market Review or Analysis, which you can use to evaluate market opportunities.

5. What are the withdrawal and funding methods? And are there any fees?

Brokers offer different withdrawal and funding methods to their clients. The most popular payment methods include: Credit and Debit cards, bank wire, Moneybookers (Skrill), CashU, Liberty Reserve etc. Usually brokers charge a fee when you withdraw money from your account, sometimes there is no fee if you withdraw money by Credit/Debit card, but for Bank Wires there could be $25 fee. Also oftentimes there is a minimum requirement in order to withdraw money, for example most brokers require that you withdraw a minimum of $100 in order to do so. Check this information before you open an account with a broker.

6. What is their Customer service?

It’s important to be able to reach your broker whenever you have a problem or a question. You should check how you can contact your broker (for example: by phone, email, or live chat), at what times of the day, and in what languages. This information is normally listed on the broker’s website.

7. Is the broker regulated?

Binary Options trading is still a relatively new industry and regulation is not common among brokers. While in Forex most of the brokers, especially the leading ones, are regulated by regulatory agencies (such as FSA UK, FSA USA, or CySEC) with Binary Options this is not the case. Currently only one Binary Option broker is regulated – Banc de Binary. We expect that as the industry matures more brokers will prefer to get regulated as a competitive advantage.

Placing Put & Call Trades on The Binary Options Platform

Here is a quick example of how to trade binary options. There are three main things you need to keep in mind: underlying asset, time, and prediction. Let’s take a closer look at them:

Underlying asset – A binary option can be based on different underlying assets such as shares, indexes, currency pairs, commodities contracts and so on. Hence, you can choose to trade a binary option on an asset you are most familiar with.

Time – every option has an expiry time and date after which the “game is over”. If at that moment your prediction was right you win and vice versa. An option can expire one hour after you place your trader or several days later at a specified time.

Prediction – Will the price of the asset be higher or lower than the price you placed your CALL or PUT? If your prediction is correct you make up to 85% in profit!

Here is an example:

Daniel from Nairobi follows closely the EUR/USD currency pair and now he decides to trade binary options. He opened an account with a binary options broker and ran their platform. After he had a nice lunch, he opened the EUR/USD chart around 2 pm.

binary-options-1

On the screen he sees a binary option with an underlying asset EUR/USD which expires at 3pm today. Now is 2pm and Daniel wants to trade it. In this case he has to predict in what direction the EUR/USD price will move in one hour. Will it be above or below the line? He has two options: to press either the green or the red button. What happens?

By pressing the green button, Daniel tells his broker: Hey, I think the EUR/USD price will be above the current price after an hour. If I am right I’ll get 85% gain on my investment. In this case Daniel places a CALL.

By pressing the red button, Daniel tells his broker: I believe the price will go below the line after an hour. If I’m correct, I get 85%. Now Daniel’s prediction is a PUT.

Finally, Daniel decided the price will be above the line in one hour, so he entered $100 as an investment in this trade and pressed the green button. He was waiting until 3pm and here’s what happened.

binary-options-2

At 3pm the market price was above 1.35471. Daniel’s binary option expired in-the-money, so he got 85% gain! If he had chosen the red button, however, the binary option would have expired on the wrong side of the line. In this case Daniel would have ended up with a loss of $100 (depending on the Return Loss percentage of the broker this is between 0% and 15%).

Types of Binary Options

The binary options market is growing fast, and so are the types of binary options offered. Here are the most common binary options explained: cash-or-nothing, asset-or-nothing, one-touch, no-touch, and double-one-touch/double-no-touch. Although the most common type is cash-or-nothing binary options, here is a description of all five types:

Cash-or-nothing binary options

As the name suggests, the return of this contract is either fixed cash amount or nothing. In this type a strike price is determined which is the price at which a trader enters the market. An expiry time and date is also determined; it shows when the contract expires. When the expiration time and date is reached, the trader wins the fixed cash amount or loses depending on whether his/her prediction was right.

One Touch Options

Another form of binary option is referred to as the ‘touch/ no touch’ option or also the ‘one touch’ option. In this form of option, the market only needs to touch the intended level once or not at all in order to make a profit.

For example if you think that EURUSD will not hit the 1.3090 level over the next 1 hour, you can buy the ‘no touch’ option for that timeframe. In this way, it makes no difference at all where the market closes as long as the market never hits this level – so this is a good strategy for volatile markets. As can be seen, interesting things can be done with binary options.

One touch binary options are a new exotic type of binary options that is increasingly becoming popular with the binary options traders. One touch binary options are extremely beneficial for those who are certain that the price of an asset will increase to a certain level in the near future, but are equally uncertain about the sustainability of that increase. It allows the trader to set his own barrier. One touch binary options can be purchased on the weekends, i.e. after the trading hours on Friday to Sunday evening, when the markets are closed for trading.

The essence of one touch binary options is the power to choose. The trader gets to set the barriers, choose the expiration time & payout. Just like any other binary options outcomes are two – if the value touches or exceeds the barrier you get your full payout. If it doesn’t you lose all you had invested in the binary.

Another big advantage one touch binary option has over standard binary options is that the value of the binary option will just have to exceed the barrier only once during its lifetime. This means that the price may exceed anytime during the whole trading period & not necessarily during the expiry. That is why it is useful in situations where one is certain that the value of an underlying asset will exceed the barrier but may not be able to maintain that height for long.

Another advantage of one touch binary options is that one can cash these binary options at any point during their lifetime & not necessarily during their expiry. That is what makes one touch binary options excellent for hedging strategies.

Asset-or-nothing binary options are the same as cash-or-nothing binary options, except the payout is the asset price itself, rather than a fixed cash amount. Here the trader wins or loses the value of the asset depending on whether his/her prediction was right.

One-touch binary options work quite differently from the first two types listed above. By placing CALL/PUT One-touch binary option, the investor bets that the price will reach (also referred to “touch”) a predetermined level before the expiry time and date. In this case the investor decides whether or not the price of an asset will ever reach a predetermined level within the duration of the contract.

No-touch binary options are simply the opposite of One-touch. In this case the price has to never reach a certain level to pay out.

Double-one-touch and Double-no-touch binary options are the same as One-touch and No-touch binary options with the only difference that instead of one level there are two. In the case of Double-one-touch the price has to reach (or “touch”) two predetermined levels before expiration. In the case of Double-no-touch the price should not touch either of those levels before expiration for the contract to pay out.

Advantages of Trading Binary Options in Kenya

Benefits of binary options trading include instant result, simple trading, minimum risk, online trading & potential for huge amounts of profit.

Binary options are relatively new on the financial markets. Before they were introduced, someone who wanted to trade on financial markets needed to open accounts with brokers who were offering assets, stock indices or currencies on individual markets.

A trader interested in more than one asset had to open multiple accounts in order to be able to trade them all.

In 2008 a regulation from the Securities and Exchange Commission allowed binary options to be traded elsewhere than on an exchange. This was the year in which online trading with binary options became possible. Today you can choose from a great number of quality binary options brokers like Olymp Trade  who have lots of tradable assets and offer huge payouts to their clients.

Starting with 2008 it was possible to trade currencies, assets and stock indices on the same platform. Multiple accounts were no longer necessary and traders were able to make profits if one of the two possible outcomes was in their favor. Only one pip in their favor was enough for ensuring earning. Up until that year profits on financial markets were proportional with the size of the trade and the number of pips.

There are also other advantages when trading binary options online. They make the binary options market a very attractive one.

Low Risk

The risk of trading binary options online is highly reduced compared with the risk on other financial markets. Traditional financial markets had limits and problems generating from brokers or platforms. These were external factors which affected the conditions and the possible incomes on the market, but they are no longer a problem in online binary options trading.

Binary Options Rebates

As opposed to forex rebates and cash-back programs, binary options rebates offer you one time fixed bonus and you can use it to increase your trading potential. If you sign with any of the brokers listed on our site you get up to $400 Bonus in binary options rebates. That is by far the biggest bonus in the industry.

Increased Flexibility

When it wasn’t possible to trade binary options online, traders didn’t have the possibility to switch from one market to another with ease. Nowadays, on the binary option market, they can simply start trading another asset if they notice that one market is not profitable. The traditional mechanism of buy and sell trades was also improved and there are several trade types available.

Possibility of increased incomes

The binary options market has a pay structure which enables traders to have increased returns. For example, a trade with an expiry time of only 10 minutes can provide earnings of $100. A trader can perform several such trades a day and even if they are not all successful, he can earn more than on other financial markets. It’s enough for 7 of those trades to be profitable, for example. However, there is one thing that doesn’t differ on the binary options market. Just like on all other markets, placing multiple trades in the same day and hoping for a high return rate is risky. Generally speaking, the possibility of high incomes has a bigger risk than trades which provide less money, but are considered safer.

Increased Accessibility

The binary options market is more accessible than other financial markets. For instance, opening accounts with brokers on the Forex market requires a capital of $25, 000. On other markets, the required capital can be even higher. On the binary options market traders can start with smaller accounts and can build their portfolio in time.

Binary options are exotic types of investment that have long been available over the counter but since 2008 have really grown in popularity. Essentially, binary options are the same as ordinary options but with two key differences.

First, binary options last for much shorter periods of time than ordinary options, from as short as 5 minutes, to 24 hours. Second, unlike ordinary options, binary options must be held to their maturity once purchased.

Brokers do not charge fees for trading binaries. Instead, they make money from the difference between options that expire in the money and those that expire out of the money.

Getting Started With Binary Options in Kenya

With lots of brokers offering online platforms in which to trade binaries, getting started in binary options is straightforward.

Once a broker has been chosen, the first thing to do is to pick a market and timeframe and decide whether you think the market will go up or down over that time.

For example, let’s say you have been watching GBPUSD for a few days and have noticed a pattern of the currency rising just as equity markets are closing.

In order to profit from this pattern you would simply log on to the trading platform, bring up the market for GBPUSD and then choose your timeframe. In this case you would choose 4pm since that is when the equity markets close.

The market will then tell you what the price is for GBPUSD to go up or down by 4pm. In this case, the market has a price of $90 that GBPUSD will be higher at 4pm than it is now.

A $100 bet will therefore return $190, a profit of $90, if GBPUSD is indeed higher at 4pm. If GBPUSD is not higher, then all you will lose is your initial investment ($100).

As you can see, a binary option is a clever way to profit from this pattern without the risk of losing more than you had bargained for.

Puts and Calls

Options bring with them their own trading jargon which can be confusing at first. However, it’s really pretty simple. If a trader believes a market is going to go up they will buy a ‘call’ option, if they think it will go down they sell a ‘put’ option. The key thing to remember is that different market levels will have different prices since they are based on the probability that the market will reach that level. For example, if GBPUSD is at 1.5010, the price of it moving above 1.5020 would be very small since it is highly likely the pair will touch this level at some point.

Trading Options Like a Pro

The binary options market offers the possibility to trade various types of assets. There are also several types of possible trades to choose from. However, each asset is best to be traded with one type of trade which is more suitable for it. Not any asset is suitable for any type of trade, so an analysis is required in order to match assets and trade types.

Let’s take gold and USD/JPY as examples. The price of gold is much more volatile than the price for USD/JPY. There are four possible types of trade which can be used for these assets, but some of them are better options in case of gold while others are more suitable for USD/JPY.

The price of USD/JPY oscillated between $75 and $82 in the past two years, without any spectacular swings. Gold on the other hand was priced between $1, 500 and $1, 800 in the same time period. Gold oscillations reached almost $400 while those of USD/JPY barely reached $8. It is naturally understood that a trader who want to trade both assets can’t use the same strategy. Each of them requires a different type of trade in order to be profitable. A range trade is much more likely to favor USD/JPY while profits from trading gold are higher if using Touch trades or Up/Down trades.

Traders should perform technical analyses in order to find out what trade types they should use. Let’s take the example of a Touch trade for gold in which $100 payout is expected if gold reaches $1690 before closing time. $1690 is the strike price and the entry price was $1644.66. If gold reaches or exceeds that strike price, the trade is profitable. Performing an analysis of the trade can show whether or not gold is capable of reaching the strike price.

Touch trades on the other hand can’t be profitable when trading USD/JPY. Such a trade implies setting a strike price which is too close to the market price. In this case, the profit of the trader is reduced because the costs of the trade are very high. Instead of a Touch trade, it is far better to place a High/Low trade for USD/JPY. If the analysis of the trade shows that the price of gold is predicted to go higher, than the trader can place a High trade. When the trade expires, the price of USD/JPY needs to be higher than the strike price which was established by considering the price support. As long as this happens, the trade generates profit.

The above mentioned scenarios are just examples and they don’t mean that these trade types are always suitable for gold or for USD/JPY. Their role is to emphasize the fact that predictions concerning the price of an asset together with a technical analysis can help traders determine what’s the best trade type is certain situations.

Using Technical Indicators for Binary Options

Platforms for trading binary options are usually web-based and unlike forex platform don’t include any indicators. However, traders can adjust forex indicators and can use them for analyzing trades.

Forex indicators can become binary options indicators if they are correctly adapted. Besides adapting default indicators, traders also have the possibility to use custom indicators.

They can be used for predicting trends on the binary options market and for performing analysis on MT4 charts. Binary options brokers like Olymp Trade offer the Open Platform which can be helpful for the implementation of advanced trading strategies.

How to Use Default Indicators

Default indicators include the RSI, the MACD indicator, the Stochastic oscillator and other several indicators which are commonly used on MT4 platform. They need to be adapted in order to be used on the binary options market and to serve the purpose of analyzing assets on this market. The required adaption is determined by the type of trade for which they are being used. Here are several examples of how default indicators can be used when trading binary options.

  • Bollinger bands – they are effective when trading range binary options, but they need to be used together with oversold/overbought indicators.
  • Stochastics oscillator – this is one of the oversold/overbought indicators mentioned above which works good together with Bollinger bands in trades involving ranging binary options. It is particularly useful in range-bound assets.
  • RSI – it stands for relative strength index and, as its name suggest, it is used for telling how strong a trend is. RSI can be used in Touch/No Touch trades.
  • Parabolic SAR – it is an indicator that can predict market reversal, but it is not very useful when used alone because it has a delayed reaction to signals. It can be combined with reversal candlesticks or ADX.
  • Pivot calculator – this is in itself a custom indicator, but it can only be used with default indicators in Touch/No Touch options, Call/Put options and range binary options.
  • MACD – its effectiveness is high in showing the divergence of price. It is very useful in Call/Put options which have a long expiry time.

There are also other default indicators which can be used. In order to find out how to maximize their usage traders should try using them in different types of trades until they determine when they work best.

How to Use Custom Indicators

Custom indicators are especially developed by traders in order to pick up signals from the charts of the assets which are traded on the binary options market. Creating them is possible because more and more forex brokers start offering the opportunity to trade assets from other markets, including commodities like precious metals and stock indices. Some brokers even include blue-chips stocks to their portfolios. These changes on the forex market help binary options traders use more indicators from MT4 platform because they are suitable for more assets.

Custom indicators are usually good in predicting Buy/Sell opportunities on MT4 platform, so they can be used in digital Call/Put options. Since this is one of the easiest trades on the binary options market, it is highly used by newcomers.

Indicators for the binary options market can be bought online or they can be developed by a programmer. Regardless of how they are obtained, they are good tools for alerting a trader at the time when a certain type of trade can be made.

Conclusion

To wrap it up, here are some binary option tips that will make you more efficient & help you earn bigger payouts.

  • Binary option is quite different from other forms of financial trading & requires a great deal of knowledge of the trading rules & the factors that may affect trading. So before you actually put your money into a binary option make sure you are familiar with the rules of the game & all the things that may affect your chances of winning.
  • Always choose your broker carefully. Make sure the broker you have chosen gives a high return on investment. Otherwise, the money you can earn will be lower compared to some other traders. Also make sure that the broker has a free trading platform & lots of assets.
  • Different binary options come with different expiration times. Expiration times of binary option vary from intraday/hourly to daily, weekly, monthly & yearly. The option you choose to trade on will certainly depend on how quickly you want to earn profit. Longer the time of expiration harder it will be for a trader to predict the outcome. For instance, you wouldn’t know how the market will behave a year from now. So it is advisable that you trade on options with shorter expiration times. The shorter the better.
  • It is extremely important that you follow news to keep track of what is going on in the market. People who read news have a better chance of making the correct predictions that compared to those who do not follow the news.
  • Always plan your trading schedule well before you actually start trading. It will keep you organized & will also save you time.

Patrick Mahinge is a full time forex trader, money manager, and consultant to major financial funds. At only 28 years old he is widely considered an up and rising star in the forex trading community and is known for his simple time proven techniques. Since the founding of KenyaForexFirm.com in 2014, his forecasts have been uncannily accurate and his subscribers have reaped the benefits. KenyaForexFirm.com is Patrick's attempt to share his wisdom and knowledge about Forex Trading so traders can see through the clutter and get straight to the core of profitable trading.

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