Binary options has a lot of advantages which will benefit the average trader on the street. But it is not all a one-way street of success for binary options traders. There are some pitfalls to binary options trading, and this article aims to reveal some of them.
Here are some of the disadvantages associated with binary options trading.
Lack of Simulated Trading Facilities
One of the greatest drawbacks of binary options trading is the lack of simulated trading support provided by brokers for traders. The number of brokers providing demo trading accounts for traders are very few indeed, and this means that traders enter the binary options market without any form of testing or training to hone their skills. This exposes the traders to an increased risk of losing money in live markets while “learning on the job” as it were.
Reduced Trading Odds for Sure-Banker Trades
The payouts for binary options trades are drastically reduced when the odds for that trade succeeding are very high. While it is true that some trades offer as much as 85% payouts per trade, such high payouts are possible only when a trade is made with the expiry date set at some distance away from the date of the trade. Of course in such situations, the trades are more unpredictable.
Lack of Trading Tools
Many brokers do not offer trading tools such as charts and tools of technical analysis to their clients. As such, traders are virtually trading in the dark when trading binary options. Experienced traders can get around this by sourcing for these tools elsewhere; inexperienced traders who are new to the market are not as fortunate.
Limitations on Risk Management
Unlike in forex where traders can get accounts that allow them to trade mini- and micro-lots on small account sizes, many binary option brokers set a trading floor; minimum amounts which a trader can trade in the market. This makes it easier to lose an entire trading capital when trading binary options. As an illustration, a forex broker may allow you to open an account with $200 and trade micro-lots, which allows a trader to expose only acceptable amounts of his capital to the market. However, you will be hard put finding many binary options brokers that will allow you to trade below $50 on any binary options contract, even with a $200 account. In this situation, four losing trades will blow the account.
Cost of Losing Trades
Unlike in other markets where the risk – reward ratio can be controlled and set to give an edge to winning trades, the odds of binary options tilt the risk-reward ratio in favour of losing trades. In other words, traders lose more money when their trades end as losses than they can gain when their trades end up as profits. It is estimated that for every 70% profit in binary options trades that end up in profits, the corresponding loss of the same trade if it ends in a loss is 85%. The implication of this is that for a trader to break even in binary options trading, the winning percentage has to be at least 55%. It will therefore take a trader winning 6 trades out of ten to get into profit, but only 4 trades out of ten to end up in the red.
When trading a market like the forex or commodities market, it is possible to close a trade with minimal losses and open another profitable one, if a repeat analysis of the trade reveals the first trade to have been a mistake. I have done this several times. I once traded a forex news item where I closed a wrong call with a 20 pips loss, and ended up making 350 pips on the reverse trade, giving me a net profit of 330 pips. This scenario cannot be replicated in binary options. The moment a trader has placed a trade in the binary options market, the value of his equity in the trade drops to reflect the trade commissions taken off by the broker. The payout on the reverse trade is fixed and cannot be used to cover the loss from the wrong trade.
It is obvious from the discussion that while binary options has many advantages that make it an attractive form of investment, it also has some pitfalls that every intending trader needs to be wary of in order to achieve trading success.