John Thiel's  Instablog

Anyone wanting to profit quickly from any money-making venture, must develop a kind of sixth sense. Particularly when engaging in high risk financial betting such as binary options, you need to have a very good idea of what you are doing and what pitfalls to stay away from.

The first and most crucial rule of thumb is never risk more than you can afford to lose. This is true in anything you do in life, because when you get knocked down you need to be able to get back up and start trading again.

The second rule of thumb is how to find the binary options broker that is right for you, and how to stay away from the scam broker sites. Your sixth sense should be working overtime when it comes to this, and if you have some doubts, let me know I have been through it all and seen things you would not believe.

The third rule is to trade the news, and here again your senses need to kick in and tell you what kind of influence a news article will have on a certain stock (if at all).

As always, the final and most obvious rule is to do the research! Get all your charting and simulation tools together and start taking risks. Don't over-research, other wise you will end up an egg-head with no money.

Other than that, always ask if you are not sure. Be inquisitive and critical and don't be hesitant to ask for more bonuses when depositing and executing trades.

The binary option, (i.e., digital option, all-or-nothing), is a new trading instrument that is different from the ordinary stock options we know in several ways. Also known as exotic options, when brokers wanted to trade stock options added fees were incurred. The Options Clearing Corporation (OCC), followed by the American Stock Exchange (ASE) began offering digital trading options. Two years right after that exotic options, also termed binary options, have grown to become one of the more popular trading vehicles.

Binary options offer predetermined wins and losses, as well as payouts based on the expiry dates on the contract. The trader speculates if the underlying asset will go above or below the resistance line based on the contract expiry time. If he speculates an asset will rise, a call option is then made. A put option is made when the investor believe a stock, index, commodity, or currency will take a dip below the resistance line. The trader then gets a pre-set payout according to the original terms of the contract. If the trader speculates incorrectly he absorbs the loss.

Today's binary options brokers usually advertise ROI of 70-81% of the original investment if you are in the money. You also have the option of having a pre-set loss percentage. In both cases every asset the outcome is based on the initial investment amount on the underlying asset and the time span (hourly, 60 second, etc).

The time span through which the asset rises or falls is called the "option expiration time". So, if you trade an option and this option expires "in-the-money", you make a gain based on a pre-set payout percentage from the original investment on the underlying asset. If your stock option expires "out-of-the-money", you lose a pre-set payout percentage from your original investment as well.

Today's binary options brokers accept trades composed of stocks, commodities, market indices, or currencies. Due to binary options regulations, many binary options platforms only accept stock trades from US traders. This boggles the mind, I mean either you accept trades on all trading vehicles or find another financial niche.

The following represents an real life example of a typical binary option investment:

You wake up in the morning and earn you check out Kiplinger you make an educated guess that FB stock will drop today. So you login to your account and see that the payout for being "in-the-money" on Facebook stock is 72% and the loss stands at 81%. After doing some research, you decide to invest $5,000 on a put option for FB stock set to expire at 18:00.

By the time 15:00 has arrived, FB stock has fallen from $79 to $78.32. At the end of the day, it is trading at $78.5. In this case your put option paid off and expired "in-the-money", so you get 72%, or a grand total of $8,600 back from the original investment. However, it could have gone the opposite way and risen to $80.1 above the resistance line. In this case you would have received $1,400 back from the original investment. If this seems like financial betting to you, you better believe it.

Because of this addictive element and the simplicity involved with binary options trading, this has become a very popular form of trading. Especially with investors seeking to flee the traditional currency exchanges with fixed fees, the CYSEC licensed brokers have become more appealing.

Before you even consider trying to make money trading binary options online your need to consider having a solid trading strategy. One way to do this is to find the most effective was to hedge or manage your risk levels. There is a plethora of information out there about trading binary options online, its best to look at NADEX and the CBOE first and then start comparing them to other binary options brokers.

In all cases, opening a demo account and practicing trades in a risk free environment is always recommended. If will make you a more successful trader and build your confidence.

It seems to me that everyone I speak to these days is talking about trading binary options online. So I thought to myself, let's check the markets and see what this is about. When I started doing my research I found myself reading through hundreds of binary options reviews sites, all of them talking about trading strategies and recommended brokers. Then I thought to myself, hey John you know better than this.

So I called a few friends of mine at the SEC, Nadex, CBOE, Dean Witter, Scottrade, and Merrill Lynch. They all told me the same thing with varying degrees of certainty depending on who I asked. The bottom line is very simple, the Cyprus-Based binary options trading platforms are unregulated. Now this is crucial to understand, unregulated does not mean illegal. For example, Dean Witter is a well-known and SEC licensed Broker with offices in New York and across the United States.

There are no surprises here, your enter the squeaky-clean New York offices of Dean Witter and you will get a by-the-book broker advising you about wealth management and how to invest. He will take his commission even if he loses your investment.

The newer and more agile binary options brokers work differently. While it is true that you are dealing with offshore companies in an unregulated niche, the CySec regulation process has already begun with the SpotOption Platform leading the way. This means good news for day traders and binary options investors wanting to diversify their trading portfolio, and try out new and profitable ways to trade options online.

Looking back when I just started working in Wall Street some of my friends advised me that it's best I take on another profession, one with less anxiety and pressure. That was maybe 20 years ago, back then you had a few options, but today you can register to any one of the many binary options trading sites out there, and start investing immediately.

OK, getting back to the issue at hand, I only recommend a broker after I open an account and deposit. After that I ask my friends to do the same and tell me what they think. I have to say that the new boys on the block know what they are doing. They are extremely helpful and the head traders will usually offer sound advice.

To conclude, it is very likely that the new options brokers will continue to give the older and more traditional brokers a run for their money, especially after offering higher returns on the investment and more flexible trading options. I myself believe that this trend will only grow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.