There are lots of different avenues to explore in the world of day trading. One that will be appealing to many newcomers is the idea of digital trades. This may sound like a modern approach with some fancy tech. The truth is actually quite different. Digital trades are actually another name for binary options. While this is nothing new, it is gaining popularity because of the nature of the trade in an online world. Day trading on digital options can have its rewards andquot; but only if you understand the process, the options and the risks.
The rise of the binary option in the modern world.
The prevalence of online trades and the plethora of options today means that binary options are everywhere. These trades have been around since the US Securities and Exchange Commission first allowed them in 2008. Today, traders across the world make simple, yet bold predictions on the movement of different stocks, currencies and other commodities. Lots of new traders want a piece of that pie. So, how does it all work?
The fundamentals of trading on a digital option.
The basic idea here is that you have an option that can provide a fixed payout if the underlying market price of a chosen currency exceeds the strike price. This strike price is the pre-determined upper limit that the currency can hit in a given time frame.
You may think that this is a sure thing. There is no doubt that the price will hit that strike price and remain there at the end of the designated period. This is why you buy a digital option called a call. If you are correct, you will profit from that decision. Alternatively, you might be convinced that the price is about to plummet and will hit a pre-determined low point. This is where you buy a different digital option called a put. Again, if your prediction is correct, you will profit from your decision. However, if you are wrong andquot; in either case andquot; you will lose. There is a high level of risk involved here. But, you can limit that risk with experience and the right knowledge.
Let’s look at a hypothetical example with a common, digital commodity.
Many online traders deal with Bitcoin on a regular basis. This experiences rises and falls like the common dollar. So, it is 9am, you have an opportunity for a digital option where this cryptocurrency will rise to a pre-determined point by 10am. Do you go with your gut, or tips from a contact, and buy a call on Bitcoin? If you check the price at 10am and it is where you predicted, you will make a profit.
So what are the benefits day trading on digital options?
Well, the number one benefit has to be the simplicity. There is no complicated process, just one prediction with a 50/50 outcome. Either you say yes, and agree that the price will reach the strike price, or you say no. There are no variables and no complications. You either agree with a proposed price rise or you don’t. That simple yes or no question also becomes easier to predict with a little research and intuition. Digital traders with their eye on financial news and trends can do very well here.
Another crucial benefit to this binary trading approach is the choice of derivatives. Many digital traders will work with currencies andquot; watching prices rise and fall and predicting movement based on global events. However, you can trade binary options for pretty much anything. There are deals to make on all kinds of global currencies, as well as major cryptocurrencies. These cryptocurrencies are so volatile that this adds to the jeopardy of the trade. You can also find these binary options with commodities, stock prices and more.
Another important derivative is the time frame. Many people day trading on digital options will work with 5 or 30 minute windows. This allows for a good period of time where you can predict an increase and reap the rewards. You can also do so multiple times a day. Some people will also try turbos, where the time frames are as short as 30 seconds to a 1 minute. This could be a little frantic for many newcomers.
What about the risks in digital options for day traders?
It can’t all be a perfect ride. Naturally, there is the obvious financial risk involved here. Inexperienced traders could lose out quite often with bad trades. You have to remember that they are also known as ll or nothing’ trades for good reason. That is why all traders need to make sure they are certain about their choice. It may be 50-50, heads or tails, but don’t flip a coin when large sums are at stake.
Scammers and unregulated systems are also a concern with digital trading options. There are concerns about the number of disreputable companies and brokers out there. Some see binary options as a brilliant way to lure inexperienced traders in and make a quick profit. Cybercrime is rampant and we need to be careful who we trust when making these trades. While regulators claim that they are looking into the issue, it pays to be vigilant. That is why it is important to look for platforms that are regulated by the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC), or other regulators.
Can anyone do this?
It depends where you go and how experienced you are. There are some brokers that will allow entry to most day traders, regardless of their experience or credentials. But, there are also some that digital options can only be offered to deemed to be professional.
Is day trading on digital options the right move for you?
This is about all you need to know to get started. The concept of these binary trades is highly appealing. There is something about that roll of the dice on a yes-no outcome that makes us a little bolder. The range of derivatives and options means that there is a niche binary option for everyone. Once you find your place, and conduct the right research, you should find that this is a highly rewarding, profitable approach to day trading.