Binary Options Beginners Guide

Binary options are a new form of trading which enables the trader to buy contracts on several different outcomes. This article aims to show the trader the different types of binary options trades that he or she can undertake in the market.

You can also read our “10 Lessons for Beginners” program at BinaryOptions.net below, or view more advanced articles for trading different types of markets here.

Binary Options Lessons for Beginners:

Types of Binary Options Trades:

How to Set up a Binary Options Trade:

The ability to trade the different types of binary optionscan be achieved by understanding certain concepts such as strike price or price barrier, and expiration date. All binary option trades have dates at which the trades expire.

When the trade expires, the behaviour of the price action according to the trade type selected will determine if the trade is in profit (in the money) or in a loss position (out-of-the-money). In addition, the price targets are key levels that the trader sets as benchmarks to determine trade outcomes. We will see the application of price targets when we explain the different trade types.

There are three types of binary options trades. Each of these has different variations. These types of binary options are:

1)     High/Low trade

2)     In/Out

3)     Touch/No Touch

Let us take them one after the other.

High/Low

Also called the Up/Down binary trade, the essence of this trade is to predict if the market price of the asset being traded will end up higher or lower than the strike price (target price the trader has selected) before the expiration of the trade. If the trader expects the price to go up (the “Up” or “High” trade), he purchases a call option. If he expects the price to head downwards (“Low” or “Down”), he purchases a put option. Expiry times can be as low as 5 minutes.

 

Please note: some brokers classify Up/Down as a different trade type where a trader purchases a call option if he expects the price to rise beyond the current price, or purchases a put option if he expects the price to fall below current prices. You may see this as a Rise/Fall trade type on some trading platforms.

In/Out

The In/Out binary trade type, also called the tunnel trade or the boundary trade, is used to trade price consolidations (“in”) and breakouts (“out”). How does it work? First, the trader sets two price targets to form a price range. He then purchases an option to predict if the price will stay within the price range/within the price tunnel/within the two price boundaries until expiration (In) or if the price will breakout of the price range in either direction (Out).

The best way to trade the tunnel binaries is to use the pivot points of the asset to be traded. If you are familiar with pivot points in forex, then you should be able to trade this binary option type.

Touch/No Touch

This set of binary options is predicated on the price action touching a price barrier or not. A “Touch” binary option is a trade type where the trader purchases a contract that will deliver profit if the market price of the asset purchased touches the set target price at least once before the expiry of the date. If the price action does not touch the price target (the strike price) before expiry, the trade will end up as a loss and the trader loses the money invested in that trade.

A “No Touch” trade is the exact opposite of the Touch trade. Here the trader is betting on the price action of the underlying asset not touching the strike price before the expiration of the trade. If this trade plays out as the trader wishes, the trade ends up in the money and the trader smiles home with a profit.

There are variations of this trade where we have the Double Touch and Double No Touch. Here the trader can set two price targets and purchase a contract that bets on the price touching both targets before expiration (Double Touch) or not touching both targets before expiration (Double No Touch). Usually, binary options traders employ the Double Touch trade when there is intense market volatility and prices are expected to take out several price levels.

Some brokers offer traders all three types of trades. Some offer two, and there are those that offer only one binary options trade variety. In addition, some brokers also put restrictions on how expiration dates are set. In order to get the best of the different types of binary options trades, traders are advised to shop around for brokers who will give them maximum flexibility in terms of trade types and expiration times that can be set.