There is a lot of discussion surrounding binary option trading with an equally divisive slate of differing opinions regarding the risks involved and the regulation of the instrument itself. I've covered regulatory challenges before, this time I'd like to discuss the risk involved in binary options from the trader's perspective.
First, let's begin with the most common comparison. Forex vs Binary Options. These two instruments cannot be compared fairly in terms of risk because they work differently, require different position investments, and yield different results. The most repeated claim against Binary Options is that you will lose your deposit very fast. False. This is up to the trader, and many traders often make mistakes that will have them lose their deposits very fast on Forex - if a trader decides to invest his entire deposit into one Binary Option position then it is not exactly the instrument's fault. Just like it isn't the fault of Forex if someone decides to use 50-60% of their margin on one position and end up hitting a stop-out before they even have time to regret their decision.
The biggest issue regarding this reputation is due to lack of trader education on the matter. Traders have a very limited choice regarding demo accounts to hone their skills. In addition, very few if any brokers offer educational materials that go beyond instructional manuals on how to use their platform. This is in contrast to Forex, where entire books are written on trading strategies and brokers invest into getting their traders educated on the fundamentals. However, I do have good news, most of what you learned in Forex can be applied to Binary Options. I also have bad news, you have to learn how the instrument works.
What this means is that you cannot plunge head-first into the unknown, that is, if you value your money.
1. Educate yourself
This step is the first and one that will have you decide whether to trade Binary Options or not. The way you will research is directly dependent on your past trading experience. If you have previous experience in Forex, then you will understand the basics of trading including psychology, analysis etc... You will need to now learn what Binary Options are and figure out what trading strategies work and which ones don't. This is best done through demo accounts. If a broker does not offer demo accounts, find another one.
If you do not have any prior trading experience, then the best way to educate yourself is to start with the aforementioned basics of trading. The amount of material freely available far outweighs the amount of material available solely for Binary Options. Having done that, feel free to move on to demo accounts then a live account to test yourself. Unlike Forex, Binary Options are fixed-profit and fixed-risk instruments, completely nullifying the psychological factor of holding on to losing positions and moving your stop loss to delay the inevitable. This makes Binary Options a great instrument for beginner traders.
2. Choose the right broker
All lessons from Forex apply here, with one exception: you cannot rely on regulation. Instead, look from where the broker is coming from, how long have they been on the market, and as an advantage, if they offer Forex services. This step is crucial, this is a big part of risk management. Try to stay away from fancy marketing banners when making your final choice, any bonuses are just that, bonuses. Online reviews are generally not the best place to gather information as most of them can be written by anyone anonymously.
3. Make a list of rules and follow them
Just like when trading any other instrument, discipline is 95% of success. Once you have developed and tested your trading strategy, make sure to develop Risk Management rules or it as well. As mentioned before, if you end up putting your total deposit into one trade, the end result of your trading will be the same no matter which instrument you trade, be it forex, binary options or equities. Make sure to record your winners and your losers, and analyze why you made a particular trade. Binary options eliminate the risk of closing the position too early or too late, since you know exactly when it expires.
In conclusion, as with any financial instrument, be it forex, binary options, equities or futures, you should only trade with the money that you can afford to lose. All of those instruments carry high risk/reward ratio, but only with binary options you know both your potential risk and your potential reward in advance. Remember that, only your own risk management rules make an instrument risker for you.
