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Binary Options Tutorial
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Binary Options Tutorial

In this binary options tutorial we'll take a brief look at what these securities are, how they are traded, and what the strengths and weaknesses of trading them are. Despite the overall riskiness of these high return investments these contracts are extremely popular amongst middle and low capital investors.

Short Duration Simple Easy to Trade and Understand Contracts

Let's begin our tutorial with a brief look at what binary options trading is and what makes up one of these contracts. As the name implies trades are basically made to resemble the outcome of a coin flip. A contract can end up in the money (heads, for example), out of the money (tails), or a push (imagine a coin landing / standing on edge). Trade durations range from just a few minutes to up to a week depending on the specifics defined by the asset offered by the broker. Winning positions typically pay out 60%-85% whereas losing positions pay out 0%-15% reimbursement of capital. On a $100 option imagine getting back either $160 (win), $15 (loss), or $100 (tie). Positions are taken based on available securities, typically the highest liquidity stocks, currency cross rates, commodities, and indexes.

Strengths of Binary Options

The strengths of this type of trading are many including high return investments, high capital turnover, and investment simplicity. Assets are easy to buy in simple, small dollar amount increments and pay high yields. The short duration of the trades makes it possible to turn capital over multiple times in a single trading session - vastly increasing the velocity of invested capital. Lastly the high yields make even small increment investing (think $100 to $200) profitable given there are no fees or transaction costs to reduce profits.

Weaknesses of Trading Binary Options

The weaknesses associated with trades of this kind essentially revolve around out of the money positions. Losses on out of the money investments range from 85%-100% depending on the broker. One blessing however is that the vast majority of binary options trading sites allow hedging positions. One other sometimes signficant restriction is the overall trade size.Most brokers only allow a maximum of one to two thousand dollars per position - although one could argue this effectively keeps whale investors from dominating this segment of the market.

Another fairly significant weakness is the overall limited number of securities to trade. Most binary options brokers offer somewhere between 25-30 assets to trade spread amongst the most liquid / globally known stocks, forex cross pairs, commodities, and indexes. Each broker typically has some area of specialty - making it necessary for traders to shop around to find the binary options broker that offers theassets tosuit their trading needs.


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