Binary options are often connected with gambling, for many people it is the same as betting the black or red and so ends 90% of discussions about binary options I have ever had. I began to wonder if maybe there is something interesting in it. That made me realize that this subject has also few bright sides.
The primary advantage will be simplicity of Binary Options. Forget about lots, the value of a pip, leverage, secure, stop out, setting the size of the SL and TP, which all together are somehow a intellectual tax from trading. You need to know meaning of these terms almost to perfection, but you still want to approach this way to effectively analyze markets. In this sense, the simplicity of binary options allows you to focus on the analysis of the market and not on the mechanics of the contract.
Binary Options just as in the case of vanilla options limit the risk of the buyer to the amount of bet. We do not need to worry about the slippage, gap or so called “Black Swan,” which could give us a negative balance despite conservative stop-loss. If you do not fall in overtrading and will be cautious about the value of options on BO market we will survive as long as we allow ourselves.
High volatility does not increase the risk
Every trader sooner or later will feel the pain of position closed on Stop Loss, despite the fact that the market goes in “his” direction”. Because on contracts we must be right, not only in terms of future direction of price movements, but also in terms of size of defensive orders – stop loss. How often you happen to have some temporary volatile price fluctuations, unexpected politics comment or reading of macro data and unexpected pin kicks you out from the trade closing it on stop loss even a moment later it would close with good result? In the case of BO it does not matter what happens in the time between the opening and the expiration of the option. We can deal with Flash Crash and the price can rotate 1000 pips up and down, but if at the time of expiration of option it returns to the correct side the option can expire profitably.
Small volatility does not reduce profits
How many times traders cursed at low volatility or lack of a clear trend, when profits from the trades, even those good were rather poor. At the same time, the cost of opening the transaction and its maintenance (renewal) remained unchanged. In the case of BO profit is the same with no difference how many (1 or 100) pips you were right
Poor Risk to Reward
Yes and no. Standard BO earn for us approx. 80-85% of the profitable option at risk of 100%. This means RR at 0.85:1. For a person trading in a longer term and counting profit many times greater than the risk such RR is unacceptable. However, if we trade within the day (intraday) or inside the session RR 0.85:1 seems not so bad, especially when in quiet period volatility hovers around tight moderate levels. In addition, many people are looking at RR wishfully – ie. expects it to be 3:1. What we can draw from a session is often 1.5:1, max. 2:1. Dividing this by the efficiency and subtracting transaction costs, you may find that the actual RR (gross profit/gross loss) will be even less.
On binary options, low payments must be made up with higher efficiency – when return from an option is 80% – efficacy of the system must be ~60%. However, given the lack of stop-loss, which can knock the price, limited risk and opportunity to focus on the market (less transaction parameters, less places to make a mistake), achieving 60% efficiency does not seem to be difficult.
It is also worth noting that we do not take transaction costs in the form of spreads and commissions, and these often are not know in advance in case of CFDs on various assets.
But you know…
Below are some arguments that appear in the minds of most people probably in contact with the binary options (including me)
60 seconds Binary Options its pure gambling – probably yes, because in such a small time horizon we trade more noise than actual price changes resulting from specific technical and fundamental factors. But no one force us to use such short options. Choose a broker with such options that fits you. There are brokers that provides options for several hours, all day, several days or even several weeks.
BO brokers are crooks – some of them notorious, but the greatest risk is associated with brokers from outside the EU (those without a license), with jurisdiction such as Gibraltar, Vanuatu, Virgin Islands, Seychelles, etc. For your own safety use broker licensed in EU like Cyprus – for example.
BO Platforms are primitive – unfortunately yes. Today, almost every broker uses a browser based solutions with limited functionality. Thus, in trading BO will be necessary to support our decisions with different platform for analysis (MT4 etc.) and opening the BO terminal only for placing the transaction. Fortunately slowly there are beginning to emerge solutions for connecting options with the MT4 as well as other, much more functional platforms. Soon, probably BO brokers will move to modernize their offer.
Trading binary options is like gambling in casino putting on black or red. In a way it is true – as all speculation on the capital markets. Opening a transaction on an instrument as a rule comes down to a question will the price rise or fall. In other strategies investors can bet on an increase or decrease in volatility. Only a few will make money only on market activity (HFT companies, stock exchanges, brokers, etc.). The vast majority of us, however, chooses the direction and time horizon.