What is Binary Options Trading?
Once in a while, a new financial product is created that gets traders excited about getting involved in the markets. It’s hard to create a new product these days that is better than the tried and true products that professionals have been using for years. One of the newer products to hit the markets over the last few years is binary options. These are products that are very much like throwing your bet down in a casino and hoping that bet hits big money.
By definition when you trade a binary option you are placing a bet that either produces a fixed profit at expiration or nothing at all. You are placing a short term bet on the price movement of an instrument like a stock over a short amount of time. When a binary option is purchased, the buyer owns a contract that gives them the right to buy an asset at a fixed price within a fixed amount of time. The buyer has to hold the contract to expiration, which is very different from a traditional option. For example, let’s say you think Apple is going higher over the next 10 minutes. You can go in and buy a binary call option which gives you control of Apple stock at a fixed price for the next 10 minutes. If Apple does indeed go higher then you get to book a profit. Often times this profit is around a 70-80% return. However, if the trade works against you regardless of the trendy the losses tend to be in the 90% range. Not the odds that we are looking for when looking to trade successfully. These products are attractive to newer traders because they are very easy to use and understand and also easy to get started with. It doesn’t take much to open a trading account and you can start with as little as a $100. However, don’t confuse these products with traditional options as they are very different.
Trading Traditional Options
When we talk about trading traditional options, we are talking about placing trades that put a statistical edge in our favor. If a trade works against us, we are able to make adjustments to limit our losses. We can still place bets on the movement in the stock but traditional options give us more flexibility. Traditional options are also highly regulated, which means the regulating bodies make sure your best interests are recognized by your broker. In the world of binary options, the broker can get away with whatever they want with no consequences. If you want the security of a regulated market then make sure you stick with traditional options.
It’s no surprise that binary options have grown in popularity over the last few years given how similar they are to making a trip to the Vegas Casinos. When trading binary options, you must understand that the odds are not in your favor and that it is very difficult to be successful. Why do Casinos make so much money? They only offer games that give them an edge. The same goes for the binary option brokers. They have the edge working in their favor, which makes it difficult for the retail trader to make a profit. If you want to become a profitable trader then put the odds in your favor by using trading strategies and markets that other successful traders use. You won’t find too many professional traders looking at binary options which should be a big sign to stay away.
Of course many retail traders have access to smaller account sizes and want to take advantage of the products that allow them to get started with less capital. Binary options offer that feature by allowing a trader to start with as little as $100. The problem here is that you can’t use proper risk management with these vehicles. I would rather use a product like a traditional option that allows us to make adjustments on a position as market conditions change. If we want to close our position early we can with traditional options, which can really increase your odds of success.
If you are looking to become a successful trader make sure you are using vehicles that give you a statistical advantage instead of trading against your broker who has the odds in their favor. While new products can be exciting at this point in time, traditional options are by far the better vehicle to trade with.