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The risks and rewards of binary trading

All or nothing option trades present obvious risks, but a more simplified approach to online trading

All or nothing option trades present obvious risks, but a more simplified approach to online trading

Binary option trading has come in for considerable criticism in recent months, as concerns over its high-risk nature arise from the relatively unscrupulous practices of some online firms. However, the industry itself, for all its risk, does offer some investors plenty of opportunities, and despite the many scare stories, there are plenty of examples of investors earning big money.

Such has been the popularity of this form of trading that the number of companies offering such services has ballooned in the last couple of years, particularly in Europe. The options take the form of a traditional European style of option, where they can only be exercised at the maturity date. Binary option trades allow for only two outcomes on this date – a payoff of a pre-agreed sum or asset, or absolutely nothing. All manner of assets can be traded, including equity indices, commodities, currencies and individual shares, and the trades tend to be done on a shorter-term basis.

European investors have enthusiastically embraced binary option trading, particularly in the UK. According to research conducted earlier this year, the number of trades using binary options rose by over eight times since 2011. The reason for this is thought to be as a result of their relative simplicity compared to other forms of trading methods, with investors preferring the straightforward choice ‘all-or-nothing’ to more complicated, technical types of investing.

Simplicity
European investors have enthusiastically embraced binary option trading, particularly in the UK. According to research conducted earlier this year, the number of trades using binary options rose by over eight times since 2011. The reason for this is thought to be as a result of their relative simplicity compared to other forms of trading methods, with investors preferring the straightforward choice ‘all-or-nothing’ to more complicated, technical types of investing.

Although comparatively simple to understand, binary option trading – as with all trading – requires a decent level of knowledge in order to avoid the many pitfalls. However, part of the reason for the attractiveness of binary options is the known level of risk upon making the trade. Regardless of any change in value of assets, the investor will either receive the agreed upon pay-out or nothing at all. All the trader needs to be concerned about is whether the asset rises or falls to a certain level.

Against the odds
However, while this may seem like a straightforward, simplified way of trading online that anyone can master, potential investors should be wary of a few traps. According to InterTrader managing director Shai Heffetz, binary options can be particularly hard to predict. He told the FT: “There is one very important factor that must be taken into account before entering into a binary bet; in small timeframes, markets tend to perform randomly and, therefore, being on the right side of a binary bet is as likely as calling the toss of a coin.

“With average binary pay-outs typically at around 80 percent, the probability of profiting from binary betting is always against the gambler and those who partake are more likely to run out of money than succeed.”

 

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