Binary options have garnered enormous popularity ever since the SEC approved their listing status back in 2008. Investors have embraced the new genre due to its inherent simplicity, trading primarily on stocks, indices, commodities, and currencies, but critics have claimed the new phenomenon is nothing more than gambling, cleverly cloaked by the prevalent use of investment terms on broker websites.
Forex traders appear to dominate the action, based on recent disclosures made by brokers in the industry. “Investors” can choose from a host of currency pairs, and the objective is to forecast the direction of pricing behavior within a specific time period, usually thirty minutes or less. Payouts are predetermined, ranging from 70% to 85% in most cases, and if you guess wrong, your broker may even refund up to 15% of your principal. If you do the math, you must be right over 55% of the time to be a successful, suggesting that the odds are stacked in favor of the “house”, as in Vegas.
Successful forex traders, however, are very accustomed to having to “tilt” the odds in their favor by employing a combination of fundamental and technical disciplines in their respective strategies. By cutting losers off early and allowing winners to run, there are ways to make a “50/50” proposition resemble “60/40” in short order. A business-like approach is necessary, and you must pick your moments carefully, not jump in with both feet when your intuition is piqued. Position sizing and risk management play major roles in this process, too.
Brokers have developed their own proprietary trading platforms, which tend to be very straightforward in their presentation, another benefit driving popularity. If you had chosen the “AUD USD” currency pair to trade, for example, your screenshot for the simplest forex binary option would display a current rate, say $1.0710, a chart for the previous hour, a split by percentage of current trades in action, a payoff rate (let’s use 75%), and an expiration time limit. Your decision would be to commit an amount, say $100, and pick a direction that you believe the price will move, either up or down.
There are no commissions to pay, and, if you guess correctly, you have made an immediate 75% return on your money. If you lose, you may get 15% back, as long as your broker has made this commitment beforehand. The broker seems to have 10% riding on his behalf to cover costs and risk, but for a forex trader that uses leverage to magnify potential gains and broker fees, the “playing field” is not that different to a degree.
Most brokers also offer what are termed “Option Builders” that permit more flexibility in setting variables and payoff requirements, adding to the complexity but allowing the trader to customize the process in line with his personal trading strategy. Additional tools at hand, either from the broker or accessed independently by the trader, provide more guidance for the ultimate directional prediction.
Why does this trading genre have so much appeal? Here are a few reasons:
- Your potential loss or reward are fixed upon execution of the trade;
- There can be no margin calls under this scenario;
- Setting stop-loss orders or being stopped out by the market are no longer events to worry about;
- Broker asset class offerings are diverse, and
- Your trading experience is customizable.
There is one downside. You may need to find another broker for forex binary options. Most forex brokers do not have the specialized trading platform and back-office required for this activity.