Education Center

The following information is brought to you by our sister site, www.BOacademy.com. If you’re looking to learn how to trade binary options on your own using price action, enroll in their online binary options trading course.

Here is some basic information to get you started…

NEED-TO-KNOW TERMS

In The Money (ITM) = Win

Out Of The Money (OTM) = Lose

At The Money (ATM) = Even (pays back your trade amount)

BUY (High/Call/Up) – You predict the markets will go higher.

SELL (Low/Put/Down) – You predict the markets will go lower.

Asset – Currency pair, stock, index, or commodity that you want to trade.

Target Price – Price that is either your entry price (high/low trades) or price determined by broker (touch/no touch, boundary).

Market Price – The current price the asset is trading at.

Expiration Time – Time at which the option expires.

Lockout Time – Vertical red line on the broker’s chart that indicates when you can no longer place trades for that particular asset/expiration time.

Forex – Currency pair trading.

Commodities – Natural resources such as gold, silver, oil, etc.

Stocks – Popular stocks that are traded on the world’s largest markets.

Indices – Trade the world’s largest indices such as the Dow Jones, S&P 500, NASDAQ, etc.

Bull(ish) Market – When the markets rise.

Bear(ish) Market – When the markets fall.

Support – Historical bottom price of an asset (as low as it’s gone in a determined time).

Resistance – Historical ceiling price of an asset (as high as it’s gone in a determined time).

 

WHAT ARE BINARY OPTIONS?

Binary options became an approved listing by the SEC in 2008. Binary Options are predictions on how a certain stock, index, currency pair, or commodity will do over a certain amount of time.  You are not buying the asset, just predicting whether the price will rise or fall. Binary Options are simple, quick, and profitable.

Binary options are named as such because they only have two possible outcomes; either the forecast is correct or it is not.  As a trader, you decide how much you want to invest in the option as there is no fixed price for the option, just fixed return.

Here’s an example:

If I believe that the price of Silver will be higher than it’s current price an hour from now, I would place a “Buy” trade to expire in an hour. An hour from now, my trade will expire automatically. If the price is higher than when I “bought in”, I just made a profit! If it’s lower than when I “bought in”, I would lose my trade amount.

I’ve had people ask me “Isn’t that just gambling? It’s like flipping a coin.”

My response is always the same. It can be gambling if you want it to be. If you just enter a trade by guessing, yes, you have no better chances than flipping a coin. However, you are not a trader, you are a gambler. It would be no different than if a trader on Wall St. blindly purchased shares of a particular stock without researching the stock or having solid reason why he believed the stock’s value would increase. A trader never enters a trade without a solid reason for their prediction. There are countless good strategies to trading. Understand how the markets move and what causes movement, and your profits are limitless. I trade binary options for a living and I’m confident that anyone who puts the time into learning everything they can about the markets can do the same. I’m not a math whiz, I didn’t go to a school to learn how to trade. I simply studied charts, strategies, news items, and good money management. This course will teach you all of those skill and how to trade using price action. Be prepared to lose when you first start. It happens to every single trader. No system is perfect and you will have ups and downs in trading. Don’t be discouraged. Find a strategy that works for you and tweak it to your needs. Never give up and give it your all. If you work hard and don’t look for shortcuts, you won’t be disappointed.

BINARY OPTIONS vs. STANDARD OPTIONS

A big difference in binary options compared to standard forex, stocks, etc. is that you know the entire risk/profit when entering the trade and you have control over the amount. Meaning, you know exactly how much you will earn if you are “In the money” (ITM) or “Out of the money” (OTM) before you even place your trade. If an asset’s payout is 80%, you know that you will earn 80% of your investment if the trade ends ITM. You will lose your entire trade amount if it ends OTM.

Lets say you take a trade for Oil which has an 80% payout. You have total control over your trade amount (depending on broker minimum requirements, we’ll discuss that later in this book). You decide you want to place a $100 trade. Therefore, when the trade ends, if it is ITM you will receive a payout of $180 ($180 payout – $100 trade amount = $80 Profit). If the trade is OTM, you lose your trade amount ($100).

With standard options (such as forex, stocks, etc.) you need to buy low and sell high in order to make a profit. With binary options, it doesn’t matter which direction the markets go, you can still make a profit as long as it goes in the direction you chose. Also with standard options, you need to sit in front of a computer the whole day and wait for a good time to manually exit your trades. Binary options expire automatically, therefore, you can place your trade and walk away if you’d like.

Also, as mentioned before, when trading binary options, you are not actually buying any asset. Meaning, your trades do not have any effect on the market’s movement. You could place 200,000 “BUY” trades on the EUR/USD and it would not increase the chances of the markets moving up.

WHAT TYPES OF ASSETS ARE TRADED IN BINARY OPTIONS?

Binary options trade forex, stocks, commodities, and indices.

 

WHAT IS FOREX?

The Foreign Exchange Market (forex, FX, or currency market) is a form of exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. EBS and Reuters’ dealing 3000 are two main interbank FX trading platforms. The foreign exchange market determines the relative values of different currencies.

The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states especially Eurozone members and pay Euros, even though its income is in United States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.

In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying some quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

The foreign exchange market is unique because of the following characteristics:

  • its huge trading volume representing the largest asset class in the world leading to high liquidity;
  • its geographical dispersion;
  • its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
  • the variety of factors that affect exchange rates;
  • the low margins of relative profit compared with other markets of fixed income; and
  • the use of leverage to enhance profit and loss margins and with respect to account size.

To put it simply, by trading forex, you are trading the fluctuating price (value) difference between currencies.

 

WHAT ARE STOCKS?

The capital stock (or stock) of an incorporated business constitutes the equity stake of its owners. It represents the residual assets of the company that would be due to stockholders after discharge of all senior claims such as secured and unsecured debt. Stockholders’ equity cannot be withdrawn from the company in a way that is intended to be detrimental to the company’s creditors.

The stock of a corporation is partitioned into shares, the total of which are stated at the time of business formation. Additional shares may subsequently be authorized by the existing shareholders and issued by the company. In some jurisdictions, each share of stock has a certain declared par value, which is a nominal accounting value used to represent the equity on the balance sheet of the corporation. In other jurisdictions, however, shares of stock may be issued without associated par value.

Shares represent a fraction of ownership in a business. A business may declare different types (classes) of shares, each having distinctive ownership rules, privileges, or share values. Ownership of shares may be documented by issuance of a stock certificate. A stock certificate is a legal document that specifies the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value, if any, or the class of the shares.

In the United Kingdom, Republic of Ireland, South Africa, and Australia, stock can also refer to completely different financial instruments such as government bonds or, less commonly, to all kinds of marketable securities.

Stock typically takes the form of shares of either common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders. Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually any time after a predetermined date. Shares of such stock are called “convertible preferred shares” (or “convertible preference shares” in the UK).

New equity issue may have specific legal clauses attached that differentiate them from previous issues of the issuer. Some shares of common stock may be issued without the typical voting rights, for instance, or some shares may have special rights unique to them and issued only to certain parties. Often, new issues that have not been registered with a securities governing body may be restricted from resale for certain periods of time.

Preferred stock may be hybrid by having the qualities of bonds of fixed returns and common stock voting rights. They also have preference in the payment of dividends over common stock and also have been given preference at the time of liquidation over common stock. They have other features of accumulation in dividend. In addition, preferred stock usually comes with a letter designation at the end of the security; for example, Berkshire-Hathaway Class “B” shares sell under stock ticker BRK.B, whereas Class “A” shares of ORION DHC, Inc will sell under ticker OODHA until the company drops the “A” creating ticker OODH for its “Common” shares only designation. This extra letter does not mean that any exclusive rights exist for the shareholders but it does let investors know that the shares are considered for such, however, these rights or privileges may change based on the decisions made by the underlying company.

A stock derivative is any financial instrument which has a value that is dependent on the price of the underlying stock. Futures and options are the main types of derivatives on stocks. The underlying security may be a stock index or an individual firm’s stock, e.g. single-stock futures.

Stock futures are contracts where the buyer is long, i.e., takes on the obligation to buy on the contract maturity date, and the seller is short, i.e., takes on the obligation to sell. Stock index futures are generally not delivered in the usual manner, but by cash settlement.

A stock option is a class of option. Specifically, a call option is the right (notobligation) to buy stock in the future at a fixed price and a put option is the right (notobligation) to sell stock in the future at a fixed price. Thus, the value of a stock option changes in reaction to the underlying stock of which it is a derivative. The most popular method of valuing stock options is the Black Scholes model. Apart from call options granted to employees, most stock options are transferable.

 

WHAT ARE COMMODITIES?

Economic commodities comprise goods and services.

The more specific meaning of the term commodity is applied to goods only. It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market. A commodity has full or partial fungibility; that is, the market treats its instances as equivalent or nearly so with no regard to who produced them. “From the taste of wheat it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist.”Petroleum and copper are other examples of such commodities,their supply and demand being a part of one universal market. Items such as stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality, etc. And, the demand for one type of stereo may be much larger than demand on the other.

In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, tea, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining.

 

WHAT ARE INDICES?

A stock index or stock market index is a method of measuring the value of a section of the stock market. It is computed from the prices of selected stocks (sometimes a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

An index is a mathematical construct, so it may not be invested in directly. But many mutual funds and exchange-traded funds attempt to “track” an index, and those funds that do may not be judged against those that don’t. Think of indices as “parent categories” of different stocks.

Examples of indices are the NASDAQ, DOW JONES, S&P 500, etc.

 

ANALYSIS

Fundamental Analysis – Based on the overall economic, social and political scenario of different countries, which influences the price movements and thus affects supply and demand. One prime example of how the fundamental analysis impacts the forex market is the release of the “Non Farm Payroll (NFP)” which tells the employment related details of the US economy and which gives the forex market a clear idea of what the economy outlook will be and what will be the strength of the dollar.

Technical Analysis – Based on the historical data of price movements. In other words, it is the study of the past trend of a given currency pair, which is used in forecasting the future prices. Technical analysis works on the principle that price movement itself speaks about the current market and the trend it will follow. Investors make different trading decisions based on the historical price movements whether it be over the past few year, or past few minutes. The historical data is available in the form of various charts. Apart from the charts, there are other technical analysis tools and theories but charts provide the easiest way to predict a market trend.