Just How Safe Are Binary Options?
Binary options have gained quite a reputation in the media over the past half decade, and they still remain one of the most exciting trading options for many individual traders. It isn’t hard to see why there is so much excitement, but does that translate to smart trading on a safe venue, or are binary options simply a glorified version of gambling that shouldn’t be a consistent part of any safe portfolio or trading plan?
While there are some professional traders have talked about binary options in a positive light, there seems to be a very large number of traders and individuals who are on the other side of the equation. Binary options have an incredible amount of risk attached, one that definitely favors the house, and the mathematics of overcoming that edge have really brought about some very justified criticisms of binary options in comparison to many other methods of trading.
So just how safe are binary options?
Read on to learn more.
How A Binary Options Trade Works
The concept is simple, which is part of why it might be considered deceiving in some ways. Whatever a trader decides to place a bet on whether currency, stock, commodity, or something else entirely, they choose a specific time and price. Then they say whether they believe the price will be higher or lower than that stated amount.
If the trader is right, they will get the original bet back plus a pre-determined amount figured during the placement based on how likely or unlikely the broker thought their bet was to cash. If it was extremely likely, the trader will earn a small bump. If the best was extremely unlikely, they will earn a large amount back with the original trade.
However a loss means 100% of the amount that was put down on the bet will be lost. There is no losing 10% or losing 5 points, it’s all or nothing when it comes to binary trades, and that type of setup is what makes the mathematics really tricky for most traders.
This doesn’t even get into the fact that a position in a binary options trade actually is called a “bet,” just the same as if you put down chips at a craps table or put in money during a poker game. Not the most reassuring terminology to a trading method wanting to appear more respected and reliable than gambling.
Does The House Always Win?
If these “investments” are going to be called bets, then is it fair to ask if the house always wins? There’s a reason there are so many brokers willing to run very aggressive affiliate campaigns – and it’s not because they’re charities looking to give money away. The amount of time a trader has to be correct versus incorrect is going to vary based on a number of issues, like the payout amount if correct. Figuring out the answer to the question “Just how safe are binary options?” depends enormously on figuring out this number.
Generally speaking a trader can figure out a general rule of thumb “break even percentage” by this formula:
BEP = %R / (%R + %PO)
BEP is “Break Even Point,” R is the amount risked (which is almost always 100 since it is all or nothing), and PO stands for the percentage payout if you win.
Supposing the payout is 80% if a trader wins a position (this is a common across the board trade out number) then the break even point is 55.5% meaning the trader must be correct 55.5% of the time just to break even. This number is even worse if working with a broker who takes a transaction fee for each trade, although it can be slightly better if a trader gets a deal or “rebate” agreement so they put up 85% or 90% of a trade instead of 100%. These are relatively infrequent but still occur.
So to show how this works:
Normal: BEP = 100% / 180% (since 100 + 80 + 180) = 55.5%
If a trader negotiated a 10% rebate it would look like:
BEP = 90% / 170% = 52.9%
At a 15% rebate (good luck getting that deal)
BEP = 85% / 165% = 51.5%
So why is all this math important?
Because it speaks directly to answering how safe are binary options for most people. Which is to say, unless a trader has a stunningly consistent track record, not very. Even in a best case scenario of losing 85% instead of 100% and being mathematically consistent (a near statistical impossibility), and not having any fees of any kind, the trader still must be correct on 52 of 100 trades to end up ahead – and only barely at that.
For the standard setting it takes 56 out of 100 trades to end up a sliver ahead. Those are not great odds at all, as any gambler will tell you.
Are There Any Ways Binary Options Can Be The Safer Choice?
There’s a lot of controversy over the idea that binary options are ever safer than other approved trading methods but they do bring one thing to the table that some others don’t: a floor. The trader knows ahead of time the largest possible amount that can be lost on a trade, which means a trader can set the floor and not have a plunge drain their account, which has been known to happen with Forex traders many times.
This is the one place where there might be a little bit of an argument made since one bad trade won’t run wild and drain a trader’s entire account and send them into debt. However, with that being said there’s no chance at a strong run that makes a ton of money and balances things out, either.
As Always, Risk Can Vary
When getting to the bottom of the question, “How safe are binary options?” it’s worth noting that for every loser there also is going to be a winner. Risk varies based on just how thoroughly a person understands the market or markets they are investing in, the math behind their break even point, and whether or not they can consistently stay well above the 50% mark. There are a lot of people touting binary options, but it’s easy to see why non-affiliates are still casting a very wary eye in that direction.
7 Binary Options Trading Strategies Examples
Binary options trading is one of the most popular trends in the financial markets currently. Beginner and experienced traders alike are rushing to include binary options in their investment portfolios. Just as with any other business or financial instruments, it is important to have a strategy to make money consistently.
Having a strategy in place is critical to the long-term success of any binary options trader. The best strategies for trading binary options can be defined as trading methods or approaches that make profit consistently. If you are a beginner trader looking to get into binary options trading, here are 7 binary options trading strategies examples.
1. Straddle/Fence Strategy
The straddle trading strategy is designed to help traders protect their trading investment and optimize the potential of their trades. It is best applied when the market is particularly volatile and just before the break of important news related to a particular trading asset.
It is one of the most popular binary options trading strategies. It is best known for presenting a trader with the option to avoid having to choose between a Call and Put, but instead selecting both on the asset chosen.
The strategy is best used when the market is volatile and prices are fluctuating up and down within a given range. This will allow you to make a Put when the market is at its highest trading range and a subsequent Call once the market is in its lowest trading range.
If the price variation is wide enough, chances are high that the trade will close in the money (ITM) for both ends of the trade. The strategy is loved by traders since it greatly increases the chances of success since at least one of the trades can end up in the money.
2. Breakout Trading Strategy
The strategy is quite popular among traders that love using technical analysis. Technical analysis is used in this strategy to identify trading opportunities specific to a situation where the underlying asset’s is just about to experience a major shift within a short period of time.
The strategy involves identifying zones of support and resistance in the trading range of a particular asset. It is in these zones where the trades/transactions will be taking place. Call options are chosen when price breaks through resistance zones while Put options are chosen when price breaks support.
3. Trend Trading Strategy
The trend trading strategy is sometimes referred to as the bullish/bearish trading strategy. It is one of the most popular trading strategies and it is not hard to see why. The strategy is not very hard to implement even for beginners.
The trend trading strategy works by helping traders capitalize on the underlying asset’s strong price movements in one direction i.e. upwards or downwards. The strategy is not hard to implement since it is easy to identify direction bias in market by simply looking at price charts.
The trend trading strategy is used in binary options trading by choosing a Call option if the market is trending upwards while a Put option is selected when the market is trending downwards. The key to maximizing investment with this strategy is knowing when to exit the market.
4. News Trading Strategy
The news trading strategy is one of the simpler binary options trading strategies examples used by traders today. It is best applied to binary options trading because of the short-term nature of binary options.
Binary options trades usually have short expiry periods unlike trades in other assets such as stocks, CFDs, and currencies that can range anywhere from a few minutes up to several years especially for assets such as stocks.
The key to the successful implementation of the strategy is having an understanding of how certain news items and economic reports can influence a particular market. Binary options traders that rely heavily on the strategy have a solid understanding of fundamental analysis.
5. Correlation Trading Strategy
The correlation strategy might seem sophisticated, but only for those that don’t really understand it. The correlation strategy relies on the interrelationship between the price movements of two different underlying assets.
If you have an understanding of the assets you are trading, it is possible to leverage the price movements of one assets to make corresponding trades in other assets. The strategy even works when the assets are from different classes.
A simple example of how to implement this strategy goes like this: EUR/USD is inversely correlated to the USD/CHF. So, you can leverage an upwards price movement in the EUR/USD to choose a Put USD/CHF option and a downwards movement in the EUR/USD to choose a USD/CHF.
6. Range Trading Strategy
The range trading strategy is used when prices of the underlying asset are fluctuating within a particular range. The key to successful implementation of the strategy is to find support and resistant levels where trades can be executed from.
A Call option is chosen if prices of the underlying asset are trading close to the support level. Conversely, a Put option is chosen if prices of the underlying asset are trading close to the resistant levels. The strategy requires having technical analysis skills and might not be suitable for beginners.
7. Swing Trading Strategy
The swing trading strategy is typically geared towards trading breakouts that occur within a short time frame of between 15 and 30 minutes. The strategy heavily relies on technical analysis to help traders identify possible breakout points and make appropriate trades.
The Bottom Line
The reality is that there is no holy grail trading system when it comes to binary options trading. However, there are strategies that work that are currently available such as the 7 binary options trading strategies examples discussed here.
Once you find a strategy that you like, try it out on a demo account to find out if and how it works. If you run the strategy on demo for a while and have good results, you can now start trading it live. If you find a strategy that works over time, you will be successful in your binary options trading.