Trading digital option is one of the most lucrative and popular trends in the world of financial markets today. It is for this reason that both ardent and new traders are rushing to add them to their investment portfolios to profit as much as they can from them. That said, for you to succeed as a digital option investor, there are a few things you need to take into consideration to continue making money.
Choose a reputable broker
Just like any other online financial transaction, digital option are prone to fraud. So, always trade cautiously. Most of the brokers found online are not regulated and can easily scam you off your money if you are not careful. Hence, it is important that you do your due diligence when choosing a broker to trade with. Avoid brokers whose trading platforms overstate the average return of a successful trade.
The worst brokers are those that manipulate tihe price points, causing their clients to lose their wager – every time a client loses, the broker wins. One simple way to sleuth these brokers is by reading user reviews and blogs about the broker. This will help you steer clear of scammers. Also, make sure you are working with a legitimate broker by making sure that they are regulated by a renown regulator.
Know your asset list
The sheer number and diversity of assets that one can trade with varies from broker to broker. The majority of brokers offer options on popular assets such as major FX pairs like GBP/USD, EUR/USD and USD/JPY, or major stock indices such as S&P 500, Dow Jones Industrial or FTSE. Popular commodities include oil, silver, and gold.
Traders can also trade individual stocks and equities through most binary brokers. However, not every stock will be available. Generally, you can choose from about 25 to 100 popular stocks like Apple and Google. The list of assets keeps growing as demand dictates. To know what trading assets a broker offers, check their trading platform on their website.
Understand expiry times
The expiry time in digital options is the time which a digital options trade is closed. An exception can only be made where a “Touch” option hits a preset level before expiry. The expiry of a trade can be as short as 30 seconds or as long as 12 months. While binary options trades started with relatively short expiries, the growing demand has given rise to a broader range of expiry times available. Some brokers now even give investors the ability to choose their own expiry time.
Expiry times are generally grouped into three main categories;
- Short Term / Turbo – these are the expires that close down in less than 5 minutes.
- Normal – these are expires that range between 5 minutes till “end of the day” which is when the local market for that asset closes.
- Long Term – these are those that go beyond the end of day up to 12 months.
Although it has taken a while for regulatory bodies to react to binary options, regulators from across the broad are now starting to regulate this growing industry to make their authority felt. Some of the major regulators include:
- Commodity Futures Trading Commission – US regulator
- Financial Conduct Authority – UK regulator
- Australian Securities and Investments Commission – Australian regulator
- Cyprus Securities and Exchange Commission- CySec
There are also other regulators in the Isle of Man and Malta. Other regulators are also starting to take a particular interest in binary option, especially Europe where national regulators are keen on bolstering the CySec regulation. That said, a good number of brokers still remain unregulated. And while some might be honest, a lack of regulation is still a warning sign for any new traders looking to get in the market.
How much can you risk?
When trading digital option, it is important to note that your position size is how much you risk on each trade. When looking to trade digital option, it is crucial that you don’t take any random risks or base your trade on how convinced you are that it will work out in your favor. Always see position size as a formula and use that for every trade.
While how much of your overall trading capital you risk is your choice, risking more than 5% of it is not recommended. Professional traders usually risk 1% or less of their capital.
Therefore, if you have a $1500 account, keep risk to $15 or $30 per digital option trade which is equivalent to 1% or 2%. A 5% risk which is equivalent to $75, in this case, is the absolute maximum and is highly advised against.
When investors start trading, the goal is to make as much profit as they can in the shortest time possible. However, you should try as much as possible to avoid this impulse. Risking too much on each trade is more likely to leave your account empty. As a new trader, it is better to make small risks on each digital option, which will allow you to test new trading methods, and hone your skills without losing much. You can then gradually increase the amount you risk to 2% once consistent.
During your early days of trading digital option, it is crucial that you make all the right decisions. The risk and profitability of each trade depend on a manually chosen strike price, which is its main distinctive feature. As a result, they provide a high degree of earning potential and freedom. Taking your time to learn, understand and practice different trading strategies and techniques, and doing your due diligence to ensure all your trades and capital are safe is highly recommended if you want the whole exercise to be profitable.
While these tips might seem obvious, ignoring them can prove to be an expensive mistake. Make good use of the above five tips to ensure that your career in trading digital option starts off on the right foot and takes off as well as possible.