Call it what you will, jargon, lexicon, glossary, all these things pertain to important and specific terminologies you’ll need to know about an industry. In trading, there’s a handful of words you’ll want to understand and memorize first before hitting those Buy and Sell orders. Lack of knowledge regarding the essential lexicon can affect your ability to commandeer the trading platform and identify opportunities as it presents itself. Furthermore, it can restrict your capacity to learn trading from books and online sources that use such standardized terms to describe strategies and market-related events. Now let’s get started.
The phrase “technical analysis” pertains to the method or style of trading that involves big data processing. Traders hope to predict future price action using price-derived indicators like simple and exponential moving averages, Stochastics oscillator, Bollinger Bands, and so on. Technical analysis has been widely used to trade financial assets, such as binary options, stocks, currencies, indices, and commodities.
World events that affect price of binary options and other assets can be categorized under fundamental analysis. Any price action that occurs due to geopolitical turmoil in a region, decrease in a commodity’s supply or demand, upcoming central bank meetings and the decisions made from these meetings are all fundamentally connected to asset valuation. Based on the information collected from press releases, traders will adjust their market bias accordingly.
Call Vs Put
Trading binary options thru an intuitive platform like UltraTrade will give you an option between Call and Put contracts. In its simplest definition, buying a Call option means you’re anticipating price to increase over the predetermined period of time. If you put a Call option on gold with a strike price at $50 and it does go above $50 before the contract expires, your position is considered “in the money” or profitable. A Put option is ordered if price is anticipated to go below a certain price level within the allotted time frame. Calls and puts are the main order types you’ll encounter on a regular basis while trading binary options.
Strike Price & Expiry
Reading the previous entry, you were likely boggled when the terms strike price and expiry were used. While the latter term is obvious enough, expiry meaning a contract’s expected completion or delivery date, strike prices may come as a foreign phrase. Strike price is included in every binary options contract. Basically, strike price acts as a threshold to profit from binary trading. If a contract expires at or above a Call option’s strike price, the trader receives the predetermined amount. If it fails to do so, the contract becomes worthless.
The risk-reward ratio is a means professional traders use to gauge the viability of a tradable setup. As a general rule of thumb, risk must always be lower than the reward you can potentially make or lose in a trade. If otherwise, a professional trader will consider the setup a low-probability setup. The higher your risk-reward ratio is, the better your odds of steadily growing your account. A risk-reward of 1:3 means you are risking $1 for every $3 gained. In a live trading scenario, a 1:3 ratio will be difficult to maintain. Nonetheless, you can get away with several strings of losses without affecting your current account and future profitability.
The U.S. Securities and Exchange Commission plays a key role in protecting participants of the binary options market. They oversee operations of options exchanges in the U.S. like the Chicago Board Options Exchange, which began offering binary options to their clientele in 2008. Exchanges like CBOE and Nadex make their commissions from matching buyer and seller sides rather than from the losses of market participants.
The amount of money you win from a profitable binary options trade is termed as the payout. In traditional binary option trades, the payout amount is less than the risked amount. Over the years, however, brokers have created contracts that provide as much as 500 percent in fixed payouts, which significantly amplifies the amount you stand to gain relative to the amount you stand to lose. But for such large payouts, the probability of winning is fairly lower than traditional contracts.
Most traders are categorized under day traders, or people who open and close trades within a day. Day traders on UltraTrade use range strategies that detect support and resistance levels on shorter time frames like 1-hour or 4-hour charts. Other styles of trading based on time frame include investing, scalping, and swing trading.
Ideally, you’d want to keep a copy of this glossary rather than skim it once. Keep in mind that there are many other jargon you should understand as a trader, such as FOMC, central bank overnight rates, and even candlesticks. However, the terminologies listed above should provide a foundation to get started in trading binary options.