Think of binary trading as probability
trading. The binary market maker will pose a question that
will have two possible outcomes. Either the event happens or it
doesn't.
For example a market maker will ask 'do you think the
FTSE will finish the day above 5850?' and it will give a price, or
probability, of this happening. This price is displayed as a
percentage and so in this example the market maker may give you are
price of 60-65 for the FTSE to finish above 5850 at the end of the
day.
This means the market maker or Binary broker believes there is a
60-65% chance of the event happening. If it does, the bet settles
at 100% and if it doesn't it settles at 0%; it's as simple as
that.
In our example if the FTSE finished at 5851 on the day the answer
to the original question of 'will the FTSE finish above
5850?' would be 'yes'. A trader who bought the price at
65 would win the difference between 65 and 100 (times the stake of
the bet) and a trader who had sold at 60 (believing that the event
wouldn't happen) would lose the difference between 60 and 100
(times the stake of the bet).
The increased interest in this product is due to the limited loss
for each bet placed. If we look at the example once more and
consider that the market actually closes at 5600 the binary trader
predicting the price would finish above 5850 would lose 65 times
their stake whereas a futures trader or spread bettor could be
facing losses far greater.