Recent years have seen a new branch of the “Forex” world grow and take root, if I can mix my metaphors. That’s binary options, a type of trading different to “spot” which has always been offered by more traditional Forex brokers. The difference between these two types of trading tends to be confused. Both binary options and spot can be traded on the price of anything, Forex, commodities, CFDs, stocks, or whatever. The difference is how much the trader wins or loses depending upon the result. In “spot”, you trade the price itself, while in Binary Options, you trade a derivative of the price. For example, if you buy 1 lot of spot EUR/USD and the price goes up by 10 pips, you make $100. If the price instead goes down by 10 pips, you would be down $100. You can exit the trade whenever you want (if the market is open), and whenever you want.
Binary options trading is completely different. A typical binary option is a lopsided bet on where the price is at a specific time in the future. For example, if the price of EUR/USD is at least 1.0900 at 8pm London time tonight, you win 85% of what you bet. If it is not, you lose 100% of what you bet. So, there are two crucial features of binary options trading: a) to break even, you need to win at least 60% of your trades (given a typical payout of 85% on winners), and b) how far away the price is from the cut-off point is irrelevant.
When we consider that one of the most important maxims for profitable trading is “let your winners run”, we can see why binary options trading is a game for losers. The only way it can really benefit a trader, is if a trader has a very strong belief that a certain level is going to not just hold, but hold so strongly that there is a greater than 60% probability that at X time, the price will be on one side of that level. Such opportunities are few and far between and can only be exploited by true experts. So, for retail traders who do not have access to bank order flow, binary options trading is an almost impossible way to make any money.
I believe that these issues are beginning to percolate down into the collective consciousness of the trading world, and are causing many brokerage operations to move away from binary options. This is something we are seeing happen more and more. It also doesn’t help that, as traders lose so much money so quickly trading binary options, it is very attractive to criminals, who have set up a number of fraudulent binary options brokerages. These criminals have not only given binary options an even worse name than it deserves as a bad way to trade, they have also attracted to attention of law enforcement and triggered an increasing lobby for a worldwide ban on retail binary options trading. In fact, they have helped to give trading and Forex in general a dirtier image than they truly deserve, even given the other negative consequences that are an inevitable part of allowing people to trade freely.
