Trading Stocks and Indices Using Binary Options

If you are new to trading or trading binary options, read on this article is for you. Binary options are essentially short term options contracts in which you can trade stocks, indices, bonds, commodities, forex, etc. The appealing nature of binary options is due to its short term existence with the potential to walk away with a 80% return on your investment. However, losing trades claim 85% of your initial investment so it is important to have prior trading knowledge.

As I have stated before, since binary options are short term, technical analysis is probably the better way to analyze potential trades. Furthermore, it is ideal that a trader new to binary options trades only indices and individual stocks. The reasoning behind this is that there is a lot less volatility in stocks and indices than in forex and commodities. Less volatility means less rapid changing prices, which can lead to big losses or big gains. Prior knowledge in trading stocks is a must. Prior knowledge in trading traditional options will help but is not required. In fact, the only options information you need is what a call and put is, along with the meaning of in the money and out of the money. If you are not familiar with these terms, have no fear I will explain them.

Prof. Binary’s Trading Tip: I personally prefer trading indices to stocks. The reason is simple: There are many different stocks pooled in one index and so my risk is diversified. If I would trade one single stock, I’m depending on one single company.One great Binary Options Broker for trading indices is IQOption. Read more about IQOption in our review.

Lets say you are interested in trading Boeing (BA) and after running the stock through your technical analysis system or any other method of analysis, you find that the stock is on the move after solid earnings report. The optimal choice would then be to purchase a call option. If our analysis told us that Boeing was due for a fall, we would have purchased a put option. After 30 minutes, the option expires and we hope that the expiration price is above the call purchase price. If it is, the option has expired in the money and you will receive an 80% return on your money. If the trade expired below the purchased price, the option expires out of the money and you would lose 85% of your initial investment.

From the example above, a pretty clear picture starts to form and the trader begins to realize that research is the key between a solid return and a potentially crushing loss. Luckily, you are able to trade smaller lots in binary options than if you were to trade traditional stocks. This will limit and lower potential risks and grow potential gains. Bottom line is do solid research and keep initial investments to a minimum until you are confident enough to raise the amount of money to invest.

Much like traditional stocks, there are risks involved. Since you are relying on traditional stocks and their price action, you must pay attention to important government data, earnings, etc. These reports affect stock prices, which, in turn, affect binary option trades. Prior to opening a trade, make sure there are none of these reports due out while your trade is open, otherwise you could be exposing yourself to unnecessary risks.

The bottom line here is that traders new to binary options should stick to just individual stocks and indices. The lower volatility will help build your confidence and your trading strategy. Another important fact to consider is good research. The way you analyze potential trades will ultimately decide whether your trade will expire in the money or out of the money. Since there is an 85% risk to your initial investment on losing trades, keep initial investments small. Some binary option brokers allow you to open a position with as little as $10. There is no reason why you should be risking a chunk of money if you are inexperienced in this type of trading. Get educated, find a strategy that works for you and limit your risk; that’s how you will position yourself favorably in trading.

See also this article at TraderXP.