Binary options trading can be quite confusing at times, but knowing what the basic types of trades that exist are can simplify things a lot for beginners. Before you ever make your first trade with real money, we encourage you to try these trades out with a demo account first so that you can have a better idea and first hand experience of what these trades are. This list is certainly not an exhaustive list, but it does cover the most widely used types of trades present at most top binary options brokers today.
Call and Put Options
The call and the put options are the basic building blocks of trading binary options. They are the most simplistic trade you can make, and they are also the trades that you will be making the most of. Do not let their simplicity of nature fool you; these can be surprisingly difficult to get right, especially for newer traders that haven’t quite grasped the best way to analyze each of their positions.
A call option is used when you think that an asset will go up in price. A put option is used when you think that the asset will go down in price. This movement is all relative to the expiry that you are trading at. So, if you think that the EUR/USD pair will drop in the next 15 minutes, then a put option is the right way to go. If it goes up for 14 minutes, but then comes crashing down below the strike price in the last few seconds before expiry, your trade will still be counted as a winning one and you will be credited the agreed upon rate of return in exchange for your correct guess. The best way to test this is by using a binary options demo account. This will show you the ways that things can be done. It will also help you minimize some loses at the start.
Exotic options have a lot of appeal to traders, mainly because they are different than what they are used to seeing. There are many types of these, but two receive more attention than others. These are the boundary and the one touch trades. A one touch trade asks you to predict whether an asset will reach a specific price target before expiry or not. A boundary trade asks you to predict whether an asset’s price will finish inside or outside of a given range of prices.
You will also find high yield varieties of these two exotic options. A high yield trade, by definition, is any trade with a rate of return over 100 percent. Because of the customizable nature of these exotic options, they can be made very easy to predict, or incredibly difficult. As the difficulty of getting a trade correct goes up, brokers increase the rate of return to entice more traders to use them. Often, this is more akin to gambling than trading. But if you keep an eye open, you can sometimes find great money making opportunities here.
A pair pits two different assets against each other, and you need to choose the one that will move upwards (or downwards, in some instances) the most. These assets might be two similar stocks, like Google and Apple, or they could be very different, like Silver versus the S&P 500. Your job as a trader is to pick the one that will have the greatest percentage of movement, as prices will vary from asset to asset. So, if you think that Apple will have a better day than Google, you can click the Apple button, and even though Google is far more expensive than Apple at this point, if Apple moves 1.00 percent upward and Google only move 0.96 percent in the same direction, then Apple is the correct decision.
A contract for difference (CFD) is very similar to Forex trading because of the presence of a spread, but just like within binary options, no ownership of an asset ever takes place. It allows traders to focus on different types of assets other than currencies, trading on their movement, but with a spread. A spread is basically a difference in the buying and the selling price, The buy price will be higher than the selling price, so that if you wanted to buy and then immediately sell off a position, it would be a loss. This makes it difficult to easily profit off of ultra short term trades, although it’s not impossible. These two different prices are referred to as the bid and the ask. As the price changes, the bid and the ask will adjust with it. If the price moves enough in the right direction, then you can close out your position at a profit. This makes things seem simple, but remember there is a big risk in trading these. Over time you will see why.
CFDs don’t always have an expiry attached to them, but they typically cannot stay open for an extended period of time. Most brokers have a time limit for how long they can stay open before they are automatically closed. CFDs also allow you to use leverage in your positions, which can drastically help or hurt you.