Successful trading is impossible without understanding the key notions. When it comes to digital options, these contracts offer a simple idea, but you should know at least the basics to capitalize on them. In this section, we cover all the main terms that are widely used in the world of digital option trading. Here you will learn more about:

Digital Options

Digital option (Binary Option, Binary contract, Fixed-Time Contract) is a special type of financial derivative where a trader predicts whether the price will be higher or lower than the strike price at the expiration moment. If the prediction is correct, the trader gains a fixed predetermined profit (in the money). If not, the trader loses the investment amount (out of the money). Digital options are considered one of the simplest derivatives for grasping as they require no complex money and risk management techniques.

Call (Higher)

A Call (Higher, Up) option is a special type of contract that a trader buys when they expect the price to be above the strike price at the expiration moment. Buying this type of digital option can be done when the price follows the uptrend or reverses from the downtrend to the uptrend.

Put (Lower)

The Put (Lower, Down) contract is a digital option type that is bought when a trader supposes that the underlying asset price will be below the strike price when expiration occurs. Market participants buy this type of contract during downtrends or when the uptrend is over and a reversal occurs.

Expiration 

Expiration (Expiry Time) or expiry time refers to the specific time in the future when the digital contract will expire. At this moment, the outcomes of the contract are calculated. If an in-the-money situation occurs, the trader gains money and has the investment back. If not, the trader loses the investment amount.

Investment

Investment in digital options is the amount of money that you invest in buying a Higher or Lower contract. The investment amount can be from $1. Choosing it depends on your risk and money management strategy. If your predictions are correct, the investment amount is credited back to your balance along with the payout amount. If not, you lose the investment amount.

Underlying asset

The underlying asset (asset) in digital option trading is an asset that you buy a digital contract for. This can be a currency pair, cryptocurrency, stock, index, commodity, or other. When you buy a specific digital option contract, you should predict whether the asset price will be above or below the strike price.

Types of contracts

Digital option brokers offer various types of contracts that you can buy to predict the difference between the current price and the strike price. At Binolla, there are two types of contracts available – Fixed and 5s Scalping. 

Payout

Payout (Profitability) in digital option trading refers to the percentage that you will receive if your prediction is correct. When the outcome is settled, the broker calculates the profit by multiplying the percentage and the investment amount.

In-the-Money

In-the-money refers to the type of outcome when the trader was correct in their prediction. For instance, if you buy a Higher contract and the current price is above the strike price at expiration. When buying a Lower contract, an in-the-money situation will occur if the current price is below the strike price at expiration.

Out-of-the-money

Out-of-the-money refers to a situation when the outcome of the digital option trade has not met expectations at expiration. For instance, if you buy a Lower contract, that out-of-the-money situation will occur when the current price is above the strike price at expiration. When it comes to a Higher contract, the out-of-the-money situation will occur when the current price is below the strike price at expiration.

At-the-Money

At-the-money is a rare situation when the current price at expiration is equal to the strike price. If this happens, the investment amount is sent back to the trader’s balance with no profit.

Risk-Free Trade

A risk-free trade is a special type of bonus in digital options that allows market participants to buy a contract without risking their investment amount. It works the following way. If you buy a Higher or a Lower contract and your prediction fails, the amount of investment is credited back to your balance.

Deposit bonus

A deposit bonus is an amount of money that you receive from the broker for depositing a specified amount. Traders can use these additional funds to open more traders or increase their investment amount.

Profit

Profit in trading refers to the positive outcome of the financial transaction if the price of the asset changes in the forecasted direction. Profit amount in the digital options depends on the profitability of the contract, while profit in CFDs depends on the number of pips between the price at which you open and close the trade.

Loss 

A loss in trading occurs when the price moves in the opposite direction and you lose a part of your investment or the entire amount. In digital option trading, you risk the whole investment, while in CFD trading, you can cut your losses at some point.

Bullish market

 A bullish market occurs when the price of the assets is rising gradually. It is always driven by positive economic data or improved market sentiment. The bullish market means that market participants are confident and they want to invest more.

Bearish market

A bearish market refers to a market situation when the price of an asset moves gradually down. During the bearish market, the sentiment is negative, which pushes prices even lower.

Volatility

Volatility refers to the degree of price movements by an asset for a specific period. It is used to evaluate the speed and the depth of price fluctuations. Volatility can be used by both CFD and digital option traders. 

Trend

A trend (tendency, price movement direction) in the financial markets is the direction of price movements over a specific period. It is important to know this direction as it helps you decide whether to buy or sell an asset under specific market conditions. There are three types of trends in trading. Bullish is when the price is moving upwards, bearish is when the price declines, and neutral or horizontal is when the price has no clear upside or downside direction.

Support

The support level refers to a level when the price stops moving downwards and reverses upwards. This level can be used by digital option and CFD traders, allowing them to buy an asset or a Higher contract when the rebound is confirmed.

Resistance

The resistance level is a ceiling where the price stops moving upwards and reverses. It is widely used by both CFD and digital options traders to find entry points for opening short positions or buying a Lower contract.

Retracement

A retracement stands for a temporary price movement against the major trend. This pullback allows market participants to buy along the main trend and use various swing strategies. Digital option traders may also trade the retracement itself using short-term contracts.

Reversal

A reversal refers to the change of the price movement direction from downwards to upwards and vice versa. Reversals are used by traders to find entry points when the market mood changes.

Grasping the terminology will help you navigate through digital options trading with more confidence. Moreover, you will learn about what lies behind each concept and how to use it to make the most out of it. Each particular article here is full of examples that will help you save time and be ready for trading as soon as possible. This terminology will help you:

• Understand how digital options work.
• Be able to apply these terms in your trading routine.
• Create your own trading strategies built on a strong foundation.
• Avoid confusion when analyzing charts or making trading decisions.

Start mastering the language of digital options today and pave your way to successful trading.