Binary Tradings

Far less complicated than it sounds, binary trading operates a simple win or lose strategy with investors knowing in advance what they are likely to gain or lose.

The simplest type of binary trading operates on a scale of 0-100 - at the expiry of the time specified, if the event has occurred, the trade is said to close at 100. If however the trade is proven wrong, it is said to close at 0. The amount won or lost depends at what level you entered into the market and can be calculated by the simple difference between that figure and either 100 or 0.

Sound complicated? Take an example on the FTSE 100 index: you believe the index will close higher at the end of the day and enter the trade at 53-55 which was the quoted price at the time and you buy at 55 points at £1 per point. At the end of the day you are proven right as the FTSE adds more than 20 points. This means that the binary trade closes at 100 and your return is 100 - 55 (your entry price) multiplied by £1, giving a total gain of £45. If the index had moved in the opposite direction, the binary trade would have been said to close at 0, losing you £55 - the difference between your entry price and ) multiplied by the price per point.

It is also possible to go short on binary trades and using the above example, the price of 53 would have been used. If the market ended the day lower, the binary bet would have been said to end at 0, therefore winning the trader £53. If the market ended higher, it would have been deemed to close at 100, making it a losing trade of £47.

There are various types of binary bet, all based around the same 0-100 win or lose principle. A one touch binary trade is based on whether the market will touch a certain level within a given period, a tunnel trade is one where the market must stay within a specified range until the trade time expires, whilst ladders refers to whether the market will be above a defined price at an agreed point in the day.

The key point for binary trading is that it is the occurrence of the event not the margin that matters. For example, in the above case, it would not have mattered whether the FTSE 100 had closed higher by 10 points or 100 points, the outcome would have been the same either way. This is the fundamental difference between binary trading and spread betting as with the latter, the gains or losses are generally per point of movement, making greater swings potentially more profitable.

The binary market is very volatile and the price quoted depends on the likelihood of the event occurring. Taking a bet closer to expiry where the outcome looks more certain will move the price upwards, thus providing a poorer return for the investment.

Binary trading is not confined to conventional stocks and shares; forex can also be used to explore binary trading via the options market as well as some exchange traded funds.