How Much to Invest in Binary Options

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How to Start Investing in Binary Options

Damyan Diamandiev
Contributor, Benzinga

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If you’re looking for a simple way to trade and invest in financial assets, why not consider binary options? They’re easy to understand and preferred among newbies, so you’ve pretty much already got a head start in the right direction. Benzinga will help launch you the rest of the way.

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What is Binary Options Trading?

Binary traders profit from price fluctuation just like other traders, but binary options have a preliminary stated risk and profit potential. That’s why this type of contract is called a “binary” option. You get one of the two possible outcomes: suffer the risk or profit from the reward.

In binary trading, you bet if the price will be higher or lower after a certain time passes: the expiration. If you’re right, you win. If you’re wrong, you lose. When you lose, you lose the amount you’ve bet in the trade. When you win, you win around 80% of the amount you’ve bet (this depends on the broker as well).

Let’s say you believe the price of the EUR/USD will be higher in one minute and you bet $10. If you’re correct, you’ll profit around $8, depending on the broker. If you’re wrong, you lose your $10.

There’s some specific terminology wrapped with binary options. Can you sell an option? No, but you can buy a “put” option.

This is how it works:

Call Option

You buy a call option when you expect the price to increase. This means you enter a deal where you bet that the market will increase in price.

Put Option

You buy a put option when you expect the price to drop. This means you enter a deal where you bet that the price will go down.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Top Binary Options Broker 2020!
    Best Choice For Beginners and Middle-Leveled Traders!
    Free Demo Account!
    Free Trading Education!
    Big Sign-Up Bonus!

  • Binomo
    Binomo

    Trustful Broker. Recommended Only For Experienced Traders!

Calls and Puts

It’s easy to understand the difference between “buy” and “sell,” and which corresponds to bullish and bearish markets. However, it might be tricky to remember the difference between calls and puts. Here’s an easy way to remember:

Imagine a phone is on a table. When you want to “call” you need to lift the phone “up,” an increase. When you want to “put” it down, it needs to go downward, or “drop.”

How To Start Trading Binary Options

Step 1: Build your strategy

Test different approaches and check which one is profitable for you. You can also combine different indicators to build your strategy. Some indicators could be:

  • Price levels
  • Trend
  • Candle patterns
  • Chart patterns
  • Moving average indicators
  • Fibonacci levels
  • On-chart indicators
  • Area indicators

These are not the only indicators available; there are many more and each of them works in a different way. Match signals from different indicators to reduce the chance of getting a bad signal and incline the scales in your favor.

Step 2: Calculate the returns

Say that your broker will give you 80% return if you guess the right price direction. You risk 100% of the invested amount, a return of 8:10. How successful should your strategy be and where is your break-even point?

Say that you do 100 trades by investing $10 in each. This means that you’ve invested a total amount of $1,000. Your strategy has a 55% success rate, meaning that you will get an approximation of 55 successful trades out of 100.

If you guess correctly, you’ll win $8. If you guess incorrectly, you’ll lose $10. Since you’ll get around 55 winners, this means you will make 55 x $8 = $440. Since you’ll get around 45 losers, then you will lose 45 x $10 = $450.

A profit of $440 – $450 (loss) = -$10 per 100 trades with this strategy, which isn’t ideal.

Here’s another test with the same brokerage conditions: 80% return on a successful guess. Let’s say our strategy has a proven record of 70% success rate. This means we’ll have 70 winners and 30 losers after 100 trades:

70 x $8 = $560 (profit)

30 x $10 = $300 (loss)

Net profit = $260

Step 3: Money management strategy

Don’t forget to factor in luck. If you deposit $100 in your account and you invest $20 in each trade, you’ll likely fail. The reason for this is that you will be able to handle only five losing trades in a row, which is very likely to happen.

It’s safe to have money for at least 100 trades. What is the chance to get 100 losing trades in a row? It’s just like flipping a coin and getting 100 heads in a row: pretty unlikely.

Step 4: Choose your binary options trading broker

Pay attention to some important rules when you choose a broker. There are scam brokers who will not let you withdraw your money, so research in advance. Good brokers:

  • Are regulated and conform to the laws of a country.
  • Have existed for a while. Scam brokers get caught and typically close after a year or two.
  • Have good reviews online. What are people saying about the broker? Can you withdraw your winnings?
  • Offer a variety of trading assets. You don’t want to have only five currency pairs available for trading.
  • Have a friendly interface.
  • Include a rich set of trading indicators. These indicators will assist in your analysis and help you build a successful strategy.

Step 5: Create and fund your trading account

This is the easiest step as long as you have the money! Follow your broker rules for creating an account. You’ll need to identify yourself and to confirm your account, then deposit the amount you are willing to start with.

Make sure you conform to the money management rules we already discussed. If you’re willing to invest $10 in a single trade, this means you’ll need to deposit at least $1,000. This way, you’ll have enough money to conduct 100 trades and you’ll be able to handle an eventual downswing.

Step 6: Execute your first trade

Now you’re ready to go! If you’ve deposited $1,000 in your account, then it is safer to invest only 1% per trade, or $10.

  • Change the investment per trade to $10.
  • Choose the expiration time of the binary option.
  • Do your analysis and apply your strategy.
  • Click “call” if your analysis shows that the price will go up or “put” if you believe that the price will go down.
  • Wait until the binary option expires.
  • Track results.
  • Repeat.

Final Thoughts

Binary options are an innovative and easy way to invest in the financial markets. Rules are simple (that’s why many traders prefer this type of trading) and there is a limited risk per trade, based on the amount you invest.

You’ll still need to conform to the well-known trading rules if you want to be successful. Build a strong strategy, calculate the amounts, manage your bank well and be smart, and you’ll increase your chances of success. A demo account is always a helpful test before jumping in with real money.

How Much to Invest in Binary Options

It is very clear that there is an inherent risk when it comes to binary options trading. This is because an inaccurate prediction regarding the direction of the price movement for an asset will result in a loss. As a result, you will be required to forfeit all of the money that you invested in a trade.

Now, this can be a bitter pill to swallow for most and certainly is not a pleasant thought to consider. Nonetheless, it is precisely these conditions that require you to have a particular amount to place on each trade. This leaves you with the question of how to know how much to invest in a binary options trade. Here are some factors to consider:

Think in Terms of Percentages, Not Amounts

The amount that you can invest in any one trade depends on the total capital in your account. This is all of the money at your disposal. However, if you lose this within a short period of time, you are unable to continue trading. Even if you replenish your account, you may be unable to recover these losses.

This is why you need to pace yourself. The best way to do this is to decide which percentage of your total account is expendable. In order to do this, you will have to make room to place as many future trades as possible, without depleting your account. Expert traders would advise that you stick with around 1 to 5 percent of the account.

The less money that you have in your account, the lower the percentage should be.

Calculate the Actual Amount

Once you have settled on the percentage, it is time to think in terms of dollars (or whatever currency is offered). For the sake of an example, let’s imagine that your account contains $1000. You have determined that one percent of this is the amount that you can stand to lose with each trade. Therefore, you will be investing no more than $10 in any given trade.

Now, it is not common for brokers to offer you a rebate. This is the feature that allows you to reclaim a small portion of your money, even though the trade ended out of the money for you. Of course, this return is often just a fraction of the initial investment.

Still, it is better than nothing. If there is a chance for you to get some of your money back, it is fine to increase the amount of money you are investing. However, this should be proportional to the rebate percentage. If you are assured 10 percent back, you can increase your investment up to $11. This is because you are guaranteed that you will receive $1 back, regardless.

Increasing or Decreasing Your Investment

If you really want to make a profit, you are probably aware that you are going to need to place more on some trades than others. This does mean taking on greater risk, however. If you wish to remain protected while doing so, it is best to wait until the total balance in your account has increased significantly.

This way, according to the policies stated above, you can increase the percentage and still remain within your safe zone.

How about when you hit a losing streak then? Well, if you are hoping to rebound from such circumstances, you are going to still need to invest a significant amount. This is the only way to win yourself back a profit that will cover the losses. This is true up to a certain extent, nonetheless. If you are account has depleted beyond a certain amount, it is best to reduce the amount of money you are placing on each trade.

This is the best answer for how to know how much to invest in a binary options trade. Remember, as long as you are smart about it, you will be able to manage your money well.

How to Invest in Forex and Binary Options in 2020

If you’re interested in investing in Forex and binary options, the large financial currency market, you’re probably wondering which is the best for you to choose.

Below we’ll try to give you a detailed overview of the pros and cons of each one, so you can make a simpler, correct and accurate decision.

How to Invest in Forex and Binary Options DIFFERENCES

Binary options are contracts that have a fixed risk and reward ratio; it’s a market in which the investor is required to predict the direction of an underlying asset within a stipulated period. Binary options are available as commodities, indices, stocks and currency pairs. If the prediction is correct, investors are informed in advance of their reward.

For the Forex currency market, traders are forced to predict not only the direction, but also how high or low the asset will be. Consequently, there’s uncertainty regarding the return and a greater risk.

You should also bear in mind that the forex market doesn’t have a limit on the amount of money an investor can make or lose, unless they are using tools that limit the amount of loss that can be had in a transaction.

This means that the trade will stop automatically if the limit loss occurs. Likewise, the investor can decide how much money he wants to make by setting the value at which he wants to stop trading. For binary options, the maximum amount of investment could be its total amount, while for Forex, the risk can be reduced by using certain programs.

It’s important to note that binary options are actually a new form of investment, while Forex has existed since several currencies came up. Consequently, the Forex currency market is much larger in turnover when compared to the binary options market. Forex is even the largest financial market in the world, working five days a week, 24 hours a day.

Not only that, on average 5 trillion dollars are traded every day, which means that when you invest in Forex and Binary options, you’re basically competing against other professional investors who have a lot of experience. The binary options market is much smaller when compared to Forex, and has a considerably small number of professional investors involved.

To this we must add that investors have many more commercial assets to choose from in comparison with the investors that trade in Forex. Just a few investors know how to use programs like Binary Option Robot, while for Forex investors, highly sophisticated trading software is practically a necessity.

Main reasons to invest in Binary Options

To begin with, with binary options, you have a much wider selection of different commercial assets. In Forex, on the other hand, you only trade with currencies, but in binary options you can market currencies, commodities, stocks, indices and basically anything with a variable value. Therefore, this is only limited by what the investor is willing to select. Unless you only want to exchange currencies, this is a great factor and the main reason to opt for binary options.

Another important thing to note is that in the binary options market, competition isn’t as fierce as it is in Forex. You should bear in mind that the foreign exchange market is huge, so there are many specialized investors with a lot of experience and above all, who are successful in business. In Forex you’ll be competing directly against this type of investors.

The opposite happens in the binary options market where competition is still low. One of the main reasons to opt for various options is that with really large sums, direct investment in equities is cheaper. This offers an excellent opportunity to investors who are investing with small amounts, since tougher competitors are scarce.

On the other hand, a binary options investor gets access to much larger bonds. That is, in the currency market, competition is relatively stable due to its long history. The binary options market is in constant development, which is why new Brokers appear every day trying to attract clients with large and irresistible bonuses and benefits.

In addition to the above, there are no transaction costs in the binary options market; that is, investors pay nothing for the transaction. Expenses are even directly linked to the payment percentage. On the contrary, the costs for foreign exchange transactions can be considerably high, while the minimum costs only allow for small investments, which aren’t really profitable.

Main reasons to invest in Forex

Here we need to note that Forex is a better fit for experienced investors who really know what they’re doing. If you want to invest in currencies based only on your intuition, you will undoubtedly lose your money. People who trade Forex currencies, have extensive experience in the forex market, an experience that comes from years of study and practice.

Also bear in mind that you’ll need skills that can be directly applied to a profitable practice. That is, only theoretical knowledge without application won’t really take you far. Another aspect to consider is that most binary options investors can only invest up to $ 5,000 at the same time.

In Forex, investments worth tens of millions of dollars can be established at a time, which means that with such a large amount, transaction costs will also be proportionally lower than if you’d invested in binary options. Now, if you’re absolutely convinced that you want to invest exclusively in Forex, forex trading is probably your best choice.

In any case, my general recommendation is staring with the binary options by investing small amounts of money and getting the necessary experience and knowledge before venturing fully into currency investing.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Top Binary Options Broker 2020!
    Best Choice For Beginners and Middle-Leveled Traders!
    Free Demo Account!
    Free Trading Education!
    Big Sign-Up Bonus!

  • Binomo
    Binomo

    Trustful Broker. Recommended Only For Experienced Traders!

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Binary Options: How To Start Trading
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