In a trading landscape that may seem complex for someone just starting out in this discipline, digital options are presented as a type of contract that seeks to simplify trading for beginners. With their binary nature, with only two possible outcomes: profit or loss, and their fixed profitability and risk, these contracts make it easier to understand and execute trades, making them a tool to consider for those wondering how to start trading in the markets.
In this article, you’ll discover everything you need to know about these contracts, as well as trading platforms and best practices for getting started in the best possible way.
Digital Options Trading Terms
Before delving into the different methods and techniques for analyzing and executing trades, the best practices and tools for trading these contracts, it’s worth understanding in detail some terms you’ll encounter daily in digital options trading. Below you can find the main ones:
Underlying asset: The underlying asset is the financial instrument from which a digital option or other contract is derived. For example, let’s say you want to make money by speculating on the price of gold, but you don’t want to physically acquire the asset. To do this, you buy a digital option or other derivative to profit from the price difference.
Strike price: The strike price is the price at which the trade is executed. Whether the price is above or below it at expiration, depending on the direction you choose, will determine whether your trade results in a profit or a loss.
Expiration: Expiration is the time in the future at which the digital option contract expires, and the results are calculated. These can vary from a few seconds to several hours, depending on the online trading platform.
Profit/Payout: The yield is the percentage of return you receive when your trade results in a profit. In the case of digital options, this percentage is preset before opening a trade, providing clarity and predictability to the entire transaction. For example, if a broker offers an 80% return and you invest $100 in digital options, you will receive $80 plus the amount invested if your price prediction is correct.
Investment Amount: This amount is the amount of money a trader decides to risk on each trade. The advantage of digital options is that they generally allow for fairly small amounts, making them an ideal instrument to start with and gain confidence by increasing the amount later. However, this amount must be subject to a trading plan, and as a general rule, it is recommended not to risk more than 2% of the total balance on each trade.
Call (Higher): Higher contracts are the options you should choose if your prediction for price movement is bullish. For example, let’s suppose the EUR/USD pair is testing resistance at 1.1150. At a certain point, the price breaks above this level, giving you an entry signal, so you buy a Higher contract to open a long trade and take advantage of the movement.
Put (Lower): Unlike the previous contracts, a Lower option is the one you should buy if you expect the price of an asset to fall. For example, the XAU/USD price bounces upward several times from 3,300, marking a support level. However, at a certain point, sellers manage to break through this barrier, and at this point, a downside option can be purchased to take advantage of the bearish momentum.
Bonuses: Bonuses in digital options trading are promotions that brokers offer traders to boost their balance. These incentives are typically offered upon initial deposit, such as additional trading funds, rewards, or risk-free trades.
In the money: This term is used when a digital options trade expires on the upside of the market, meaning the price direction prediction was correct and results in a profit.
Out of the money: When a digital option expires out of the money, it means the price direction prediction was incorrect, and a trader loses their investment amount.
At the Money: Although this occurs infrequently, an At the Money situation occurs when the digital option expires at the same price as the strike price. In this case, the trader receives their investment amount back (if the broker offers this functionality).
Now that you know the main terms that will help you better understand trading these contracts, learn more about the platforms for trading these options, why they are important, and what features to look for before your first trade.
Why is it important to choose the best trading platform?
An online trading platform or broker acts as an intermediary between traders and investors and the markets they trade. There are platforms that offer their services to different types of clients, and some that seek to meet the needs of all market participants. The functionalities of these platforms can vary depending on the clients they target, offering different tools and features for each type.
The Binolla broker is adaptable for both beginners and more experienced traders, from those seeking quick profits with short-term trades to those focused on the long term. For those looking to start trading digital options, the platform offers the most convenient market conditions, with a wide variety of tools, expiration types, and assets so you can choose the one that suits you best.
Key Trading Concepts
Achieving success in trading the markets requires a planned approach, a methodology that puts the odds in your favor, and strong emotional control. While there are different methodologies that may vary depending on the timeframe or the different assets and financial instruments being traded, some key concepts lay the foundation for professional trading. Read the following section to learn more about them:
Technical Analysis
This type of analysis is one of the most widely used methods by digital options traders. It involves studying past price behavior, looking for patterns, formations, and trends to determine future direction. To do this, participants use different tools to obtain a certain probability. There are two main groups into which technical analysis can be classified:
Technical indicators: These tools use sophisticated mathematical calculations with past price data, then present this information to determine market volatility, liquidity, and trading volume. By applying these indicators and according to their strategy, traders seek to identify moments when an asset is overbought or oversold, as well as its trend and the strength of a movement.
Drawing tools: These market analysis tools allow traders to draw areas of interest on the chart, define the trend, and look for patterns or price formations that provide an entry signal. By improving the visual understanding of what is happening in the market, traders will be able to better understand how the price reacts in certain areas, helping them complement their analysis.
With over 100 drawing tools and technical indicators, the Binolla platform gives participants the ability to build a wide range of strategies, applying them to any of the more than 200 available assets. An intuitive, simple interface with fast execution allows them to trade digital options with the most convenient return on the market, with the opportunity to test their strategies in demo mode with $10,000 virtual funds.
Fundamental Analysis
This method of market analysis focuses on trying to determine the reasons behind price movements. Central bank decisions (such as interest rate changes), geopolitical events (such as elections or conflicts), and other macroeconomic developments greatly influence investor sentiment, causing investors to buy or sell, thus defining trends.
These are some of the main indicators that traders use within this analysis method:
Interest rates: By setting interest rates, central banks increase or decrease the supply of a currency, causing changes in its price and trading liquidity.
Employment reports: Investors and traders follow this indicator to determine the health of an economy and therefore, gain a clearer perspective on how banks will act.
Inflation: Central banks make interest rate decisions by closely monitoring inflation. If inflation is very high, they will likely raise rates to reduce inflation. If not, they may lower them to stimulate growth.
CME Fedwatch: Unlike the previous indicators that are part of the economic calendar, this tool calculates and displays the probabilities that the Fed (US Federal Reserve) will raise or lower rates, based on current federal funds futures prices.
Trading Psychology
One of the key premises for success in trading is learning to think in probabilities, but is it enough to have a strategy that delivers a certain percentage of returns? The answer is no. Having a strategy that delivers 7 out of 10 profitable trades is useless without following a plan. Emotions play a role here, and the trader must learn to master them so they don’t interfere with their methodology.
Fear of losses, greed, and revenge-based executions are some of the silent enemies that stand in the way of profitability. Here, discipline, persistence, and adhering to a trading plan are the tools that help overcome these difficult times.
Risk Management
The last of the key concepts is risk management in trading. Establishing a planned amount of money allocated to each trade is key when trading digital options. Although profits and losses are predefined in these instruments, it’s still necessary to allocate an amount of capital that won’t affect your account balance. As a general rule, it’s recommended not to risk more than 2% of your total balance on each trade; this will help you overcome periods of market volatility.
By managing your money this way, you ensure you have sufficient funds as you gain experience. Additionally, setting daily or weekly limits will help you avoid impulsive trades, complementing risk management with sound trading psychology.
Why should a trader be willing to constantly learn?
Financial markets don’t have defined laws that are constantly repeated; they evolve as new trends, economic events, and regulatory environments emerge. Being willing to change perspectives will help traders avoid common trading mistakes, develop strategies that adapt to these changes, and stay up-to-date with new developments.
In addition to the market’s changing aspects, your own trading experience should also be a source of knowledge. Be sure to keep a record of your past trades and review them from time to time to improve your strategy if necessary.
These key trading concepts will help you view trading from the right perspective, complementing your analytical strategy with the right planning and mindset. The following section presents some of the main advantages and disadvantages of trading digital options.
Advantages and Disadvantages of Digital Options Trading
As we mentioned earlier in the article, digital options are an ideal instrument for beginners; however, they are not limited to beginners, and many experienced traders make money with these contracts. Let’s look at some of the main advantages and disadvantages that can also help you avoid common mistakes when trading these instruments:
Advantages
- Simplicity: Digital options offer simple execution, requiring you to define the direction according to your strategy, choose the expiration time, and the investment amount. If your price prediction was correct, you will receive your investment amount plus the profit percentage. Otherwise, you will lose your invested amount.
- Predetermined outcome: Before executing a trade, the trader already knows how much profit they can earn or lose from it. This predictability makes digital options a favorite among many participants.
- Small investment amount: These instruments allow you to start trading with very small amounts, a major advantage for those without much capital.
- Learning: Thanks to their ease of understanding and operation, many experienced traders choose them as instruments to learn and gain experience before later trading other contracts. However, digital options are completely valid for an entire trading career.
Disadvantages
- Variable profitability: The profitability or payout of digital options can vary depending on the broker, the asset, or even the time of day.
- Overtrading: Their inherent ease of operation can be a double-edged sword if not used in a planned manner. Each trade must follow the strategy’s rules, which include the entry signal and capital management.
- Availability: Digital options are not available in all countries. Nations such as the US and other eurozone countries prohibit trading these contracts.
Conclusion
Digital options trading presents an excellent opportunity to begin trading in the markets, but it is not limited to this training stage, as you can trade and consistently profit with them. Their ease of operation, predictability, and low capital requirement make them an excellent option for improving market analysis, capital management, and developing sound decision-making.
The digital options available on the Binolla platform offer the most convenient payout/return ratio on the market, where traders can apply their strategies with these instruments to more than 200 assets. Whether they apply a technical or fundamental analysis approach, or a combination of both, the platform’s tools, as well as its blog with all the latest market news, will give traders everything they need to trade the markets with confidence.
