Binary trading has taken the trading world by storm over the past few years as day traders who have been used to scalping miniscule returns for small stock movements can now generate returns up to 90% for these same small stock movements through binary trading.
In its most simple form binary trading is a direction based, win loss proposition.
If the trader is correct in picking the direction of the underlying asset in a given time frame he/she will win a set percentage (typically between 60% and 90%), and if the trader is incorrect in picking the direction of the underlying stock in a given time frame he/she will lose anywhere between 85% and 100% of the trade.
Keep in mind in binary trading the magnitude of the underlying asset move is meaningless, the direction is all that matters. This can best be described in an example:
For instance say a trader thinks the price of Google is going to rise over the next hour, he/she could purchase a binary call option expiring at the top of the hour, at Google’s current price.
If the binary call option was purchased with shares of Google trading at $600, the trader would generate the winning return percentage (60-90%) if shares finished anywhere above $600 upon expiration.
So whether shares of Google finished at $600.01 or $699 the trader would only generate the specified winning percentage. This is the essence of binary trading.
So who is exactly using binary trading as part of their daily trading activities? We’ve seen the most binary trading activity from stock day traders and forex traders.
The one thing successful stock and forex day traders have is the ability to forecast price movement over short time intervals. If this best describes you then you need to jump on the binary trading train as soon as possible.
However, price speculation isn’t the only way these successful stock and forex traders are incorporating binary trading into their trading activities, they are also using binary trading as a hedging instrument.
What I mean by this is instead of closing out a trade that is going against them, they may first consider placing an appropriately sized binary trade in the opposite direction of the original trade to offset potential losses.
This is a super effective way to mitigate downside portfolio risk. In many instances not only does an effective binary trading hedge limit risk but it also increases overall profitability. Now that’s what I call a win-win scenario!