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Home > What is the Theory Behind Binary Options Trading?

What is the Theory Behind Binary Options Trading?

theoryIn terms of newness, binary options trading is essentially a newcomer on the scene. This is not the only thing that makes it stand out, however. Binary options also offers a relatively novel approach to trading as well.

As it is new and unusual, it is quite possible that you are wondering what the theory behind binary options trading is. Well, in the following article, we take a look at just how this form of trading works.

What Are Binary Options?

First things first, what on earth does binary options mean?

  • If you were to consider binary in a strictly digital sense, it would be deciphered as being 0 or 1. Essentially, this is what binary options alludes to – all or nothing.
  • When you trade with binary options you are saying that the value of a particular asset is going to either appreciate or depreciate. Furthermore, you are saying that this change in value will take place within a particular frame of time.
  • Imagine, for instance, that you have predicted that the price of gold will increase in the next sixty seconds. You then invest a certain amount of money in this trade with your broker. Once the sixty seconds is up, the trade will be over. At this point, you will be able to discern whether your prediction what right or wrong.
  • If the price of gold did increase, you get your money back plus a profit. If the price dropped, however, you will have to forfeit your investment. Therefore, this is where the term ‘binary’ comes into play.

The Types of Options Available

Now, that is the overall premise of binary options trading. In reality, however, there are many different types of trades. The one that was mentioned above is known as a call/put trade. If you feel as though there is going to be an increase in value, you use the call option. In the event that a depreciation is imminent, you use the put option.

Then, there is the boundary trade. This is when the broker expresses a particular range of prices. For example, imagine that the value of an asset is expected to be confined within a certain margins.

Perhaps between $10 and $15. You will then need to determine whether the asset will settle within these boundaries or fall outside it.

Last but not least is the one touch option. In this instance, the broker will provide you with a particular target price. At the end of the trade if this price has been reached or even exceeded, then you can collect a profit.

A Calculated Assumption

It can often feel as though binary options is just guesswork. However, there is a considerable amount of research, investigation, and calculations that go into a trade. Binary options traders do not blindly take a stab in the dark when deciding the direction in which an asset’s value will move.

Therefore, while there is a certain amount of risk involved, it is calculated.

This, in a nutshell, is the theory behind binary options trading. This, however, is just the gist of the subject. It is a vast and rich form of trading that often takes study and experience to master.