Is Trading Forex Binary Options Right For You?

Binary Options Guest Post by Tom Cleveland


Trading currencies can be a daunting task, especially for newcomers to the craft. Success requires time, study, and practice. There are no shortcuts for experience, unless you have a Forex veteran at your side to guide your early forays into the market. Beginners, however, quickly become impatient, start upping the size of their positions, and soon succumb to market forces, just another casualty in the graveyard of Forex fatalities.


Casualty rates can be as high as 70% from most accounts, but the industry has responded with new approaches from “mirror” trading to Forex binary options. The latter approach has garnered instant popularity, especially from beginners, because it removes many of the challenging obstacles that impede success. Trading platforms are simple and straightforward. Payoffs are defined, as well as all other risks, at the front end. There is no possibility for the dreaded margin call, and traders need no longer fret anxiously over when to close a position. The option process does it for you.


What is the history behind binary Options?


The concept of a binary, all-or-nothing, or digital, as it is known in most Forex circles, option originated back in the early seventies. When the Chicago Board of Exchange (CBOE) started, option standards and regulations were in a state of flux. The binary approach evolved as a less complicated version of a plain vanilla option, but due to the lack of standards, there never developed a broad liquid market to support traders.


Finally, in 2007, rule changes were proposed, and the Securities and Exchange Commission approved the listing of cash-or-nothing binary options in 2008. The American Stock Exchange (Amex) and the CBOE quickly followed suit the same year. A year later, the North American Derivatives Exchange (Nadex) broadened the mix of offerings to include a range of Stock Index Futures, Spot Forex, Commodity Futures, and Economic Events. Popularity has grown ever since these changes and spread from the United States to other regions around the globe.


Have there been any outcries of criticism during this history of Expansion?


Innovation always sparks controversy in any industry sector, if there is a perception that existing participants are losing market share to the new innovators. The back office necessary to support binary option operations is decidedly different than for the traditional broker operation, whether for Forex or other underlying assets. Trading platforms are proprietary, and most critics claim that digital options are nothing more than a glorified form of gambling.


Gordon Pape, a contributor for Forbes, once opined publicly, “If people want to gamble, that’s their choice. But let’s not confuse that with investing. Binary options are a crapshoot, pure and simple.” This critique may have been fair during the wild early days of the genre, but competition has improved payout ratios over time. With a 75% payoff and 15% loss rebate, the breakeven ratio approximates a “55/45” win/loss percentage mix, the same benchmark that traditional Forex traders must achieve to cover broker spreads and yield a net gain.


Why have Forex binary or digital options become so popular?


An investor likes knowing from the beginning of the contract what his immediate potential for gain is and that his downside risk exposure is fixed from the get go. The complications of stop-loss orders, emotional intervention, and whether to sell or wait have all been eliminated by this innovative approach. Market direction within an expiration time period is the primary decision to make.


After considering the immediate high rates-of-return and minimized exposure to risk, it is no wonder that investors are taken with this short-term investment vehicle.