Disadvantages of Binary Options

Disadvantages of Binary Options

We’ve looked at the great things that binary options can provide that you can’t find elsewhere, so to give it an honest examination, we are now going to look at the downside of trading binaries, or where Forex trading might allow you to keep the upper hand.

Stopping Losses is not Easy

In the vast majority of your trades, you will find that it’s almost impossible to pull a stop-loss. Binary options are typically final once you hit the execute button on your computer. So, if you put in a $10,000 call option on the GBP/USD, and then the pound drops heavily, you are going to lose that $10k.

Obviously, some sort of safeguard on your end needs to be imposed to prevent this sort of loss from happening. The most common way that is used in binary options is to take smaller position sizes. There are various mathematical methods of calculating what the optimum risk amount is for you based upon your probability of success and the size of your account, but really, you should never risk more than 1 or 2 percent of your account. So, if you have an account with $10,000 in it, you should never risk more than $200 if you have ideal trading conditions. $100 is the amount you should be using far more often.

In addition to smaller trade sizes, you can also use shorter expiries to help limit risk and exposure in the binary options market. For example, taking out a weeklong, $500 trade, makes it so that you cannot use that $500 to make more money until the week is up. However, by taking out five $100 trades throughout the week, all for only a few hours each, you are risking the same amount, but putting your money to a more immediate use and giving yourself more chances to multiply it. These strategies are not immediately known to all traders, so education is needed before you advance to this type of trading, or you will find that there is too much risk at once, and that’s definitely a bad thing for you.

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Rare Scenarios do Come Up

There are times when you will find that using binary options are actually holding you back. These don’t happen often, but they are possible. Unfortunately, they are usually only identifiable with certainty after the fact. For example, if you are taking out a five minute option on the EUR/USD and your binary broker gives you a rate of return of 70 percent, you stand to profit $70 if you risk $100. However, with that same $100, you could use leverage with a Forex broker, turn it into $10,000, and when the price moved enough in the right direction, you suddenly have far more than $70 credited to your account in the same timeframe. These cases occur, but usually there is far too much risk to make them worthwhile. Still, if you have a great way of assessing risk before the fact, this is obviously the superior choice. Only advanced and proven traders should be taking this route with regularity.

Ending Trades Early

There are a handful of binary brokers out there that allow you to end your trades early, either at a partial loss or a partial profit, depending on where you are. These are for long term trades only, and typically only for a certain window of time. This is not something that you will want to use more than a handful of times each year, and only in extreme cases. Still, it is a nice way to alleviate some of the risk associated with binary options, and tilt the favor back into the binary broker’s favor, and not the Forex broker’s. The fact that these are not widely used yet is a disadvantage for sure, but it is an area that is slowly growing within this field.