Binary Options Trading Basics: Selecting Between Put or Call

Binary Options Trading Basics: Selecting Between Put or CallBinary options trading is a lot different than a lot of other types of market trading, but that does not mean you cannot be successful with it or make money at it. Once you learn how to place binary options trades, they are actually much simpler to place and win on than several other types of trades.

There are some nice advantages to trading with binary options. For one, there is no middle ground as far as the payout goes; you either profit on the trade or you lose. The other really nice thing about binary options trading is you will know what you stand to win and what you could potentially lose, even before you place the trade.

There are a lot of statistical analyses and other elements that go into binary options trading, these all lead you to either wanting to place a put or call option with your trades. All binary options trades are somehow linked to asset price movement. If you are placing a put option you are predicting a price decline and if you are placing a call option you are predicting the price of an asset will increase.

To be able to make a profit on binary options trades, the underlying asset has to be above the strike price on a call option or below the strike price on a put option when they expire.

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That is why it is so important to predict accurately the market conditions or trends when placing binary options trades. The market is said to be bullish if prevailing investor sentiment is favorable to making purchases, when this happens investors think the market will continue to rise. Under bearish conditions the opposite is true; investors see an unfavorable market as prices are in a down trend.

Binary options’ trading is becoming very popular due to the fact that investors can make a profit off both declining and rising market prices.

It was mentioned that technical analysis plays a big role in determining where to place binary options trades. There are very few traders that can be successful at binary options trading without at least doing a little statistical analysis. Statistical analysis is the key to predicting trading entry points and price performance over time. If you see price trends are strong in either direction, then placing trades should be easy of you are right. If there is no strong price trend in either direction, then you will have to make your trades by looking at historical price movement more closely.

You also have to look at the expiration time factors closely when making a binary options trade. A trader will usually use recent price performance data when making trades using shorter expiration times and use underlying asset performance when making trades based on longer expiration times. Statistical analysis will show you the high and low prices of an asset over a certain period of time. Although that same asset may go above or below these analytical highs and lows, most likely they will remain within the boundaries of them.

Most experienced traders will assume that if an underlying asset’s price moves close to a statistical boundary, the next thing that will happen in the short term is a trend reversal. It is often at this point or near it, that it’s a good time to place put or call options. On those rare occasions that you predict an asset’s price to break out of the boundaries, you can still make a profitable trade, but be aware these are much harder to predict and do not happen nearly as often as price movements within the boundaries.

A very important thing to note is that you should never base a put or call option based on guesswork. If that is the case and you do not have what you feel is concrete evidence to make a trade, then simply forget about basing a trade offof that particular asset and move on.

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References and Further Reading:

1. Liquidity and Asset Prices (V Polimenis – 2012)

2. Automated Foreign Exchange Trading Strategies: Improving Performance Without StrategyModification (D EKSTRÖM – 2014)

3. Identifying Challenges Faced by Foreign Exchange Robots Designers (C Kisangani Makombe – 2015)

4. Asymmetric Information and the Forex Spreads of Custody Banks (C Osler, T Savaser, T Nguyen – 2010)

5. A study of market efficiency in the stock market, forex market and bullion market in India (D Sarker, BK Ghosh – 2007)

John Miller
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John Miller

John has worked in investment banking for 10 years and is the main author at 7 Binary Options. He holds a Master's degree in Economics.
John Miller
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