Binary option trading is a relatively new development in the retail trading world. Five years ago, no one had even heard of it.
Since 2012 however, the popularity of binary options surged as a result of aggressive marketing by binary option brokers, and the promotion of binary trading software by the trading "gurus".
Right now, interest on the topic continues to grow at record levels. Given its current popularity, binary options are likely to be the first "asset" that beginners start trading with.
However, just because something is new and popular... doesn't mean it's worth doing. (Who remembers the fuss over bitcoin trading?)
Opportunities come and go all the time in the retail trading space... and it's important for us to tell the difference between sustainable business models and short-lived fads.
So let's take a moment to examine binary options, and see if it's something we should be paying attention to.
But before we do that, let's first take a quick look at traditional (i.e. vanilla) option contracts.
VANILLA FOREX OPTIONS
Traditional option contracts were initially introduced for people to hedge against future uncertainty.
For example, a German company selling cars in the United States would worry about high EUUSD exchange rates in the future.
Because then they would be getting revenue in a weaker currency (USD) while having to pay expenses in a stronger currency (Euro) in their home country. This results in a significantly lower net profit, or even worse, a net loss.
Forex option contracts were thus introduced to solve this problem, as any losses stemming from currency fluctuations could be offset by profits made from buying options contracts.
To continue with the example, the German car company may choose to buy EUUSD call options, which would profit from an increasing EUUSD rate. Thus, any operational losses in the future (due to a high EUUSD rate) can be offset by the profits gained from those option contracts.
This is, and continues to be, the main purpose of Forex option contracts.
Now of course, in order for the German company to buy call options, someone has to be willing to sell it to them.
Perhaps, a financial institution in France does not believe that the EUUSD will continue to strengthen over the next 12 months, and so is willing sell call options to the German company.
(This, by the way, is how financial markets work. Participants have varying views of the future, and so trade against each other in line with their own expectations.)
In this transaction, the German company pays a fee (in buying call options) to protect against future currency risk, while the financial institution gets paid to take on that risk.
- The German car company looks to limit future currency risk by buying call options - The financial institution (or speculator) collects a fee from selling call options and assumes the currency risk
- Option buyers pay a fixed fee for the potential of a very large profit - Option sellers collect a fixed fee for the potential of a very large loss
FOREX BINARY OPTIONS
In a vanilla option trade, the buyer does not know in advance the amount of money he stands to win. Similarly, the seller does not know in advance the amount of money he stands to lose. The amount is ultimately determined by how far the market price moves.
In a binary option trade however, the trader will know in advance the exact
amount he stands to win or lose, before taking the trade. Binary options are named as such because there are exactly only two possible outcomes: you either win a fixed amount, or lose a fixed amount.
Binary options ask a simple question: will the price be above [price level] at [time]?
For example: will the EUUSD be above 1.3000 at 4.30pm? If you think so, you buy the binary option. If you don't, you sell.
That's pretty much all there is to binary options.
UPSIDE OF BINARY OPTIONS
As you can see, binary option trading can be simply explained and is easily understood. This is a big benefit to new traders, as they can quickly learn the basic mechanics and start trading right away.
A related benefit of this, is having to make fewer trading decisions.
In spot forex trading, for example, one has to decide:
- Where and when to enter the market - The appropriate trading lot size to use - How to manage the trade - Where and when to close the trade
In binary option trading however, there are only 2 decisions to make:
- Whether the market price will be above a certain price level at a certain time - How much to risk on the trade
As such, binary options offer a much simpler trading process. You don’t have to think about (or calculate) leverage and margin at all.
And, since the potential loss on each trade is fixed, you will never get a margin call.
Lastly, options offer traders the unique ability to make money by predicting where prices will NOT go. (This goes for all types of options, not just binary options.) This can’t be done in the spot Forex market.
So… does binary option trading sound good?
Sure it does!
Well... at first glance, anyway.
Now let’s take a look at the downsides of binary option trading. These are the things your binary option broker won’t tell you.
DOWNSIDE OF BINARY OPTIONS TRADING
The most obvious downside of binary option trading is the lack of flexibility.
For example, if the market price moves even one pip against you upon option expiry, you’ll lose your entire stake. You can’t choose to defer your trade exit under any circumstances.
Also, with some binary option brokers, you can’t change your mind and close or modify a trade before expiry. In this sense, a binary option trade is typically an all-or-nothing proposition.
These points on inflexibility can be summarized by the following comment (found in the Forex Factory forums):
"I once traded a forex news item where I closed a wrong call with a 20 pips loss, and ended up making 350 pips on the reverse trade, giving me a net profit of 330 pips. This scenario cannot be replicated in binary options.”
Lastly, the value of a binary option is fixed between 0 and 100, with the broker charging a bid-ask spread and often, a commission as well. The implication of these factors is that the average loss per trade will always be larger than the average profit. This is a structural (i.e. inherent) characteristic of the binary option game.
Thus, in order to break even, a binary option trader would have to win at least 55% of the time. Compare this to spot Forex trading, where a trader can be profitable by winning just 40% (or less) of the time.
MY PERSONAL OPINION
On paper, binary options are an opportunity seeker’s wet dream.
The promise of regular fixed payouts and a focus on short-term profits are exactly the characteristics that appeal to people looking for a quick buck.
Unfortunately for them, what feels good in trading is typically a losing approach.
You see... the only way to keep making money with binary options is to accurately predict market prices at least 55% of the time, AND get the timing right. This is an exceptionally difficult feat to accomplish.
In other words, you can correctly predict future market prices AND STILL LOSE because you got the timing wrong by a few minutes.
All this said, there may be a genuine opportunity here… and that is to be a seller of binary options.
Why? Because it’s a lot easier to estimate where prices will 'not go', rather than trying to predict where it will. Whenever the market settles at a particular price level, it is not settling at a dozen other price levels.
Does this make sense?
This root concept may then be expanded to form a complete binary option trading strategy that you can use.
Note however, that this is a benefit available to all types of options, not just binary options.
SO, ARE BINARY OPTIONS JUST A FAD?
One reservation I have about binary options is that they do not serve a major commercial purpose. Unlike the spot and derivatives markets that serve to benefit society, binary options exist solely for speculation purposes.
In other words, it can be reasonably argued that binary option trading is not much different than a casino game.
Without a commercial purpose, binary options could be banned tomorrow and not impact anyone else other than the brokers and speculators.
Compare this to spot Forex trading, or Forex futures trading, upon which global commerce relies. These markets are unlikely to be closed or banned, because they serve a useful purpose beyond speculation.
As a retail trader for the past 10 years, I’ve seen all sorts of gimmicks and fads come and go. Some years ago, expert advisors were the hot topic. Slowly but surely, people are now gradually realizing that "automated trading" isn't as amazing as it's cracked up to be.
Will binary options follow suit?
My opinion is yes, I think they will.
Binary options do not provide any major benefit to serious traders, and I think that once the opportunity seekers get bored or lose enough money, they’ll lose interest and turn their attention to the next shiny object.
WHAT DO YOU THINK?
So... do you particularly agree or disagree with any of the points I’ve mentioned? Did I miss mentioning any important points?
Let me know what you think! The original article is published here
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IQ Option Review
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Have you been thinking about taking part in the binary options trading market? There are a lot of ways for people to become involved in trading these options, but there are inherent problems that come along with any sort of options trading. Many people have traditionally needed to know a lot about the market, so that they could make the right choices, and increase their odds of profiting. This has basically kept the industry closed to outsiders, and anyone who does not have previous knowledge about the market. What is IQ Option?
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Like all programs that are intended to help you earn money through trading binary options, the makers of IQ Option promis a lot. The question is, of course: can it really do everything that it is meant to? Firstly, take a look at the features that the system comes with:
It is completely free to use, and you will never be asked for money for its use in the future. IQ Option only works with completely legal networks and brokers. It will work all over the world. You don't have to download the software, because it is based online. This also means that it will work through web browsers on any type of PC, smart phone or tablet with internet connection.
This system is guaranteed to increase your chances of making big profits by trading in binary options. You will be able to access your money easily, at any time after earnings are made. This seems like a great set of features, especially the part about not costing anything. However, keep reading to find out how many of these things are actually true. ====>> CLICK HERE TO GET IQ OPTION DEMO WITH $1000 <<==== How Does IQ Option Work?
The IQ Option must be accessed before you can start to use the system. This can occur once you have completed the free registration. We were able to complete this with ease, and it did not cost any money. So far, so good! Next, the system allowed us to invest some real money, by transferring it into our own private trading account. This money was not used to pay for anything in the IQ Option program, and it was our money entirely.
The system uses special “signals”, which are basically pieces of information about what trades should be made. Using these signals, the software began to do all of the hard work for us. In fact, there was practically nothing else to do after this point, apart from sit back and watch. Of course, you do not have to actively watch, and you can just leave the software to trade your money for you.
In a small amount of time, it is possible to start seeing real profits from the small amount of money that you decide to invest in the beginning. It is actually amazing to think that the software was able to do everything by itself. Even though an IQ Option download is not necessary, and there is no installation, the web-based software is extremely powerful, and there were no problems at all. Is IQ Option Scam?
One of the main reasons that many people miss out on good opportunities, is that they are worried about being scammed. There are other companies around who are pretending to be involved with this trustworthy binary trading software system, and they are giving IQ Option a bad name. You have probably seen a lot of different “money making schemes” on the Internet, but this is not one of them. We had no trouble accessing our profits, so it is disturbing to learn that people are falling victim to scams from other groups. Pros of IQ Option:-
Cons of IQ Option:-
- IQ Option is completely free of charge;
- IQ Option is fully automated;
- The system is available as a desktop and browser-based software;
- The system is very easy to use;
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While you can trade a lot in a day with 60 second binary options and potentially make a lot of money, you could also lose a lot. “Over-trading” is common among new traders who want to try to catch every market move, but these aren’t likely high probability trades to win. Good set-ups often take time to develop, and therefore by using 60 second binary options you may be distracted by mediocre or poor trade set-ups, missing the good ones. Is IQ Option Worth It?
If you have a little bit of time to spare, and you are willing to take a look at a new piece of software, which is quite easy to use – you might want to join up. This IQ Option review
was written by people who are interested in sharing the best money-making methods that are available online.
IQ Option delivers, there is no question about it. Trades based from the software are scoring over 88% in accuracy. The key to making money with IQ Option is to get started. The longer you debate about whether or not to pursue this path, the less money you can make as opportunities fade into the past. Don’t delay, get started today and see what the future can bring you. IQ Option makes it easy to get in on the binary options markets no matter what your experience level or the amount of funds that you have to invest.
However, it is obvious that they are making their money some way. Otherwise they would have never survived in the market. Where does the money come from in binary options “The broker makes money when the client loses it”. But does this mean that the broker wants you to lose in order to make money? Not exactly. It does not have to. But, somewhat, there is a thin line between earning and making money. Binary options trading is about the decision, between yes or no. However, the process is less complicated than other trading types. Traders around the world can perform binary on different assets such as forex, commodities, stocks, etc. Make Money with Binary Options Trading. To start, let’s be clear: you can make money binary options trading.It’s definitely possible to generate a consistent profit. Smart traders do it every day, executing binaries in everything from oil and gold to stocks and currency pairs.. The question is, is it as easy to make money as a lot of websites claim? If you are just starting out with trading, then this is the perfect guide for you to start making money with binary options trading. Here is our #1 Rated Broker. FREE DEMO. IQ Option – Best Trading Platform. IQ Option is a trading platfrom that is regulated by CYSEC. It is the best trading binary options broker on our website. Binary Options Strategies for Making Money Online Don’t be fooled by what you hear, binary options trading requires very little experience. There is a common misconception that to be successful at option trading, a person must have a lot of knowledge of the markets and binary options trading in particular, that is hardly the case.
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