Despite being classified as an “exotic” type of trading, binary options are a relatively simple and straightforward means of investment. Binary options involve trading in price fluctuations in world markets of almost any kind. As a concept it goes by many names, including digital options, barrier options, two-way options, fixed-return options or all-or-nothing options, but the principle is very much the same.

Their relative simplicity however does not mean that they are risk-free. Investors new to trading in this way need to be aware that one can only ever speculate about the direction of a trade, making binary option trading as risky as any other type of investment where even the smallest of unpredicted factors can result in big losses. It is wise when starting out in binary options to begin trading virtual rather than actual funds until a grasp of how it all works can be obtained. More importantly, first-time traders should be well-versed in economics and possess a thorough grasp of how binary option trading functions.

Please not that this is not an exhaustive guide, and those serious about starting to trade binary options should consult authoritative finance and trading news sites such as Investopedia.com or Binaly.com for further information.

What is the definition of a binary option?

Put at its simplest, binaries are “propositions” in which everything boils down to a simple yes or no. Traders effectively wager on whether an asset will be above a particular price at a particular time, and success or failure depends upon whether that judgement is correct. If a trader believes the value of a currency or price of a commodity will rise above a certain specified price at a set time, they buy the binary option. If they think the price will be below that certain amount by the specified time then they sell the option. The price of a binary in the US is always between $0 and $100, the range within which they are therefore traded.

Is binary option trading a type of investment or a type of gambling?

In many jurisdictions binary trading is outlawed on the grounds that it is considered to be a form of gambling. It is however perfectly legal in the United States of America, perhaps somewhat surprisingly considering the US government’s restrictions on other forms online trading and gambling. It could be argued that the essential difference between binary trading and gambling is that in the former practice one must possess detailed economic knowledge and have conducted extensive market research if one is to be successful, whereas in most types of gambling success is reliant upon luck.

What are the advantages of binary trading?

Both the risks and the potential rewards of trading in binary options are known to the investor from the outset, meaning that there can be no unpleasant surprises. Brokers may charge for their services but this is a minimal outlay in the wider scheme of things and such payments are factored into any calculations made at the beginning. A good broker will prove to have been a worthy investment, fees notwithstanding. Binary options make for an easy and uncomplicated way to start trading commodities or currencies as there are only ever two possible outcomes, with manageable profit and loss potential.

Binary option trading is also attractive because of its flexible nature. Traders can buy or sell binary options from anywhere in the world, at any time, and with any budget. Furthermore, new traders can get started very quickly. Signing up with brokers only takes a moment, and pay-outs are similarly fast.

What are the disadvantages of binary trading?

On the down side, trading in binaries usually involves a greater potential risk than reward. This means trades need to be successful for a majority of the time in order for the trader to generate a profit. In the long term sustainable gains are made only by the acquiring of knowledge and expertise along the way. Even the most experienced traders, however, will be limited in how much money they can realistically make, in that the most one can ever make in through trading a binary option is $99 – and even earning this much is highly unusual.

Due to the lack of regulation in some parts of the world, and the gullibility of new traders, the binary option industry has unfortunately attracted a good deal of scam operators. It’s crucial to check that the brokers with which you are investing your money are legitimate, licensed and vetted.

Is binary option trading for me?

Binary trading is not for everybody, and anyone who is unsure or compulsive by nature should probably look for some other way to make a side income. Being a successful binary options trader means making sound judgment calls, holding one’s nerve and being capable of recognising and avoiding the many scams which are abound throughout the industry.

Where can I get more information about binary option trading?

Brokers are unlikely to offer the most neutral information as their interest lies in attracting more traders. Consult reputable websites like Fortune, Forbes or MarketWatch. FinanceMagnates has a very comprehensive guide for those looking to start binary option trading. For serious study, you can get the books ‘Trading Options for Dummies’ by George Fontanills or ‘Binary Options Crash Course’ by Arnold Taggert.