Binary options trading sounds as if it is legitimate, you will be dealing with stocks, commodities or currencies.
However, lately, there have been many programs launched on the internet with software that can supposedly predict the results. There have also been calls that this is no better than gambling. Then there are the fraudulent trading platforms that can perform a number of dishonest acts to cheat their clients.
Some bad press for this form of investing. In this review, I will see if this is a good way to make money or nothing more than gambling.
A little history
Binary options trading really began in 2008 when the Securities and Exchange Commission (SEC) approved the trading of these options. Since then, it has developed very rapidly and in the US binary options are regulated by the Commodity Futures Trading Commission (CFTC)
In the beginning, the trading was more complicated than today and there was only one choice, that an asset’s value would rise. Since then there are several factors that have caused a much greater interest in this form of investing:
- The broadening of the types of options available
- Improvements in the trading platforms that have made trading of binary options quite simple
- The introduction of foreign exchange binary options
Binary options have been adapted to the internet so investors can trade from their own homes and this form of trading has become very popular. There are now many binary options brokers or trading platforms, new tools and indicators. The increased numbers of binary brokers have created increased competition and has forced the brokers to improve their trading platforms.
As happens so often when something is successful, there are many people who are ready to scam others out of their hard-earned cash. Therefore you must research before signing up for a trading platform or trying software that promises easy money.
What are binary options?
Binary options allow people to profit from the movement of a large range of financial assets. This is called binary option trading because there are just two outcomes win or lose or in this case up or down. The investor takes a position that the price of the asset will either be higher or lower at a given time. These positions are known as Call or Put trades.
This is easier than traditional options where you have to guess the extent of the price movement and has the advantage over other forms of investing, in that you don’t actually have to buy anything.
These are some of the advantages over other forms of investing:
- Easy to understand
- You only need to consider the asset’s price
- How much you will earn is predetermined
- Adaptable trading strategies
- Trade at any time
- You will know the result very rapidly
How does binary options trading work?
Ideally, as a trader of binary options you should have some knowledge of the asset you will be trading. You should treat this as a form of investing and take some time to educate yourself on how it works, learn how to read charts, study the markets and hopefully at the end of the day you will make successful trades.
Binary Options can be traded on stocks, commodities, stock market indices or foreign exchange pairings (USD/EUR). The attractions in this form of trading are that it’s easy to understand and can be profitable with quick returns. But as with all investments in the financial markets, there is also a risk of losses.
To get started you need to sign up with a broker and then get some practice using the demo accounts they provide. It’s always beneficial to have a good look around and test your strategies. The best brokers will provide some help and support, so if you have any questions don’t be afraid to ask. Many brokers will require a deposit before you are able to access their demo account. This deposit is usually refundable should you decide not to continue. As always, carefully check their terms and conditions before committing yourself.
If you try to start straight away without having tested your plan of action, you will rely on luck and you will lose your money. To have a chance of making money you need to know the essentials of the asset you will be trading and you should also be aware of any events that might affect the asset.
For example, if you’re trading a company you should know when they will declare their results or launch a new product, if you’re trading currencies you should know when a country will release financial news or when a central bank is due to make an announcement on interest rates.
Once you are happy with your strategies you can start trading for real.
- Choose the type of option
- You should have decided which asset you will be trading
- Decide whether you think the asset will increase in value (CALL) or decrease in value (PUT) between when you open the trade and when the contract expires.
- Decide how much you want to invest
- Choose the expiration time this can vary from anything from 60 seconds to 24 hours and sometimes longer
When everything is selected, you sit back and watch the progress of your trade.
Different types of options
There are several different types of options:
- High/Low options also known as Call/Put options are the most common. The trader decides if an asset will go up or decrease in value in a given time frame
- One Touch or No Touch options. With a one touch option, you predict that an asset will reach a certain price but may not maintain this price in a given period. Once the price has been reached you have won even if the price falls afterwards. No Touch options you win if the price doesn’t reach a predefined level before the option expires.
- Range options – In Range -the trader is given three rates, the current market rate for the asset also an upper and lower rate. This will be a winning trade if the price of the asset is between the upper and the lower rate when the option expires. Out Range – this will be a winning option if the asset’s price is outside the upper and lower limits when the trade expires.
Types of assets to trade
- Stocks (Apple, Google, Boeing, Ford etc)
- Commodities (Gold, Silver, Copper, Oil, Sugar, Rice etc)
- Indices (FTSE100, DAX, NASDAQ CAC40 etc)
- Currency Pairs (GBP/USD, EUR/USD, GBP/EUR, USD/JPY etc)
Binary options trading platforms
As trading binary options becomes more popular, there are more and more online trading platforms appearing. As a relatively new market, there are many new platforms out to get new traders to sign up with them. There are legitimate platforms that have a good record, but unfortunately, there are also other brokers out to get the traders money.
One thing to be aware of is that most trading platforms are operating from outside the US. This gives the US investor very little choice when looking for a platform that is in compliance with US regulatory requirements. Below is a video from one of only three boasting compliance with the CFTC: NADEX.com (North American Derivatives Exchange).
Most binary option trading platforms are registered in Europe and there are a few things that you should verify before choosing a trading platform:
- How they are regulated – this will depend on what country they trade from.
- Make sure the platform is web-based and doesn’t require you to download any software. This means you will be able to access the platform from any computer
- Different platforms have different payout percentages. A binary contract pays a fixed percentage of your investment, choose a platform that offers 65 to 70%
- Some platforms also pay a small percentage if you lose your trade (out of the money) Although this may not be much, every little helps
- Make sure the platform offers a wide selection of the assets you are interested in trading, they should ideally also have a full list of all the different types of assets and a wide range of expiry times
- Can you withdraw your money at any time? Check their policy on withdrawals and methods for withdrawals and payments
Additionally, these are some features that should be included in a good trading platform.
- Good customer service – good idea to ask a few question before you sign up to see how reactive they are
- A demo account, accurate stock prices and latest financial news
- An education section with information, articles, courses, ebooks etc
How trading platforms make money
Trading platform scams
The SEC has issued a warning about fraudulent binary option trading platforms. The most common scams are:
- Failure to credit the investors account or not allowing fund reimbursement. To open an account with an online broker you have to deposit a minimum sum. As an investor you use this sum to buy options, amounts are credited or debited from the account depending on if your trade is successful or not. There have been complaints of investors not receiving their due credits and not being able to withdraw the money in their account.
- Identity theft – some internet-based brokers have been collecting credit card info and data from drivers licenses. If a trading platform asks for photocopies of any personal information don’t give it.
- Exploiting the software to produce losing trades. There have been complaints of people having a winning trade when the time limit expired, but the trade continues until it becomes a loss.
Binary options trading software and programs
I don’t think it is possible for software to predict whether a market, commodity, stock or currency will rise or fall. There are certain times that we can guess what will happen. When for example the unemployment figures are published and the general expectation is that they will fall. In this case, you would expect the markets to rise, but if the fall is less than expected the markets might actually drop. This means even when there is some information that you are expecting, you might only be right some of the time.
There are many programs that say they can predict the markets, but of course this isn’t possible, so these programs are scams. Often they operate as follows:
- Secret software with promises of large returns in a short time
- Free access
- But to get the free access you have to open an account and deposit $200/$300 with their chosen broker
The owner of the software will make a commission from the broker and you will lose your money because the software doesn’t work.
Is binary options trading gambling?
If you trade on the spur of the moment without any strategy, short term trades, then this is gambling and I can imagine you could easily become hooked on this. Even if you have a strategy and study charts I would still call this gambling. Most investments are gambling – you risk a sum of money on a result that isn’t certain.
Nevertheless, there are traders, that I would say make an educated guess. For instance, trend traders will trade when an asset’s price has been rising or falling for a long time. To trade this way you must first be able to identify the trend. This is done by studying charts that show the current and past price movements. By doing this they hope to be able to anticipate an asset’s price movement over a short period of time. Perhaps with experience, they will win more trades than they lose, but it still looks quite risky to me.
In addition, the odds are stacked against you. To break even you will have to make more successful trades than losing trades. This will vary depending on the platform, but a figure of 55% of successful trades to break even is average, meaning that if you make 100 trades, you will have to win 55 just to break even.
My final opinion
I must admit I find binary options trading quite exciting, but it seems like a form of gambling to me. Therefore, if you do decide to try this, you must only invest money you can afford to lose. Before depositing your money with a trading platform do your research to make sure they are legit and if possible registered with the CFTC. You can use the FINRA broker check to verify the background and registration status of any platform you are considering joining.
There are people who make money trading binary options, however, they are probably people who have extensive knowledge of the financial markets. For me trading binary options can be fun, but stay away if you can’t afford to lose your money.
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If you have tried binary options trading, I would love to hear your experience. Did you win or lose? I hope you enjoyed my review and if you have any questions, please leave a comment below.