Pros and Cons of Binary Options

 

2016-01-18-1453094884-1018249-Binary

 

Most people interested in learning how to trade have been told the best first step is to start with paper trading. In today’s electronic world, “paper trading” means tapping into demo programs that don’t use real money but can help you learn the market ebbs and flows and trade using various technical tools. The other method to learn how to trade, forex in specific, is to use binary options. Binary options are an increasingly popular type of global trading tool which have in fact overtaken the search frequency over the term “forex trading” according to google in the past years.

Along with its increasing popularity came the Internet growth of white-label platforms offering binary options. This is no surprise as binary options have many advantages, one being the ability to put on a trade for a simple yes/no on whether a market will move up or down within a certain time frame which can be between five and 30 minutes. Also, many trades can win return of more than 70%. This has led to it being extremely attractive. From a technical perspective these are at-the-money options with very short-term expirations. But from a risk management point of view, binary options require a win/loss ratio of 6-out-of-10 trades to break even.

Binary options offer many different options, such as “one–touch” options where a trader may anticipate that the price will touch a certain level. Range options for example allow traders to take a position on the price, whether it will stay within a specific range or not. Some platforms also allow traders to select their own target strike prices. There are even 60-second expiration options. These are the most challenging to end up in-the-money as the price behavior within the durations is highly volatile. Firms often offer binary options that are basically set and lock in a position until expiration, although some firms allow closing the position before expiration. Binary options are exciting, offering within minutes, near instant result.

Players need to understand that with any high-growth market comes challenges. Choosing the right broker or platform is vital. As with any new instruments and industries, binary options have a “wild west” aspect. Many firms that offer these platforms are licensed offshore and do not fall within the users local jurisdiction. As a result, some platforms use questionable marketing tactics designed to lure customers with lucky draws, such as iPhones and flat-screen TVs. Sadly the reality is that most customers lose their money quickly when engaging in these schemes.

Another common marketing scheme are “bonus” programs that match a customer’s deposit, which essentially prevent the customer from withdrawing money until 10-20 times the deposited volume is generated. Greedy customers respond to the opportunity to trade the firm’s money, not realizing that they are trapping themselves into financial oblivion. If a trader places $10,000 and gets a $10,000 match in one firm, they have to generate $200,000 in trading turnover or volume before being able to withdraw their capital. This results in a very low statistical probability of ever getting any money back. Unless you have a proven track record, never enter a “bonus” agreement.

Some of these unregulated or offshore-regulated firms also use deceptive practices in which their brokers use aliases. To top that off, brokers in these firms have little experience in trading the markets and use certain buzz words to fake their expertise. These brokers often give out whim-based trade alerts to stimulate and encourage trading than making profits.

All the negative aspects aside, trading binary options is a low cost way to learn a market and also provides a great opportunity to hone trading skills. It strengthens the understanding of trading and market fundamentals. Trading binary options is definitely a great start especially for a new trader to understand the fore market. The North American Derivatives Exchange (Nadex) for example offers free demo accounts that get a feel of the market and understand the tools available. The exchange also is regulated by the Commodity Futures Trading Commission and offers several currency pairs, including the EUR/USD, USD/JDP and USD/CAD on its platform. Adding to that you may also trade with Nadex without the need of a broker. A great appeal of binary options lies in their amenability to the use of classic trend lines, resistance and support levels, candlestick charts and analysis of price patterns to find trading signals. This current binary option trend may even evolve into a tool that can be used in a variety of ways to help all traders hone their craft.