Binary Options Spread Trading
Spread Trading is a form of speculation which involves making a prediction on the price movement of an asset.
Use this Binary Options Spread trading strategy wisely with leverage and you can make enormous amounts of money in binary options.
The spread trading broker will usually quote two prices. These two prices are:
• Offer price (Spread)
• Bid price
The investors are tasked with trading the value of the asset to exceed or remain under the offer price. The investor doesn’t own an asset in case of spread trading. Their main task is to speculate on whether the price movement of an asset will go up or down.
Defining spread trading
Spread trading is termed as a derivative strategy, as the investors don’t own the actual assets they are trading on, commodity and stocks. The spread traders are just tasked with assessing the price of the asset in nearby trading time.
Using leverage is an important characteristic of spread trading. Other characteristics are wider markets availability, tax benefits and long or short capabilities.
Defining a spread
In case of stock market trading, two prices are stated in regard with spread bets.
• A price for purchase
• A price for selling
The variation between the buying and selling price of the option is called a spread. The investors benefit from the spread trading due to this spread. This also negates commissions as in the case of stock market trade.
Comparing stock market and the spread trade
In this case, spread trading and stock market will be compared side by side.
If for instance the FTSE 100 share index is trading at 4214, a company will quote its sell price as 4213 and buying price as 4215. The quote has a spread of 2 point spread. This allows the trader to trade on this spread.
For instance in stock market, a purchase has been made of 1,000 shares of a company for $193. The price increases to $196 and shuts down. Thus, a profit of $3 was accomplished on every share.
Now pay attention to the fact that $196,000 would have acquired 1,000 shares. Commissions are also needed to enter and exit the stock market. The profits are subject to tax and stamp duty.
Risk management in spread trading
The risks are high in the case of binary options spread trading especially when using high leverage. Spread trading does offer tools to overcome such high risks, these are:
1: Standard stop loss binary options strategy
The stop loss strategy involves shutting a losing trade before it spirals down to a bigger loss. For a standard stop loss, the trade will be shut down at a price available suitable for the trader.
Otherwise, the trade could have stepped down to a graver level. The binary options spread trading is a volatile market. Using stop loss order is imperative.
2: Guaranteed stop loss order
In case, the stop loss completely shuts down the trade at the value trader has set, not withstanding underlying market situation. This form of strategy will incur a fee from the trader which is a good way to manage trading loss. The online broker a trader chooses to invest with should provide this tool.
Leveraging for new traders
Over leverage is still a demerit many traders fall prey to and this is the main reason not to leverage in the first stages of investment for new comers to the financial and binary options trading market.
Still, with less capital involvement, better risk management software and tax benefits makes spread trading very appealing for traders, tread carefully.
Binary Options Spread Trading Conclusion
Binary Options Spread Trading is evolving and changing with the new electronic and online markets. The barrier level for entering spread trading has long been lowered. It is an immense and vibrant marketplace that can be very profitable.