Binary Options and Binary Trading: What They Are and How They Work
What Are Binary Options and How Does Binary Trading Work?
Today, we'll explore what binary options are and why they've become so popular. We’ll also break down how binary options work and their key operational principles.
Binary options first appeared in 2008 as one of many financial instruments. At the time, people were looking for simpler ways to profit compared to the complexities of traditional financial markets, which remain intricate and challenging for speculative trading.
Let's take a closer look at how binary options work with an example:
The broker also offers a selection of assets, which most commonly consist of currency pairs—the value ratio between two currencies (e.g., EUR/USD—Euro versus US Dollar). Brokers also frequently offer assets like precious metals, commodities, stocks, indices, and more. You can select any of these assets and place trades on them. In this example, we’ve chosen the AUD/CAD pair (Australian Dollar versus Canadian Dollar).
Before placing a trade, the trader chooses an investment amount—this is the sum the trader is willing to invest in the trade with the goal of earning a profit.
Profit on binary options is fixed, usually ranging from 60% to 98% of the investment amount. Profit is only earned if the trader’s prediction is correct; otherwise, the trader loses the invested amount. The profit percentage is known before the trade is placed—in this example, it is 77% of the investment.
All trades are set for a specific expiration time, which the trader selects. Binary options trades can range from a few seconds to several months.
Did your prediction come true? If so, you will receive 77% of the investment on your trading account, plus the return of your original investment. For example, if you invest $100 in an up trade and the prediction is correct, the broker returns your $100 and adds a profit of $77 (77% of your investment).
If the prediction is wrong, the broker takes the invested amount. For instance, if you invest $100 in a down trade and the prediction is incorrect, you only lose the investment.
This model of trading quickly became popular because traders know in advance how much they can earn and how much they can lose. In short, you decide how much to risk or earn before placing the trade, and then simply wait for the result.
In practice, the trader’s job is to correctly predict the price direction and select the right time to close the trade (expiration time). Let’s break this down further.
For example, the trader hears news that the US Dollar is slowly but steadily falling. Here’s what the trader might do:
One critical feature of binary options is that you can earn even from small price changes. A trade is profitable if the price moves in your predicted direction, even by just one tick.
For example, using the same USD/CAD trade mentioned earlier: the down trade was opened at "1.33759" and closed at "1.33758"—here, the trader still earns a profit because the price moved down, even if just by one tick.
This feature of binary options allows traders to open very short-term trades—from a few seconds to several minutes—and profit from even minimal price fluctuations.
By the way, if a trade closes at the same price it was opened, the trader (depending on the broker) does not lose any money—the investment is returned.
As a result, most binary options traders are beginners. This is also because binary options are much easier to learn compared to Forex or other financial instruments.
Technically, binary options trading is also straightforward: there are just a couple of buttons to choose the direction, and a few additional windows to select the asset, expiration time, and investment amount—even a beginner can figure it out within 5-10 trades.
However, behind this simplicity lies the challenge of mastering the profession. To trade consistently and profitably, you need specific skills and knowledge that aren't typically acquired in everyday life.
In the early stages, you may not notice this, but over time, you'll realize that things aren’t as simple as they seem, and this course is designed to bridge the gaps in your knowledge.
For the most part, binary options brokers do not take your trades to the real market—even if you invest billions of dollars in the rise of the euro, the price will not change direction. In short, brokers provide real price data, but all trades occur solely within the broker’s system.
Binary options can be thought of as a betting system on price movements. The trader makes a prediction, and if it’s correct, the broker pays the profit. If the prediction is wrong, the trader gives the money to the broker.
Unfortunately, statistics show that 95% of traders enrich brokers, so to answer your question—no, even a highly successful trader won’t bankrupt a broker. The broker earns far more from the losses of less successful traders.
Does this mean it’s unprofitable to be a trader? Not at all. Your goal is to be part of the 5% of profitable traders, and the broker will have no choice but to pay you consistently.
In short, if you’re a skilled trader and earn steadily, the broker will pay you part of their earnings. The sums in this business are enormous, so in 99.999% of cases, your reward is just a drop in the broker’s ocean.
Ask a beginner trader, and they’ll confidently say it’s easy—choose the asset direction and press the appropriate button. But ask an experienced trader about the simplicity of binary options, and they’ll tell you about the difficult path they had to take to achieve success. Why is that?
Would you use a financial tool if you had no experience with it? Probably not. Brokers advertise binary options as a "very simple financial instrument"—high profits in just seconds, just click the right button.
As mentioned earlier, binary options are also called "All or Nothing"—once again, two potential outcomes.
Interestingly, binary options existed long before 2008, though they took a slightly different form. Brokers have been taking bets on price levels for decades, proving that what’s new is often just a revamped version of the old.
Brokers are investing heavily in developing their product, and as long as they do so, it’s clear that binary options are profitable for them. So, talk of them disappearing is unfounded.
Of course, since their "appearance" in 2008, binary options have evolved, and competition has intensified. But still, binary options continue to exist and thrive.
Brokers are continually improving their services to attract more clients—they’re adding new types of options, increasing profitability, and offering better conditions. This business has been profitable for over a decade, and believe me, this is just the beginning.
At present, no force could entirely shut down binary options. Even in countries where binary options trading is prohibited, there are many brokers not subject to such bans—so you can trade as much as you want. Moreover, brokers offer new types of options that don’t fall under existing prohibitions. There are always loopholes for traders.
Thus, we’re dealing with an industry that began in the last century and is unlikely to disappear in this one.
Binary options first appeared in 2008 as one of many financial instruments. At the time, people were looking for simpler ways to profit compared to the complexities of traditional financial markets, which remain intricate and challenging for speculative trading.
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How do binary options work?
A binary option, also known as an "All or Nothing" option, is a transaction between a broker, who provides all necessary trading conditions, and a client (trader). The trader makes a prediction: will the asset price be higher or lower after a certain period of time? Depending on the result, the trader either earns a fixed profit or loses the investment. Hence the name "All or Nothing" or binary options.Let's take a closer look at how binary options work with an example:
The broker also offers a selection of assets, which most commonly consist of currency pairs—the value ratio between two currencies (e.g., EUR/USD—Euro versus US Dollar). Brokers also frequently offer assets like precious metals, commodities, stocks, indices, and more. You can select any of these assets and place trades on them. In this example, we’ve chosen the AUD/CAD pair (Australian Dollar versus Canadian Dollar).
Before placing a trade, the trader chooses an investment amount—this is the sum the trader is willing to invest in the trade with the goal of earning a profit.
Profit on binary options is fixed, usually ranging from 60% to 98% of the investment amount. Profit is only earned if the trader’s prediction is correct; otherwise, the trader loses the invested amount. The profit percentage is known before the trade is placed—in this example, it is 77% of the investment.
All trades are set for a specific expiration time, which the trader selects. Binary options trades can range from a few seconds to several months.
How do binary options trades work?
The trader's task is to predict where the asset price will be after a certain period of time, specifically, whether it will be higher or lower than the current price. To place trades, there are typically two buttons: Call (Up) and Put (Down).
Did your prediction come true? If so, you will receive 77% of the investment on your trading account, plus the return of your original investment. For example, if you invest $100 in an up trade and the prediction is correct, the broker returns your $100 and adds a profit of $77 (77% of your investment).
If the prediction is wrong, the broker takes the invested amount. For instance, if you invest $100 in a down trade and the prediction is incorrect, you only lose the investment.
This model of trading quickly became popular because traders know in advance how much they can earn and how much they can lose. In short, you decide how much to risk or earn before placing the trade, and then simply wait for the result.
How to make money on binary options?
To make money with binary options, you need to open at least 58-60% profitable trades—those where your prediction is accurate.In practice, the trader’s job is to correctly predict the price direction and select the right time to close the trade (expiration time). Let’s break this down further.
For example, the trader hears news that the US Dollar is slowly but steadily falling. Here’s what the trader might do:
- The trader finds an asset involving USD—this could be any pair like EUR/USD, USD/JPY, USD/CAD, and so on.
- As the USD weakens, the second currency in the pair strengthens. So, on pairs where the USD is listed first, a decline is expected (e.g., USD/CAD), while pairs where the USD is second will likely see a rise (e.g., EUR/USD).
- The trader opens a down trade on USD/CAD (or an up trade on EUR/USD) for a specific period of time and waits for the trade to close.
One critical feature of binary options is that you can earn even from small price changes. A trade is profitable if the price moves in your predicted direction, even by just one tick.
For example, using the same USD/CAD trade mentioned earlier: the down trade was opened at "1.33759" and closed at "1.33758"—here, the trader still earns a profit because the price moved down, even if just by one tick.
This feature of binary options allows traders to open very short-term trades—from a few seconds to several minutes—and profit from even minimal price fluctuations.
By the way, if a trade closes at the same price it was opened, the trader (depending on the broker) does not lose any money—the investment is returned.
Who can trade binary options?
One of the biggest advantages of binary options is that trading is accessible to almost anyone. Many brokers allow you to start trading with a deposit of just $5-10 and open trades for $1 or its equivalent in your currency.As a result, most binary options traders are beginners. This is also because binary options are much easier to learn compared to Forex or other financial instruments.
Technically, binary options trading is also straightforward: there are just a couple of buttons to choose the direction, and a few additional windows to select the asset, expiration time, and investment amount—even a beginner can figure it out within 5-10 trades.
However, behind this simplicity lies the challenge of mastering the profession. To trade consistently and profitably, you need specific skills and knowledge that aren't typically acquired in everyday life.
In the early stages, you may not notice this, but over time, you'll realize that things aren’t as simple as they seem, and this course is designed to bridge the gaps in your knowledge.
Who benefits from binary options and who earns from them?
If you think binary options only benefit traders, that’s not the full picture. Binary options are based on the principle of "All or Nothing," meaning that the "Nothing" generates profit for someone.For the most part, binary options brokers do not take your trades to the real market—even if you invest billions of dollars in the rise of the euro, the price will not change direction. In short, brokers provide real price data, but all trades occur solely within the broker’s system.
Binary options can be thought of as a betting system on price movements. The trader makes a prediction, and if it’s correct, the broker pays the profit. If the prediction is wrong, the trader gives the money to the broker.
Unfortunately, statistics show that 95% of traders enrich brokers, so to answer your question—no, even a highly successful trader won’t bankrupt a broker. The broker earns far more from the losses of less successful traders.
Does this mean it’s unprofitable to be a trader? Not at all. Your goal is to be part of the 5% of profitable traders, and the broker will have no choice but to pay you consistently.
In short, if you’re a skilled trader and earn steadily, the broker will pay you part of their earnings. The sums in this business are enormous, so in 99.999% of cases, your reward is just a drop in the broker’s ocean.
What is the 'simplicity' of binary options?
In a nutshell, you have two buttons (Up and Down) that reflect the essence of binary options. It all seems very simple, but in practice?…Ask a beginner trader, and they’ll confidently say it’s easy—choose the asset direction and press the appropriate button. But ask an experienced trader about the simplicity of binary options, and they’ll tell you about the difficult path they had to take to achieve success. Why is that?
Would you use a financial tool if you had no experience with it? Probably not. Brokers advertise binary options as a "very simple financial instrument"—high profits in just seconds, just click the right button.
What does 'binary' mean?
"Binary," as you might expect, refers to the two possible outcomes of a trade. There are two directions for the asset price to move, and the trader chooses one.As mentioned earlier, binary options are also called "All or Nothing"—once again, two potential outcomes.
Interestingly, binary options existed long before 2008, though they took a slightly different form. Brokers have been taking bets on price levels for decades, proving that what’s new is often just a revamped version of the old.
Will binary options disappear soon?
Every year, someone claims that binary options are about to be shut down. It was said in 2008, and again in 2018—nothing has changed.Brokers are investing heavily in developing their product, and as long as they do so, it’s clear that binary options are profitable for them. So, talk of them disappearing is unfounded.
Of course, since their "appearance" in 2008, binary options have evolved, and competition has intensified. But still, binary options continue to exist and thrive.
Brokers are continually improving their services to attract more clients—they’re adding new types of options, increasing profitability, and offering better conditions. This business has been profitable for over a decade, and believe me, this is just the beginning.
At present, no force could entirely shut down binary options. Even in countries where binary options trading is prohibited, there are many brokers not subject to such bans—so you can trade as much as you want. Moreover, brokers offer new types of options that don’t fall under existing prohibitions. There are always loopholes for traders.
Thus, we’re dealing with an industry that began in the last century and is unlikely to disappear in this one.
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