The definition of Binary options
Binary options – are electronic contracts with a fixed high yield. Thanks to binary options, it is possible to earn on stocks of various companies, commodities, currencies, and not only on the rise of their rates, but also on the fall. It is an opportunity to earn a lot of money just by determining whether the market rate of an asset will go up or down. The whole principle of trading is very simple, and there is no need to install any programs.
The Main Binary options risks
Binary options are considered to be a highly profitable financial instrument. Like all trading on exchanges, there are also binary options risks.
Being aware of potential risks can significantly reduce the possibility of losing your own money while trading in the binary options market. Let us list all the risks that may be encountered by any trader who has decided to try his forces in trading binary contracts.
- Market risk. Like any other type of financial activity, for example, Forex, Binary options also have an element of unpredictability, that is, the market can move in any direction, often without even signaling the upcoming change in its direction. There are analytical methods which allow forecasting a potential trend with high accuracy, but even the most thorough analysis will not give a one hundred percent guarantee that the market will move in that direction. The probability that the forecast will be wrong is always there, but it is minimal in case of a qualitative analysis.
- Fixed/limited income. In binary options risks there is the limited maximum profit, this should not be forgotten by beginners. Binary contracts are characterized by limited losses as well as profits, that is, when you make a deal, there is always an upper limit of profit, and above it cannot rise in any way. But this could also be a risk free binary options strategy, as you can know your risks and almost control them.
- The trader can be separated from profit or from loss by only a few points. In this type of contracts, the number of points passed does not affect the amount of profit, but its profitability can be determined by only three or four decimal places. The fact that the price is at least for 0.0001% higher or lower than the set value is important in binary trading.
- Illiquidity. Binary options are difficult to call a liquid instrument, so traders cannot close a trade already open and take their funds whenever they want, even if they see that the market is going against them. When trading this derivative, one should simply wait for the expiration time of the option to take their profit or accept the loss.
- The asset is not owned by the trader. The peculiarity of binary options is that the trader does not need to buy the asset physically, he only bets on the direction in which its value will go. Some traders do not see this as a problem, while others find this feature as binary options risk.
- Lack of regulation. As binary options is a fairly new financial instrument, not every regulator on the markets controls the activity of brokers that provide intermediary services in this area. Cooperating with a broker that does not have a license increases the probability that the trader will fall into the hands of fraudsters. Choose a broker with a license, such as Binomo, eToro, FXPro.
Most beginning traders strive to start earning as soon as possible. At the same time, they overlook the fact that it is necessary to go through the stage of training and obtain more trading on financial markets knowledge. And this is also a kind of risk. The less knowledge you have on binary options trading, the higher are the binary options risks.
Is it possible to avoid binary options risk and how to create a risk free binary options strategy
Many traders wonder if it is possible to avoid binary options risks when trading – if there is a risk free binary options strategy. Actually, unfortunately, no. Risks accompany every trade you make. But you can minimize them. Here are a few rules which will help you lower the binary options risk and the risk of losing your investment and your entire deposit.
- Choose a reliable broker. A broker that is not regulated can seriously increase your binary options risks. Choose only reliable and regulated brokers.
- Don’t invest all of your money. Even if you are 100% sure that the deal will bring profit. Psychologically, you have a great incentive to enter with as much volume as possible. But greed can ruin your entire trade. So stick to the rule of 5-10% of the deposit – the maximum investment in one option.
- Choose your trading hours carefully. This will help you create your own practically risk free binary options strategy. If you don’t like trading based on the news, don’t be lazy to look at the economic calendar and see if there are any important publications planned for your trading period. They can make significant adjustments to the market situation and spoil your plans.
- Don’t forget about your choice of underlying asset. Not all underlying assets fluctuate equally. Before choosing one or more, study their behavior on average carefully. We also recommend paying attention to the times at which volatility for a particular asset may increase or decrease. For example, European currencies trade with less volatility at night. At this time, significant fluctuations can be observed in Asian and Pacific currencies. During the day, however, the situation is different.
- Prepare to trade. Successful traders are not those who spend days and nights studying theory, but those who can put theory into practice. So, in addition to reading, you need to study strategies and create your own almost risk free binary options strategy.
- Avoid trading on luck. Intuition is not luck, and it is only inherent in professionals. Beginners do not have market intuition. That’s why we can recommend beginners to carefully analyze the market before making a decision.
- There is a chance of developing an almost risk free binary options strategy. The solution is to open a demo account to be able to trade with virtual money. That will help you improve your skills and be ready for real money trading.
You can try to calculate the risks of binary options on the platform of a reliable broker, as FXPro, for example . To do that, you need to:
- Go to the FXPro website;
- Choose the Sign Up button on the main page;
- Following the instructions fill the registration table with all the necessary information;
- Complete registration choosing a demo or real account for trading;
- Replenish your trading account any time with various payment methods you can find clicking on Deposit button.
We hope the information above will help you in risk management in binary option trading and creating your own nearly risk free binary options strategy.