It is the age old question that so many new traders would like to know, can you make money with Binary Options? It may seem from the countless anonymous sources online that it is a veritable goldmine, all rich for the taking. All one has to merely do is deposit some money, click a few buttons and money will start rolling in.
Unfortunately, nothing in life is this easy. Generally, any endeavour requires a certain degree of commitment and persistence in order to pay off. Binary option trading is no different from this. Just like trading Forex, CFDs or stocks, the traders requires a certain degree of experience in order to make the most of it.
Having said that, there is no reason that someone cannot make money trading binary options. Indeed, given that they are a financial instrument, any trader with a limited knowledge of financial markets can formulate a particular strategy that could earn them incremental returns over time.
Trading Binary Options profitably requires the trader to take a number of steps and try to limit the “lucrative” shortcuts that are often abound online. Below are some of those steps that need to be taken.
Adjust your Expectations
This is one of the most important steps that he new trader can take to make money with Binary Options. This is because it frames their entire way of thinking about their profits, loss and trading longevity.
Binary Options have for too long been touted as some sort of a miracle financial instrument where a trader can make upwards of 100% every month without much effort. This means that many traders have the perception that this is a realistic return and they target this.
In trading, psychology and mindset is incredibly important. It impacts the amount of risk that you take and the general decisions you make. A good trader knows what they can realistically achieve and set their risk tolerance to target that.
In Binary Options trading, a really good trader is able to achieve a win rate of about 80%. Assuming the trader is trading an option with a 75% payout, this means returns over the long run (with constant trade size) are about 12%. Of course, this can be much larger when we start to introduce compounding and variable trade sizes.
For this trader, achieving an 80% win rate is indeed quite an impressive feat yet it is nowhere near the number that is being quoted around a number of binary options websites. Indeed, the option robot scam claims that they are able to attain these types of win rates with general consistency.
Once you have a realistic expectation of the returns that you can garner trading options, the less you are disheartened by so called “average” returns. Indeed, average returns combined with compounding over the long run can generate healthy profits when reinvested.
Understand the basics of Finance
Many people hope to make money with binary options by jumping in to the industry without even a basic understanding of finance or the asset that they would like to be trading. This is akin to someone trying to learn to run before they can walk.
Take the time to read about basic economics. The discipline is indeed quite large and it is easy to get lost but understanding the fundamentals of supply and demand, interest rate theory and the difference between technical and fundamental analysis will greatly help you.
Similarly, you can’t make money with Binary Options or even trade them without an idea of which asset class you would like to trade. Do you only want to trade currencies or would you like to trade equities and commodities? If you are trading currencies, which pairs would you like to trade?
In trading, it sometimes helps to be more of a specialist than in a generalist. This means that you would focus on an asset that you are competent with and trade only those assets.
Once you have decided on the asset pair that you would like to trade, it makes sense to take sometime to learn about what drives movements in that asset. For example, you may want to learn how to trade Ether or how to trade EURUSD.
Knowing how to make money in general with these assets means that you have more information to make informed decisions when you are exploring the market with binary options. Options are, after all, a derivative instrument which we will explain in a short while.
Learn about Binary Options
Before you can realistically expect to make money with binary options, you have to have an understanding of exactly what the instrument is and how the payoff structure works. We have explained binary options in a separate post.
When trading binary options, you are in essence trading an asset that has a value that is derived from another asset. This is why Binary Options are termed “derivatives”. Hence, trading them also requires an understanding of binary option pricing.
There are also a number of different types of binary options which can all be used to different degrees with different strategies. It is important to understand which ones would be most applicable for the given asset and circumstance.
Have a Strategy
Making money with binary options involves a lot more effort than merely hitting a few buttons. The trader has to have a number of strategies that they would like to implement in order to achieve those gains. This ties in nicely with the previous two points. The strategy can be well tailored according to the asset and derivative instrument that you are trading.
It therefore helps to understand the difference between technical and fundamental analysis. The latter is more applicable for economic studies and analysing general macro economic or company level metrics. The former is looking at the charts and previous price levels as a benchmark of how the asset is likely to perform.
Fundamental analysis is the realm of some famous investors such as Warren Buffet on the Equity side or George Soros on the Forex side. If you are more interested in reading reports, analysing market news and doing an in depth analysis of long term prospects in the asset then you may be more interested in fundamental analysis.
Technical analysts or “technicians” study charts and patterns. They try to identify unique patterns in a chart such as breakpoints, compression zones etc. They also use numerous indicators such as Bollinger bands, volume indicators and the like. They look more at the behavioural finance side of trading.
If you are more interested in short term trend driven trading, then technical analysis maybe more to your liking. It is also generally quite fast paced so is more applicable to day trading. Hence, if you see yourself as the kind of person who wants to trade full time then this could be your strategy.
Of course, in order to make money trading you can’t operate in a vacuum. Most of the best traders use a small combination of both strategies. You can’t trade technically the whole day without preparing yourself for any economic news which could indeed move the needle substantially.
Once you have an understanding of the type of trading strategy that you would like to use, you also have to have a money management strategy in place. This could also be a large factor in whether you will make money trading binary options. This is because having a strategy for how much you are willing to invest, save and reinvest in each year, month, day and even trade is essential.
Find the Right Broker
One of the most important factors required in order to make money with binary options is finding a reputable broker. This is almost unrelated to the strategies that you will be using but will have a large impact on your profitability in the long (and sometimes short) term.
There are a number of reasons why the choice of a bad broker would hamper your trading performance. This ranges from the broker being a complete scam to the broker having a lack of tools or one that sets margins that are too high. Broker due diligence will go a long way in helping you achieve your goals.
We have covered all of the essential steps one should take when choosing a binary options broker but in short, you need to make sure that your broker is regulated, has good pricing, fair payout policies and the right tools.
Binary Option regulation is quite a large topic and you are not required to understand all of the nuances behind it. All you need to know is that you are safe in the case of any broker insolvency as well as any nefarious broker practices that are sometimes used.
Pricing is also very important for this will determine the level that you are able to enter trades and hence whether the option will expire in the money or out of the money. If the broker operates through an exchange, their fees are usually quite prominently presented. However, if they are counter party to the trade, this could be difficult to establish. We will cover this below when talking about demo accounts.
Similarly, making profits on a Binary Options platform is one thing, being able to withdraw your funds quickly and at a relatively low cost is also essential to turning paper profits into money. What fees the broker charges and payout times should be inquired about.
Moreover, there is no use having a binary options strategy in place if you don’t have the right tools in order to best use it. This includes not only things such as charting software but news feeds, technical indicators and price alerts. Having a highly functional trading platform is essential to making money with binary options.
Practice Makes Perfect
As with most things in life, you can only get good at something when you have devoted some time to practice. Trading Binary Options profitably is no different from that. You require at least some time to get used to the technicalities of placing trades and implementing strategies.
This is where trading demo account can be your best friend. A binary options demo account is a trading account that has been credited with “demo funds” in order for you to trade with. These funds are essentially phantom money and allow you to trade online without the risk of losing your own money.
Trading with a demo account is also non threatening as you don’t get disheartened by early losses. Early losses are generally expected especially for traders who are just cutting their teeth in the market. Some brokers will also offer to top up your demo accounts after a number of tries.
A demo account is also very helpful when it comes to broker selection as it allows you to get an idea of whether the broker’s platform is indeed as functional as you would like. Does it have all of the tools that we mentioned above? Is there anything that is included on the live platform that is not on the demo account?
Another great offer that some brokers provide is no deposit bonuses. These are essentially bonuses that are offered by the broker without you having to deposit any funds. Hence, it is considered “free” real money to trade with. It is important to note, however, that there are turnover requirements needed before you can withdraw any of these funds.
A no deposit demo account is a great transition from a demo account to a live trading account. It gives the feel and pressure of trading a live trading account but the trader still does not have any of their own money at stake. It also allows the trader to get an idea of all of the included tools the trader has access to on a live account.
Lastly, a no deposit demo account will allow you to get the best idea of what sort of trading levels you will be getting at the broker on a live account. You can compare the trade entry levels to the live market quotes on a financial news provider. This will allow you to determine how far off the broker’s pricing is from general levels.
Don’t Give Up
This is one of the most important requirements for you to make money with Binary Options. Persistence is essential to succeeding in any endeavour, whether it is trading, sports or academics. You need to keep on going and use your trading performance as a benchmark to determine whether you should adapt your strategies.
No trader likes losing money and it is indeed true that losing funds can be worse on the downside than gaining is on the upside. However, you have to take the losses as a learning experience. You have to analyse your trades and see where you are coming short. You could also reach out to a number of other traders and ask them where you could improve.
Eventually, you will get used to trading and you will feel more comfortable with your decisions. You will have a established which strategies work best for yourself and when. Therefore, over the long term it is indeed possible to make money with binary options.