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An Introductory Guide to Binary Trading

  • Soumyaa Rawat
  • Oct 15, 2021
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What is Binary Trading

 

Stock trading is an exciting world to step in and make quick profits in no time. That said, it surely takes time to excel and get a hang of how things in the stock market operate. 

 

From the pricing of the options to presumed risks, one must always be aware of the world that s/he is stepping into before actually putting their assets and money at stake. 

 

While you must be aware of a variety of concepts that are prevalent in the stock market, in this blog we shall discuss a much-controversial yet exciting way to trade options - BINARY TRADING. 

 

In a stock market setting, an investor/trader trades shares while knowing that there are a number of risks attached to investment. Losses and profit are inevitable, and so are disappointment and contentment. 

 

(Also read - Top Benefits of Stock Market)

 

However, no options trading for beginners or seasoned professionals offers a set standard of risks that one might be facing while trading a particular share. Surprisingly, Binary Trading does that. 

 

An options trading method, Binary Trading allows two set outcomes that either lead to a potential profit or a loss. 

 

(Must read - Types of Trading)

 

One of the most striking features of this trading concept is that it has defined risks and specific outcomes that cannot be altered no matter what the situation of the market is. 

 

Simply put, binary trading can be understood as a financial instrument that either pays off or leads you to loss. Either way, one is aware of these 2 outcomes irrespective of the future market situation. 

 

As a financial instrument operational in the stock market, binary trading indicates a contract that states the two outcomes of the binary option - a predetermined profit value or a no-money at all outcome. 

 

Once the binary options contract matures and the expiry date has come, one can either end up gaining the profit value that was prefixed a while ago or simply end up losing the whole value.   

 

 

How does Binary Trading work?

 

Even though you might have got a hint of what this concept is all about, we shall discuss in this segment the way this concept works in detail. 

 

Binary Trading is a financial instrument that underlines two clear outcomes and predefined risks. An interesting trading system, binary trading is so-called because it has only two outcomes leading to its name. 

 

Unlike any other trading option that has no fixed profit value, binary trading exactly does the opposite. But how?

 

Well, let us find out. In a binary options trading contract, one is always speculating or guessing the price of a stock rather than actually pouring in money to purchase it. 

 

To achieve either of the two outcomes in a binary trading contract, the investor has two choices to make - buy the commodity (which signifies that the speculated commodity price stands true), or the investor has to sell the commodity (indicating that the speculated price might turn out to be false). 

 

If the predicted future price of a share turns out to be correct, then the investor is liable to get the predefined profit. Yet, if the investor does not forecast the price correctly, then s/he gets no profit at all. 

 

“Binary options trading is an investment that works more like a prediction that can be either right or wrong, but nowhere in between. An investor bets that a given asset will be above or below a certain point after a fixed amount of time.”

The All-or-nothing concept of Binary Trading 

 

In the financial market, binary trading can be classified into two types - cash-or-nothing binary option and asset-or-nothing option. The binary options trading strategy can be structured accordingly. 

 

While the former refers to the payment of cash as predetermined in the beginning of a binary options contract, the latter understates that the investor is eligible to be paid the underlying value of the asset laid down in the contract. 

 

(Related blog: Types of financial risks)

 

A number of factors must be kept in mind while learning about binary trading. 

 

  1. Strike Price 

 

The first and foremost factor that influences binary trading is the strike price. The strike price can be understood as a base price that is set as a standard to decide whether the investor gets it all or nothing. 

 

For instance, if an investor predicts that the stock price will hit above $300, then the strike price in this respect is $300. If the speculated price reaches above the strike price, then it is known as strike price in the money. 

 

 

  1. Expiration Date

 

The expiration date defines the maturity period of a binary options contract. 

 

The expiration date and time can be set accordingly by the investor and is an important factor that plays a big role in determining the outcome of the contract. 

 

 

  1. Underlying Market 

 

Another factor that plays a huge role in the binary trading contract is the underlying market in which the trading takes place. 

 

There are 4 financial markets where one can practice binary trading - foreign exchange, stock indices, commodities, and events. 

 

Throughout these 4 underlying markets, binary trading can be practiced with predefined risks and set outcomes. 

 

 

Pros and Cons of Binary Trading

 

Even though binary trading sounds exciting and good to go ahead with, there are a few binary trading advantages and disadvantages that we shall discover in this segment. 

 

Pros of Binary Trading 

 

  1. High Returns

 

One of the biggest advantages of binary trading is that it has high returns as compared to other trading options. 

 

Since the crux of this concept is all-or-nothing, binary trading is profitable, if the predicted forecast turns out to be true. Moreover, the word of trading always calls for higher risks with higher profits. 

 

Yet, binary trading can provide an investor with high returns, if the guessing game goes well. 

 

(Recommended blog: Introduction to Dividends and Dividends Policies)

 

 

  1. Easy for Beginners 

 

Another pro of this type of trading is that it is highly easy for beginners to understand and step into the world of trading. 

 

Unlike other types of trading that call for in-depth research and practice in the share market, binary trading leads one to only 2 outcomes that are perhaps quite easy to handle. 

 

That said, the concept’s structure and easy working are some of its biggest advantages. 

 

 

  1. Predefined Risks

 

The third advantage is that this type of trading has predefined financial risks. In an all-or-nothing situation, predefined risks are easy to work with and perhaps are beneficial in the long run. 

 

In addition, predefined risks of either gaining the prefixed profit or losing it all can help one to weigh the depth of the situation before entering into it at all. 

 

“You know right up front exactly how much you are risking and exactly how much you will profit if you win the trade. There is no risk of leverage costing your more than the amount you risked on the trade. Only your chosen amount to risk on any particular trade is at risk on that trade. “

Benefits of Binary Trading 

 

Cons of Binary Trading 

 

  1. Controversial Trading Method

 

Even though binary trading has its long list of advantages that can make you believe that it is the perfect option to begin with trading in the stock market, one has to consider its cons too. 

 

To begin with, one of the biggest disadvantages of binary trading is that it is a controversial trading method. With poor regulation and unauthorized trading segments, binary trading is even considered illegal in many countries. 

 

For instance, binary trading is illegal in countries like India, but it is completely legal in the USA. 

 

  1. All on None at All

 

While one could be excited to claim the predefined profit at the time of maturity, the major highlight of this concept is that one could lose all as well. In an all-or-none at all scheme, one could end up winning everything. 

 

But at the same time, one could lose everything. There is no in-between. And that could end up ruining many investors’ trading futures. 

 

  1. Limited Investment Capacity

 

Even though one can earn fast profits and high returns by trading binary options, another drawback of binary trading is that it only allows for a limited investment capacity. 

 

Since it is a high-return trading method, a lot of investors try to make the most of it by investing a large amount of money. 

 

However, as fate would have it, binary trading has a limited capacity for investment that does not allow large sums of money to be invested in. 


 

Summing Up 

 

To sum up, binary trading is an interesting trading method that is equally shady and controversial. When it comes to seasoned professionals and beginners, this particular method can make investors feel the rush of investing in the stock market.

 

(Suggested blog: Capital budgeting)

 

However, the biggest mystery lies in the guessing game wherein the investor has to forecast the price of the options. With an all-or-nothing trading highlight, binary trading can seem very risky. 

 

However, the best part of it is that it has predefined risks and only 2 outcomes. All in all, it is a win-or-lose game that decides the fate of the investor in a click.

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