Binary options are short-term, limited risk contracts with two possible outcomes at expiration – you either make a predefined profit or you lose the money you paid to open the trade. The payoff is fixed on either side of the strike price.

Trading a binary option is like asking a simple question: will this market be above this price at this time? If you think yes, you buy, and if you think no, you sell.

Binary options are priced between $0 and $100, so you can decide how much capital you can risk. Each contract will show you the maximum you could gain and the maximum you could lose, so you’re always making an informed decision and losses don’t spiral out of control.

If your trade is successful, you receive a $100 payout, so your profit will be $100 minus the money you paid to open the trade. If your trade isn’t successful, you don’t receive a payout. This means you lost your capital, but nothing else, because your risk is capped.

Difference between Binary options and Traditional trading.

Both binary options and traditional options come with sharp volatility. A contract can quickly gain value or become worthless based on a single news item. However, binary options trading offers less room for error. While you can buy a traditional option that expires in more than a year, most binary options have shorter windows before they expire.

One key difference is the short-term nature of binary options: They typically have very short expiration times, ranging from a few minutes to a few hours. In contrast, traditional options can expire daily, weekly or monthly, and LEAP options can have expirations that extend several years from purchase.It's possible to close a binary option position before it expires, just like with a regular option. This flexibility allows traders to lock in their gains instead of risking that they lose their entire investment. Some traders opt to lock in a 20% gain instead of taking a double-or-nothing approach. However, binary options don't give you as much time before expiration.

Traditional options are better for risk management.

Another key distinction is that only traditional options give you the potential to own an asset. However, you can't gain ownership of an asset through binary options. Any winnings are treated as short-term capital gains. Your gains are also limited with binary options, as the maximum reward is fixed. Traditional options give you the potential to realize unlimited gains as long as the underlying asset continues to move in your favor.

Advantages of Binary options.

Accessibility:

Since it's online, you can trade from any internet connected device. With mobile apps provided by brokers, you can trade on the go.

Another significant benefit of engaging in binary options is potentially high investment returns. This makes it possible for traders.

Defined risk: One of the main advantages of forex binary options is the predefined risk. Traders know precisely how much they can lose or gain right from the start.

Simplicity: The binary options market is relatively straightforward, especially for newcomers. Traders predict whether the currency pair's price will be above or below a certain level at a specific time.

Limited market exposure: Binary options have fixed expiries, and traders are not exposed to overnight risks such as significant after-hours economic announcements.

Common terms used in Binary options 

Here are important terminologies used in binary trading:

1. Binary Option: A type of option that pays a fixed amount if the underlying asset meets a certain condition.

2. Call Option: A type of binary option that pays out if the underlying asset price is above the strike price.

3. Put Option: A type of binary option that pays out if the underlying asset price is below the strike price.

4. Underlying Asset: The security or commodity that the binary option is based on.

5. Strike Price: The price at which the binary option is exercised.

6. Expiry Time: The time at which the binary option expires.

7. In-the-Money (ITM): A binary option that is likely to pay out.

8. Out-of-the-Money (OTM): A binary option that is unlikely to pay out.

9. At-the-Money(ATM): A binary option where the underlying asset price is equal to the strike price.

10. Broker: A company or individual that facilitates binary option trades.

11. Trading Platform: Software used to execute and manage binary option trades.

12. Leverage: The use of borrowed money to increase potential returns.

13. Margin: The amount of money required to open a binary option trade.

14. Payout: The amount of money received if a binary option expires in-the-money.

15. Risk Management: Strategies used to minimize potential losses.

16. Stop-Loss: An order to close a trade if it reaches a certain price.

17. Take-Profit: An order to close a trade if it reaches a certain profit level.

18. Trend: The direction in which the underlying asset price is moving.

19. Volatility: The degree of uncertainty or risk associated with the underlying asset price.

20. Liquidity: The ability to buy or sell a binary option quickly and at a stable price.

These terminologies are essential for understanding binary trading and making informed trading decisions.