What once started once as an over the counter instrument designed by investment banks, has evolved into a global industry with millions of traders.
Given the immense interest in Binary Options, the internet has been flooded by dubious brokers, internet marketers and dream sellers.
This is unfortunate as not only have they scammed numerous people across the world but they have also tarnished the industry and left people with negative perceptions.
Hence, there may be many people who would even be asking whether binary options are even legitimate? Can anyone really make money trading these instruments?
An Overview of the Instrument
Taking a look at the industry requires a thorough understanding of what a binary option instrument is. We have covered the Binary Options basics previously but very simply, Binary Options are an exotic variant of traditional vanilla options.
Unlike with traditional vanilla options, a Binary option only has one of two options, 0 or 1. The positive pay-out can also be some positive scalar with a lot of Binary Options having a 100 pay-out.
As such, a binary option has a stepwise pay-out function that is instantly recognisable from a traditional option. This is on the graph to the right.
Binary options have been traded OTC (Over the Counter) for a number of years by investment banks. This could either be to take a view with a defined payoff at the end or merely to hedge an event with a binary outcome.
The binary options that are sold between in the Investment Banks are generally quite complicated and the option pricing has a number of different variables which drive it.
However, when it comes to the simple payoff, how to make money on binary options is generally easy to understand. It has become as simple as knowing whether an asset will go up or down. It is for this reason the instrument has become such a popular one on the retail market.
Unlike traditional forex that relied on an understanding of leverage, stop losses, entry points and spreads, trading a Binary Option is straightforward enough. You would decide whether a stock is going up or down. Based on what happens, you would either get some predefined percentage or you would lose your initial investment.
How did it Begin?
Binary Options first started to appear on the retail market back in 2009. Traders enjoyed the idea of entering a trade with a predefined payoff structure.
Other traders liked the idea of being able to pay a relatively small option premium with a much larger positive pay-out. Indeed for a few years traders and brokers alike enjoyed a relatively respectable trading record.
Legitimate binary option brokers respected their clients and the traders themselves knew that there remained a certain degree of risk and they needed to have a reasonable strategy in place in order to make consistent returns.
However, it was when the previous online casino and gambling shops and affiliate marketers got on board that the market started to take a turn for the worse. Similarly, some scammy forex operations that were being shut down decided to move into Binary Options.
Far from being a trading instrument with some degree of risk, they were presented as a wonderful financial instrument with no risk. Brokers and salespeople were telling pensioners and inexperienced traders that trading binary options were the solution to all of their financial needs.
We have kept track of all of the Binary options scams throughout the years and are able to easily spot them. These have all been thrown at all amounts of people globally.
Indeed, the first interaction most people will have with Binary Options is likely to be a scam. This is indeed unfortunate as it has created a deep level of mistrust throughout the industry and made many people wonder whether Binary Options are legitimate.
Where is it Going?
Many industry insiders and traders see Binary Options going the way of traditional Forex traders. There was a time when there were a number of scammy forex brokers who were forced out of business by the authorities.
What remained were well regulated and legitimate forex brokers who really enjoyed the trust of their clients. Indeed, it seems as if many brokers have already decided to take this route and seek regulations.
We have covered Binary Options Regulations previously and are of the view that a regulated broker is indeed a wise first step. Brokers who are regulated have to meet a number of minimum requirements before they can get the stamp of approval.
Regulators such as CySec have also become way stricter in the manner with which they have dealt with brokers who have operated in a dishonest manner.
As more Binary options firms become regulated then the dishonest brokers and scammers will get shutdown. This will mean that traders will be able to easily choose brokers without the spectre of running into a trap.
Can a trader Make Money?
Given the vast amount of scams out there, a number of people are of the view that one cannot realistically make money with Binary options. If a trader lands up with a broker or a trading system that is dishonest then they are most likely to lost money.
Yet, Binary options as an instrument itself can make money for the trader. They are a legitimate investment and trading product just like forex pairs and other derivatives.
However, like trading any other financial product, the trader needs to have an appreciation for risk as well as have an effective strategy. Trading binary options requires a certain degree of education and training. It is not something that someone with no experience can easily pick up and make sustainable returns doing. It requires a concerted effort as well as discipline.
However, if the trader is indeed serious about making returns trading Binary Options, they are still one of the best instruments to use for a risk controlled binary options strategy.
How to Make Money with Binary Options
Now that you know that it is possible to make reasonable returns trading Binary Options, you need to implement the right strategies, option types, brokers and signal providers. This step by step process will help new traders understand what is required in order to make money trading Binary Options.
1. Have a plan
Before trading Binary Options, the trader should lay out his or her objectives, investment horizon and general trading expectations. Too many traders just jump into the market without a clear strategy or game plan.
The trader needs to know their own risk tolerance levels as this will inform how much they will invest on each trade as well as their max daily draw-down.
You should also have a relatively good understanding of the fundamentals of Binary Options Trading such as expiry time, type of option and strike price.
2. Find a Legitimate Binary Options Broker
This step can be easier said than done. Given the amount of dishonesty online, legitimate binary options brokers can be slightly difficult to find. However, there are a number of things that you can do in terms of due diligence that will make certain that the broker is legitimate.
Firstly, you should ask them for important information such as regulations, trading platform, pay-out policies, legal domicile, and customer support. These are all factors which an honest broker will be forthcoming about.
If you are satisfied with the answers that you have received, you can do some external vetting and due diligence online. Take a look at trader reviews on forums as well as review sites. Make certain that the reviews are honest and are not being pushed by the broker themselves. We have a list of legitimate brokers at the club.
Ask to speak with the senior broker and make certain that you are comfortable with the level of interaction they provide. If you are certain that the broker is worthy of your time, you can progress to the next step.
3. Test your Trading on a Demo
Although you may be quite eager to start trading, it would be a wise decision to first test out a demo account. This will allow you to get used to the Broker’s platform and to practice your trading.
You will also need to make use of some training and education materials. Although trading Binary options can be relatively straightforward, doing it on a regular and consistent basis is not always so easy.
Once you have been trading on demo for some time and are comfortable with your trading ability you can move onto the next step.
4. Open a Live Account
You are now ready to open a live account with the broker. Depending on the broker that you use, there may be different minimum funding requirements. We would recommend depositing the minimum amount just to make certain that the live account operates in a similar fashion to the demo.
It also makes sense to cross check the levels that you are getting with the live account with those that you were getting on the demo and with other data providers like Bloomberg and Reuters.
Once you have traded for a bit, try to withdraw. See how the process works and how long the withdrawal will take. If you are comfortable with the withdrawal process and are satisfied that the binary options broker is legitimate, you can invest more money.
What is important, however, is to only invest as much money as you are comfortable to lose. This is because trading Binary Options does involve risk and no one can be completely certain that markets will move in their favour.
5. Stick to your Guns
If you are seeing different returns in your strategy when done in the real account than you were seeing on the demo, this could come down to how you are reacting to the markets and how you are closing the trades.
Emotion could also be clouding your judgement. When there is real money involved in a trade, we tend to react differently based on the risk associated with it.
The best traders know that this is a mistake. You should never let risk cloud your judgement and impact on your trading style. Enter and exit positions based on your strategy and not on the perceived profit or loss.
Whatever you do, do not attempt to sign your account over to the broker if they are offering to manage the account for you. This is a conflict of interest and could lead to a collapse in the value of your account.
Join Trading Communities
Are Binary Options Legitimate? As an instrument, yes they are. As an industry you need to know what to look for. As shown there are many potential pitfalls that you need to be aware of.
One of the most effective ways to avoid this is to talk with like-minded traders in a community. Fellow traders have their own experiences that they would like to share with us. This is the main goal of the trading club, to find the legitimate binary options brokers, signals and services.