If you’re in the world trading or are thinking about getting into it, you might have heard of binary options trading. And although many understand the ins and outs of a binary option, not everyone understands it fully or what the benefits and drawbacks are. There are many styles of trading available to investors, so it’s important to know what is best for you. Let’s talk about what binary options trading is as well as the pros and cons.
Binary Options Trading: Defined
A binary option is a financial product where the person buying it receives either a payout or they lose their investment based on if the prospect has expired. A simple option contract that has a fixed risk and reward, it’s often regarded as an all-or-nothing deal.
How Does it Work?
Trading a binary option involves choosing whether or not an underlying asset (either currency, commodity, or stock) is going to go up or down at a particular time. It’s important to know that the size of your gain or your loss is dependent on the increase or decrease of the product.
Now that you know what the basics of a binary option are, here are the key pros and cons that you should be aware of if you’re looking to try trading binary options–no matter your level of expertise.
Pros of Binary Options Trading
Low Risk Of Considerable Loss
Despite being a substantial risk that’s often associated with binary options trading, the amount of money that’s at risk is entirely in your control. Typically, the contracts that you’ll trade won’t cause significant damage to your finances, and you’ll be fully aware of what your potential loss could be upfront. You’re setting the amount of money that you’re going to put into the trade.
Effective Risk Management
Managing your risk when it comes to binary options won’t be a pressing issue from the start of the process. The level of risk can easily be managed, tracked, and altered depending on your personal preference. Many brokers will allow you to trade as little as $5 at a time, meaning you don’t have to risk thousands of dollars unless you have the money to do so.
Easy to Understand
In comparison to traditional trading, binary options trading is simple. Traders that are operating at any level will find it enjoyable, easy to understand, and (at times) profitable. This results in it being a popular choice for many online traders who are interested in more elementary types of trading.
Receive a Quick and Efficient Payout
Compared to several other types of trading, the return on your capital investment when you’re trading binary options can be rapid and efficient. A return that you can see within either hours or minutes, you’re often offered a payoff on your investment as high as 70%. This is why binary options are an attractive investment.
Trade No Matter the Market Condition
Traditional forms of financial trading typically hold several market condition limitations. However, with binary options, you can not only make money when the prices are rising but also when the prices are falling, if you do it correctly. This results in you being able to open up a variety of different trading strategies, leading the way for higher profits.
Trade Anywhere, Anytime
Similar to a variety of types of trading, you’re able to trade binary options online, making it a convenient process that anyone can do. There are dozens of binary options trading brokers across the world who offer the chance to trade no matter what device you’re on. This allows you to trade when you’re on the move as well as checking your options when it suits you.
Cons of Binary Options Trading
No Way to Practice
If you’re used to trading traditional options, you know that you can download software that will allow you to submit practice trades. This offers you the opportunity to hone your trading skills and create a strategy that you can then use when it comes time for the real thing.
Practicing gives you confidence if you’re considering real-money trades, but you’re unsure of the risk. While individual binary options brokers offer no-risk accounts for practice, the majority of online brokers have yet to provide this convenience. This makes it more difficult and riskier for those wanting to try trading binary options for the first time. Note that in the future, more brokers are likely to offer this, so keep an eye out for updates.
Potential for High Risk
Generally, you can control the amount of money that you trade, but bigger payouts will tend to come from bigger risks. It can be challenging to determine when to take action because market movements are inconsistent, and you sometimes only have a brief window of time to decide on a trade. This may lead to riskier choices. If you put a lot of money into the deal, chances are you won’t see a high profit.
Limited Trading Tools
Many brokers won’t provide you with informative materials and tools to support and assist with your decision making. With the fast-paced and high-risk nature of this form of trading, it can be easy to get caught up in what you’re trading and ignore the potential risk of losing. If you don’t check your key performance indicators, you could find yourself in an unfavorable financial state.
Unbalanced Ratio Between Wins and Losses
Like with traditional trading, if you fail, you can face losses of up to 100% of your initial investment. Of course, if you win, you can receive favorable earnings of up to 70% of your original investment (depending on the broker that you choose). It’s therefore worth weighing up the percentage ratio between a win and a loss with your preferred binary options broker.
More Expensive Than Forex Positions
It’s good to know that binary options tend to be more expensive to trade than forex positions. They also generally offer a lower payout than the forex market. However, despite the lower price, the level of risk in comparison to forex positions is lower.
In the United States, binary options tend to trade on platforms that are fully regulated by the Securities and Exchange Commission (as well as other prominent regulatory agencies). However, it’s vital that you’re aware that the binary options trading elsewhere might not be regulated, and the legalities are different.
If you’ve traded with an unregulated broker, you could be at risk of fraud. Therefore, before trading internationally, it’s essential that you understand the regulations of trading binary options in a specific country. Alongside the rules, you should also be aware of the broker fees, tax, licensing, etc.
It’s not just abroad that you could be at risk of a scam. There is a history of online brokers scamming people out of the money that they invested. As it’s seen as a simple form of trading, it’s easy for scammers to take advantage of the traders. Therefore, it’s worth looking at the reputation of the broker, reading reviews about them, etc. before trading through them.
Those are the top pros and cons that you should be aware of when it comes to trading binary options. At the end of the day, it’s up to you as to whether trading binary options is the way to go. Although many traders might find that the process is straightforward, others might find it a little more complicated. That’s why it’s important that you research exactly how to trade within the market and seek software that allows you to undertake practice demos beforehand.