Binary options trading is highly popular these days, drawing participants from every sector of the investment community to try their hands at the latest new way to trade. Obviously, there must be something rather unique going on with this investment vehicle to attract so much attention in so short of a timeframe. Beginners and seasoned veterans are both drawn to this new genre, indicating that the appeal is widespread and not some fluke of human nature. Where there is so much smoke, there must surely be a fire blazing for several reasons.
What exactly are the pros and cons of binary options trading? Here are a few “pros”:
- First and foremost, there is a potential for a quick payoff. Where else can you get a 70% or more return on your capital in hours, if not minutes? Payoffs can actually be higher, and there is always a possibility for a rebate percentage amount if you guess wrong. Many brokers also offer special weekly “one-touch” options with astronomical payoffs in the 500% range.
- Simplicity is the next factor that is appealing. The decision tree is straightforward. You pick your asset class, expiration point, and amount of your position. All that is left to do is to pick the correct direction versus the targeted value provided by the broker. No other decisions are necessary, unless you want to take advantage of more complex betting strategies that your broker supports.
- Ease of execution is right next to simplicity. You do not have complex timeframes to consider, leverage decisions to ponder, or correlations to find. You set a few variables, look at how other traders are betting, and then execute from a single “dashboard.”
- No angst or anxiety over when to close a position is especially a benefit for beginners. It is easy to open a position in any investment vehicle, but the real test comes when it is time to sell. Most all investors stumble at this point, but binary options fix the endpoint for you. Adrenalin may flow, but you will not have to make a crucial decision late in the game, unless you elect to use more advanced features.
- There are no fees or commissions. The entire costs are borne by the spreads contained within the payoff/rebate structure.
- Risk management is not a problem because you set your risk tolerance at the pint of execution, based on the size of your position. There is no additional downside risk. Some brokers may vary the amount of the rebate they offer based on how close you come to the correct direction, but these amounts are just a few percentage points in the overall scheme of things.
- You will never get a margin call. You can only wager what is in your account. There are no decisions related to leverage or margin, no chance that, if the market moves against you and you do not react quickly, you may lose a small fortune in the blink of an eye.
- Most brokers offer a host of advanced features for more experienced traders, such that a beginner can grow as he learns the business. In other words, your mind can expand as experience grows, and there is always a higher level to ponder, once you have achieved a modicum of success at a lower level.
As with most things in life, however, binary options trading is not all “peaches and cream”, so to speak. Brokers are in this arena for the money. Make no doubt about that, and the preponderance of new weekly entrants in this field suggests that somebody has got to be making quite a bit of money off of someone else, which leads us to the following list of “cons”:
- Current odds are highly biased in favor of the brokers. Competition from so many brokers trying to win your favor has improved the odds lately, but for a common payoff ratio of 70%, including a 15% rebate feature, a trader must still win 55% of the time to break even, let alone record a gain. This situation is often referred to as a “negative reward/risk proposition”. Your odds are better at a roulette table. The added “cost” pays for commissions, the simplicity of the investing format, and the limiting of risk exposures.
- High payoffs mean there is high risk. Short timeframes also mean that consistent predictions of market movements will be harder to come by.
- The majority of binary options brokers are in foreign jurisdictions, most likely an accepted “tax haven” where casino betting is a local industry. Due to the uniqueness of the trading platform and the back-office professionals required to operate binary option offerings, the preponderance of brokers will more than likely not include any of your existing brokers. If the “fad” continues and the traditional broker community begins to lose material business to these new entrants in the field, then we might see local brokers get into this business. Only time will tell if this happens.
- Most traders will want more trading tools to support their decisions. While binary option brokers provide a wealth of learning materials, commentary, and support, the primary “dashboard” does not present the tools that you may need to make a carefully guided investment decision. You can easily get caught up in what you see and react quickly, without checking your favorite indicators, Fibonacci levels, key support and resistance, or key patterns that might influence your judgment.
At the end of the day, binary options trading offers a high payoff potential with risk fixed on the front end. The best advice is to invest considerable time practicing on a free “demo” system before risking your hard-earned capital. Everyone may not be cut out for this fast-paced trading environment. Let caution be your guide!