Trading binary options may offer quick rewards, but risk is high as well

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By Tom Cleveland, analyst for investment risk and fraud for Forexfraud.com

 

Trading binary options is the latest rage sweeping the global trading scene, but after discounting its apparent simplicity and the ability to reap quick and high rewards, the risk profile for these instruments and the brokers that offer them remains. The options themselves are not really options. You are betting on the spreads offered by a binary options broker, and most of these operate out of far-flung tax havens with very little in the way of demonstrative regulatory oversight. As with any financial service, the buyer must be wary, exercising a fair amount of due diligence to protect his capital.

Binary options also have appeal since they encompass a broad range of asset choices – foreign exchange, commodities, stocks and indices. Trading platforms tend to be very straightforward, displaying recent pricing behavior and customer sentiment to guide your “up” or “down” choice, your “binary” decision, as it were. The payout can be substantial, 75% as a rule, with a possible 10% rebate if you guess incorrectly. With these pricing demographics, the odds still favor the “House”, but if you do the math, a “55/45” winning ratio would match breakeven, the same as for trading traditional currency pairs with stop-loss orders and nerves of steel.

Are you interested? Just pick a broker, make a deposit, and start trading. Trading platforms are web-based, no need for a complicated download on your PC. Most brokers also support mobile trading, as well. But hold on a minute! Yes, all you do is pick an asset, enter an amount, and hit enter. Everything is fixed at that point, no margin calls or sweating palms, agonizing over when to sell, but your risks could easily wipe you out, even if you chose a respectable broker from the multitude seeking your favor.

To begin with, your stock or currency broker, more than likely, does not offer these items. They have been legal in the U.S. for over five years, but the back office of professionals needed to support this type of action is not what you would find in a typical market maker’s shop. You are betting where the price for a particular asset will be at a given moment in time. A Reuters’ feed will determine the outcome. The broker is presenting a betting decision much in the same way as at any horse track, but without “Place” or “Show” to complicate matters. By manipulating the “Bid/Ask” spread over time, the broker ensures that it will be on the winning side of the equation.

How does a trader win at this binary options game? The road to success is much the same as with any other trading genre – recognize favorable pricing patterns and utilize technical tools to shift the odds in your favor, and then deploy your position sizes according to a well-thought out strategy. There are no shortcuts for experience, especially in the world of trading, but newcomers tend to get impatient with practice regimens, look for a simpler approach, and then dive in, head first. As a result, casualty rates usually exceed 65%, although published data for binary options trading are lacking.

Risk mitigation, however, starts with choosing a qualified broker, one that can gain your trust and keep it. There are the “best of breed” in this arena that operate in regulated jurisdictions, too. Find one that offers favorable pricing odds and more than the standard in support tools to help with your decision-making.

The popularity of binary option trading is extraordinary. Online gambling can be fun, but guard against the risks if you want a truly enjoyable experience.

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