Digital Contracts Trading

Trading digital contracts is a popular investment vehicle for traders in the UK due to the simple “up” or “down” mechanics and potentially lucrative returns. This tutorial outlines all you need to know about digital contracts trading, such as the asset types available for speculation like stocks and cryptos, the best accounts for online trading, plus tips for getting started.

What Are Digital Contracts?

Digital contracts, also known as binary options, involve betting on the price direction of an asset over a set period. Investors can either go long, betting that the price of an asset will increase, or short, betting that the price of an asset will decrease.

If a trader makes a correct prediction, digital contracts trading can yield returns of over 90%. However, traders lose all of their staked funds if their trade finishes out-of-the-money. As a result, some companies allow traders to close positions early for a reduced return.

Digital contracts are by definition, derivatives – the trader does not take ownership of the underlying asset, for example, barrels of oil. Instead, traders simply make a prediction on the future price of the asset.

Platforms that support trading digital contracts are usually straightforward, with few complex variables and often only two order types: long or short, also sometimes displayed as buy or sell, or higher or lower.

Trading Example

Here are two examples of forex (FX) digital contract trades on a popular global currency pair – EUR/GBP:

Let’s assume the current price of EUR/GBP is 0.8500.

Trader A believes that the pound will strengthen and, therefore, the price of EUR/GBP will decrease. So they open a single digital contract on EUR/GBP, selecting a “short” or “lower” trade with an expiry time of one hour. Their stake is £100 and their broker is offering an 80% payout for a correct prediction.

Trader B foresees an opposite price movement in EUR/GBP over the same period. So they also open a single digital contract on EUR/GBP but choose a “long” or “higher” trade. Their stake is £100 and the payout offered is 80%.

After an hour, the price of EUR/GBP has risen to 0.8650.

Trader A does not get paid out and loses their £100 stake. However, trader B wins their bet and receives £80 from the broker and their £100 stake back, meaning a total of £180.

Design & Usage

There are several variables to alter the dynamics of digital contracts trading, which will change the payout offered by a company. These are the specific asset, the quantity of contracts, the time until the contract expires and the predicted price direction.

Investors can open multiple contracts simultaneously for hedging potential with brokers that allow clients to cash out or alter their contract volume mid-trade.

Digital contract trading dynamics are also affected by the length of the contract. The best brokers offer investors a wide range of expiry times, from as low as 30 seconds up to days, weeks or even months.

Our experts found that the best payouts are provided for contracts with short expiry times, as markets are often more unpredictable in the ultra-short term.

Markets

A wide selection of markets and assets are available to speculate on using digital contracts trading. However, this varies from broker to broker. These can include forex, stocks, indices, cryptocurrencies such as Bitcoin, bonds and commodities like energy and metals.

It is worth reiterating, that with digital contracts trading, the underlying asset is not traded, meaning a bet is simply made on the asset’s price movement. So, for example, a successful long trade on Ethereum does not give investors any ETH at any point during the transaction.

This gives investors freedom from receiving and storing significant quantities of a commodity or timing the market to sell stocks or currency for the optimal price.

Pricing

There are not normally fees to pay when making a digital contract trade – the payout quoted by the company is what you get. Brokerages and platforms usually make their money from clients’ losing positions.

However, deposits and withdrawals from your account may not be fee-free, with international wire transfers costing up to £25 in some cases. Some digital contracts brokers that allow clients to cash out their contracts early also charge a commission to do so, often of around 40% of the payout value.

Digital Contracts Vs Other Trading Products

Digital contracts have several unique uses and characteristics compared to other investment vehicles such as traditional options, contracts for difference (CFDs) or buying stocks.

One of the key advantages over traditional options and CFD trading is the capped losses of trading digital contracts. Investors can only lose their stake and no more when making a digital options trade. The flip side is that gains are also capped. So even if the price of an asset changes significantly, returns remain the same.

Following on from this, with digital contracts trading, payouts are not correlated to the size of the price movement. An increase of 0.1 pips will correspond to the same payout as 1000 pips. Depending on the outcome of the trade, this can be an advantage or disadvantage.

Compared to options contracts and stocks, digital contract trades are normally traded over the counter (OTC) rather than through an exchange, which may raise concerns about the security of contracts. This is particularly important as most digital contracts trading brokers and companies are unregulated.

Safety

The online trading world can be tricky to navigate, and trading digital contracts is arguably more dangerous than other forms of investing.

The FCA banned the marketing of binary options and digital contract trading in the UK and companies that offer these products are often unregulated locally or regulated by a less reliable, offshore financial watchdog.

With this in mind, investors should opt for trusted digital contract trading platforms based on user reviews and ratings.

When it comes to keeping your account safe, our experts also recommend using additional login protection such as two-factor authentication (2FA). Unfortunately, not all digital contract brokers will support this feature, so alternatively see if your chosen company provides one-time passcodes.

Education & Training

The mechanics of digital contract trading are basic and require no specialist training. However, despite the seeming simplicity of digital contracts, there is no such thing as an easy form of trading for beginners.

Before diving into the markets, general knowledge of trading and economics basics will serve investors well. Our experts recommend using resources such as e-books, online guides and academy courses to create a solid foundation to draw upon while trading digital contracts.

While it may require a more significant investment of time and funds, this approach will yield greater long-term benefits than following one-off trading tips.

Demo Trading

Many digital contract trading companies provide demo accounts for customers to practice different ideas and strategies before investing real money.

A demo account is an excellent way for traders to learn hands-on in the markets and supplement more analogue knowledge bases.

Digital Contracts Trading – Focus Option Demo Account

Pros Of Digital Contracts Trading

• Fixed Risk – Investors can only lose what they stake when making a digital contracts trade.
• UK Tax Advantages – Due to their categorisation as gambling in the UK, digital contract trading yields are tax-free.
• Easy To Create – Digital contracts are a simple product to understand. To create a contract, traders need only specify a price direction and expiry time.
• Trading App Friendly – Due to the simple nature of digital contracts, trading is easy to do in mobile apps or basic trading platforms.
• Low Stake Speculation – Many online brokers support small stakes when making a digital contracts trade, from just £0.10.
• High Payouts Relative To Price Movements – Trades either settle as a win or a loss and the size of a price movement has no bearing on a payout.

Cons Of Digital Contracts Trading

• Fixed Reward – No matter how much an asset’s value changes, the reward is capped at around 95% with most brokers.
• Limited Cash-Out Support – Only select brokers allow clients to close out their positions before expiry.
• All-Or-Nothing – With a digital contract, you either win and receive the payout or lose your stake.
• Lack Of Regulated Brokers – Very few digital contracts trading companies are regulated, less still by a stringent body such as the UK’s FCA.

Strategies & Tips

Due to the simplicity of trading digital contracts, traders can employ various ideas and investing systems when they identify a suitable opportunity.

The implementation of these strategies should be rooted in thorough technical analysis and market research to give investors the best chance of making successful predictions.

60-Second Strategy

Trading digital contracts is at its most lucrative when taking advantage of short-term market opportunities. Therefore, the 60-second strategy aims to capitalise on strong short-term momentum in the markets rather than longer-term trends.

For this strategy, buy/sell signals can be a particularly effective indicator. Due to the higher payouts on shorter-term contracts, the rewards can be considerable if investors can turn successful 60-second digital contracts trading into a repeatable plan.

5-Minute Strategy

5-minute digital contract trading is a slightly longer-term strategy in which price history and overall trends are more of a factor.

While momentum is still a critical variable, trading support and resistance lines found through technical analysis are more effective within this time frame.

Hedging

Opening short and long positions on the same or similar asset reduces overall risk significantly, especially when making trades with a longer expiry.

Combining contracts with different start prices, directional predictions, expiry times and stakes can lock in profits or reduce exposure to losses when trading with digital contracts brokers with no cash-out feature.

Trading Bots

We found that automating your digital contracts strategy helps investors be more precise, unemotional and make market moves round-the-clock.

While not all platforms supported by digital contracts trading companies will support automated bots, it could be worth making the most of the apps and accounts that do.

Comparing Digital Contracts Brokers

Here are some of the things to look out for to find a quality digital contracts trading broker:

Competitive Payouts

It is a given that investors should seek the digital contract brokers with the most lucrative payouts. Brokerages will have different payouts based on specific assets and expiry times, so ensure that the returns for successful speculation on your favoured trading assets are competitive.

However, prospective clients should be wary of brands that offer payouts significantly higher than the industry average or ‘guaranteed money’. These brokers may be outright scams or advertising higher rates than actually delivered. If a payout seems too good to be true, it may well be. Leading companies offer payouts between 70% and 100%.

Secure & Trusted

The digital contracts trading space is notorious for bad actors, so it is vital to select a quality website when opening an account.

Regulation is a solid place to start when comparing brokers. However, thorough research of reviews from trusted sources is also crucial before depositing any funds with a company. See our list of the top digital contract trading brokers to get started.

Range Of Assets

Ensure that a broker has a solid range of products within your preferred market, whether forex (FX), cryptocurrency, nfts, stocks or bonds. The best brokerages and accounts offer UK assets, like FTSE-listed stocks and currencies with the GBP.

Low Payment Fees

Instead of trading fees, many digital contracts trading brands charge a premium on deposits and withdrawals. So before committing to a broker, check out their payment options and associated costs. Some firms charge up to 5% for Visa and Mastercard deposits while crypto payments can be an effective way to keep transfer costs down.

Do not be scared to reach out to customer service if anything is unclear – the quality of a customer service department is often a reliable reflection of the brokerage as a whole.

Trading Platforms

A responsive and reliable trading platform is a must for all types of investing: digital contracts trading is no exception.

Some brokers use universal trading platforms such as MetaTrader 4 (MT4) or MetaTrader 5 (MT5). However, most develop proprietary, web-based systems for their websites.

We found that some brokers offered mobile trading apps for on-the-go speculation too. If you value being able to create positions from anywhere, ensure your broker offers this feature.

Also look for innovation in terms of copy trading and social investing tools. In addition, does the brokerage offer insights into market volumes and trading quantities?

Bonuses

Due to the largely unregulated nature of digital contract trading providers, many companies offer lucrative deposit bonuses. While these are often highly appealing, watch out for restrictive wagering requirements that may lock up your real funds until complete.

How To Make A Digital Contracts Trade

We have put together a guide on trading digital contracts for beginners. Follow these steps to open a position:

1. Set Up An Account – Using our recommended criteria or shortlist of brokers, find an operator that fulfils your trading needs. Sign up for your chosen service and create an account.
2. Make A Deposit – Add funds to your account using a secure payment method. Our experts recommend using e-wallets that protect your payment credentials via encryption, such as PayPal, Skrill and Neteller.
3. Select An Asset – Navigate through your broker’s supported digital contracts trading platform and select your desired asset. This may be a UK or US stock, an FX currency pair or a cryptocurrency asset. The website or trading platform will usually display an interactive payout calculator with which clients can preview potential profits for different assets and expiry times. Before making a trade, ensure you are familiar with the significant price determinants of this asset and have a well-reasoned plan for making a profit from it.
4. Place A Trade – Decide how much you wish to stake on a particular trade, balancing your risk and reward tolerance. Next, choose your desired price direction and expiry time. Once the current asset value reaches a decided level, open your contract.
5. Wait Until Expiry – Some digital contracts brokers may allow you to cash out a trade early, or you may wish to hedge your contract with another. However, for most trades, now all you have to do is wait until expiry. Once a trade expires, it will either be successful, unsuccessful or a draw. If you predicted the price movement correctly, you would receive your stake back and the predetermined payout. If not, your stake is gone. If the price is at the same level as when you opened your contract, the broker should return your stake to you in full, but with no payout.

Bottom Line On Trading Digital Contracts

The creation and design of digital contracts trading presents unique opportunities and advantages to investors, along with some downsides to consider.

High payouts for minimal price movements and the simple mechanics of the trade make this an appealing investment vehicle. In addition, UK tax regulations mean that yields from digital contracts trading are classed as gambling and exempt from taxation.

However, this is a largely unregulated form of trading and is rife with scams. Therefore, investors should ensure they select a well-reviewed and trusted provider when trading digital contracts. Use our list of the best digital contract brokers to start trading.

FAQ