Before you jump headfirst into binary options trading, heed these five warnings before placing your bets. If you look up “binary options” on Google, the fourth article down is this article on Forbes magazine, warning would-be traders not to gamble on binary options. Of course, we are considering that you might be a gambler if you are visiting our site to learn more about betting binary options. There is nothing wrong with that if you gamble responsibly.
And if you are investor, you surely know that binary options are a legitimate investment vehicle offered by Nadex and other key exchanges.
That article on Forbes raises some good points, though we think it oversimplifies in some respects. Yes, binary options can become addicting—but that depends on the personality of the trader as much as anything. Discipline is essential for serious traders and gamblers alike. Secondly, we disagree that “no one, no matter how knowledgeable, can consistently predict what a stock or commodity will do within a short time frame.” There are enough pro traders out there who do this on a daily basis that we know it can be done. Can you do it, with what you know now? Probably not. That is something else to address. We do agree with the article regarding the house edge though, which we will talk about below. Here are our top five binary options warnings:
- The house does have a serious edge.
- Trading can indeed be addicting.
- Not all brokers are legitimate. Most, in fact, are not.
- You are not as smart as you think you are.
- There is a real element of risk with binary options trading.
1. The House Edge
A lot of binary options brokers sell themselves to customers on the basis that it is a 50/50 shot whether you win or lose. While on some level this makes sense, that does not translate to a breakeven in your bankroll. Why not? Because you do not win 100% of your investment, and while you do get an out-of-money reward when you lose, it does not make up for the gap. If a broker pays out 75% on trades you win and returns 15% on trades you lose, that results in a gap of 10% in the broker’s favor. That means that if you win half your trades, you are actually losing money. You have to win more than half to break even, and substantially more than half to profit over time.
That does not mean you cannot profit. What it does mean is that it is going to be harder than you think, and you will not be able to do it by sheer chance. Over time, you will lose money unless you have a reliable method.
2. Trading Can Be Addicting
Binary options websites are set up to offer maximum ease of use. It takes minutes to understand the platform and get set up with an account, and with such small expiry periods offered (as little as 60 seconds per trade), binary options trading facilitates an addictive gambling mindset.
How do you get around this? A combination of discipline and slowing down is best. Whether you are using a trading method and trying to seriously invest or you are just trading to enjoy yourself, it is essential you learn money management rules and learn to set hard limits on your trading expenditures. You can also skip out on those really short-term trades for a while and focus on longer timeframes which are less likely to tempt you to burn through your bankroll overnight.
3. Not All Brokers Are Legitimate
We are at a time where regulation in binary options trading is minimal. Cyprus and a couple of other countries are working on regulations which will govern the operations of binary options companies. But aside from Nadex and a couple of other exchanges, there are no truly regulated binary options brokers operating as such. There are binary options brokers who are regulated under other laws set to govern private banks, casinos, and Forex brokers. There are also legitimate companies out there with strong reputations which are working on getting regulated under those laws or under new laws as soon as possible.
How do you find the good brokers and avoid the bad ones? We have a list of binary options brokers to get you started on the right track. These brokers have met our standards for compliance and transparency. They should also meet yours, though. We suggest you test out their customer service teams with any questions you have and read all terms of service and FAQ pages carefully before you join any binary options website.
Nothing will kill you faster in trading than overconfidence. Just as binary options trading often appeals to people with addictive mindsets, it also can appeal to people who believe they understand more about the economy than they do. Are you attracted to binary options trading because you think you are an expert on stocks, even though you never have studied them? Do you think that your understanding of the global economy is so strong that you can predict the price of oil, all because you watch CSPAN every night? That does not mean you know enough to trade profitably. You are not going to make a killing in the market in 60 seconds because you have strong political views or think you have an intuitive sense for the market. You will only lose money with this mindset, and fast.
Confidence in yourself is good, but overconfidence is not. One is built on experience, discipline, and learning, while the other is built on hubris. Overconfidence leads to trading losses, where as confidence which is well grounded can help you to succeed in the binary options market. If you are interested in building confidence by learning how to trade, then check out our tips and strategies.
5. Risk is Unavoidable
Binary options trading involves a high degree of risk, as does any other form of investment. With the house edge set against you, that element of risk is higher in binary options trading than it might be with some other types of trading. If you want to trade, it is essential that you understand that you can and will lose money. Whether you win or lose over the long term however, depends not only on chance but on how you deal with uncertainty.
There are ways you can reduce the influence of luck. These include learning how to manage money, trade using a reliable method, and develop self-discipline. You can view these as a three-pronged formula for success. With all three under your belt, you are ready to trade. If you are missing any of these three ingredients, you are not ready yet. They are also all part of an ongoing journey toward success. You can never stop learning about trading, and never stop learning about yourself. The more time and effort you invest in yourself and your training, the better you will be able to minimize your risk and maximize your profit.
The fact that binary options trading involves risk is not alone a reason to avoid trading. Neither is the temptation to be unwise with your spending. But you should pause and consider how you are going to be responsible and disciplined before you start trading binary options, whether for fun or for profit.
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