We are all familiar with the basic principles of trading – a trader studies the markets and buys a good trade at a certain cost, hoping that its value will rise allowing him to sell that particular asset at the brand new higher price and benefit from the difference.
In binary option trading however the trading process is different. Yes, the trader, otherwise known as the purchaser, will look into the marketplace and yes he will figure out which way he or she thinks the market will most likely move, but the result and method of making money is somewhat different with binary option trading.
Below are 5 ways in which Binary Option Trading is different from Traditional Trading.
Binary Option Trading Outcomes
1. With conventional trading there are a great number of possible outcomes, but none of them are actually known before the asset is bought.
With binary option trading there are just 3 possible results that can occur:
- Binary Option Trading asset expires out of the money
- Binary Option Trading asset expires in the money
- Binary Option Trading asset expires at the money
Based on this the trader is able to better judge his potential risk with binary option trading.
Binary Option Trading-Direction Of The Trade
2. Traditional trading: the net income or loss depends on the magnitude of the price rise or fall of the acquired asset, for example, when 200 shares are usually bought at $10 each, the amount of profit as well as loss is totally determined by how much the price of the particular asset rises or even falls.
Traders who make use of binary option trading when buying and selling, only have to worry about the direction of the trade and not the actual magnitude of it. Therefore, if a buyer makes a $2,000 Call option on an asset that has a 71% underlying rate of return, then he can be sure from the outset that he will receive $3,420 if it expires in the money. However, if the option expires out of the money, he will also know that he will be due $300 as a 15% payback.
The reason is that all of the outcomes of binary option trading tend to be known from the outset of the contract being taken up. This decreases the risk factor as well as limits the knowledge which a buyer must have prior to making the binary option trade.
Binary Option Trading- Asset Ownership
3. Traditional trading: the trader actually owns asset itself.
Binary Option Trading: a buyer is merely trading on the overall performance of the asset. It doesn’t how much of it he own. Only the direction of the trade makes a difference between success and failure.
Binary Option Trading- Asset Knowledge
4. Traditional trading: the dealer will need an in-depth familiarity with the asset and the market being traded if he wants to be successful.
When binary option trading, a buyer only needs have a sense of the actual direction in which the option is most likely to move in because he is only trading on the assets performance, rather than the size of the price movement.
Binary Option Trading-Timing
5. Conventional trading: the trader has the flexibility to offload the asset at any time.
Binary option trading is different in that at the time binary option trading takes place, the trader also has to specify the time of expiry. This can range from one hour after placing the trade, to a week and even a month. Once the trader has specified his particular expiry time, it is fixed and cannot be reneged or changed in any way.
Binary option trading is an extremely unique approach to investments and it has created a way for investors and traders to better control the risks that they are exposed to making them a safer alternative to the traditional way of trading the markets.