The Binary Option
Binary options gained immense popularity over the years, luring in dumb money from the four corners of the earth.
To understand binary options, opposed to traditional forex trading, the expected Return on Investment (ROI) is predetermined by the binary options broker, often above 70% (known as the payout) as well being confined into a predetermined time frame known as the expiration.
To simply, if I believe the price of EUR/USD will fall within the next 15 minutes, I will place a binary option predicting the price will fall (known as a put option) with a 15 minute expiration.
If I decide to invest $100 in the trade, my ROI would be 70% or $70. If by the end of the 15 minutes EURUSD is lower than the executed price of the binary option (known as the target price), even by a tenth of a pip I would claim the full 70% ROI. Of course, if EURUSD will trade higher I would incur a loss of $100.
The expirations vary from 30 seconds to over 30 days and are spread across four different asset classes, Forex, Commodities, Indices and Stocks. What you are about to read next will salvage your investment from being electronically transmitted into the broker’s pockets.
I Have a Binary Dream
Capitalism created an augmented reality where everyone can become millionaires, sponsored by the American Dream. Sadly, the ugly face of life is about to teach you how far you are from this magical dream, on your flesh. The idea that trading the markets have the potential to elevate you to the pinnacle of the finest upper class is masked by an invisible misty cloak called reality.
A reality that will literally bite a bug chunk of your invested capital, leaving you trading account to bleed out the losses, intertwined with dark psychological emotions that will only prevent the open wound from healing.
Trading is one of the most difficult arts in the world where education or trading experience may not qualify you into a successful trader.
Acknowledge that despite the lucrative ROI, trading strategies, risk management, trading psychology, deep market understanding, smashing the ‘American Dream’ and the will to accept losses must be exercised before attempting to step into the financial markets.
Based on our experience, avoiding the death-dream-trap will preserve your market investment and hopefully eliminate unnecessary losses.
A Quick Buck
This is how we label binary options expirations of 30 seconds, 60 seconds, 2 minutes and 5 minutes. If you are a fundamental trader, executing trades with such expirations may not be inline with your trading strategy.
Fundamental traders often observe key economic data such Gross Domestic Product (GDP), monetary policies, interest rate announcements etc. Employing such short-term expirations may not be suitable at all.
In fact, this appears to us as a great recipe for a ‘Quick Loss’ rather than a ‘Quick Buck.’ Such fundamental strategies will often target the medium term (such as three months) and not 30 seconds.
If you are a technical trader, we are certain you have adopted or developed your own technique for trading binary options and perhaps you believe you have conquered the market. We have a great article on how to improve your forex trading signals today.
How can you be so right when you are so wrong? The success rate of technical analysis is significantly reduced when trading on time frames such as 1 minute, especially in the Foreign Exchange market.
Even if you are a hedge fund manager, the amount of skill that is required to successfully trade such expirations is immense in terms of psychology. Can you emotionally handle 10 consecutive losses in 30 minutes? If not, your gut feeling will recommend you to invest more capital in the next option in order to compensate for the burnt-to-crisp capital.
Such activity will cloud your rational thinking and may cause a greater pain to your investment when the earlier loss is now blown into monstrous dimensions, the outcome of the Martingale.
ROI and Price Manipulation
In ROI terms, brokers will often offer a reduced payout for short-term expirations and inability to realize the trade ahead of the expiration.
So why trade such expirations? Despite the European regulations, trading such expirations open a door for market manipulation by the binary broker as just a tenth of a pip/cent/point requires to fulfil the terms for the fixed payout.
Although the broker has the ability to manage its exposure on the North American Derivatives Exchange (NADEX), the trades are often placed in a Market Making (MM) environment, hence the ulterior motive for manipulating the quotes of your selected financial instrument.
Flimsy trading strategies, creating a window for manipulations, lower payouts and greater psychological risks are sufficient logical reasons to avoid such expirations and focus on at least 15min expiration where a greater payout is offered and the much-needed ability to exit the trade ahead of the expiration.
You’re welcome to review our Advanced Trading Strategies to enhance your trading abilities.
To conclude, no pot of gold is stashed at the end of the 60 seconds rainbow. It is important you fully understand the risks of trading the market before head-diving into an unlimited pool of liquidity. We also suggest to carefully select your financial broker.