Forex $ocial Traders


Binary Options: Trap for your Money

binary optionsBinary options have become very popular in recent years. Binary options brokers did really good job at advertising and marketing their products, creating false belief that this could be great financial instrument to trade in order to make lots of money very quickly.

In my humble opinion, forget about binary options, because it is a big trap for your money. There is not much of a difference between trading binary options and playing for example in a game of roulette.

Why Binary Options is big trap for your money?

Well, let´s elaborate little bit on that.

First of all, binary option operators have very similar business model to casino operators, both make their profits from the loses of their customers. They assume that statistically majority of their customers would loose all the money sooner or later.

In case of binary option platforms it is contrary to what they market and advertise to general public. This is something which irritates me the most, namely: Binary option operators, present their product as a great trading or investment opportunity, where the biggest attraction of their marketing hype is that they emphasize that clients can get 75% or even 80% ROI (return on investment) in one trade.

It sounds so easy and effortless to make money with binary options. Operators often preach something like that: “All you need to do is to decide whether the price of commodity or currency pair would go up or down in predefined period of time, like minutes or hours, and you get 80% profit on your initial investment” It sounds easy, right? Well, I wouldn’t say so!

In fact trading binary options is a form of gambling like casino! Sadly, plenty of wanna be investors lured to binary option platform by their deceiving marketing tactics, believe that they found holly grail of financial markets trading. Eventually, almost all loose lots of money.

Additionally, in casino it is commonly expected to loose money over time, so majority of people in general are prepared for this eventuality, therefore usually playing with relatively small amount of money for a bit of fun and entertainment or some kind of adrenalin rush and excitement, rarely with the intention to make money on regular basis. Unfortunately, in case of binary options people enter this field with intention to make money, after being exposed to misleading advertisements. That false believe that they found money making machine, results in much larger sums of money deposited to binary option platforms, than it would have been otherwise, should they knew before that they just entered an equivalent of gambling platform!

Why trading binary options is similar or even worse than playing roulette in a casino?

Imagine going to casino in order to play game of roulette, where you place two bets one on RED and one on BLACK. The chances of winning are exactly the same as tossing a coin, namely 50/50. If placing two bets on two different colours in a long run you would not make any money as well as you would not lose any. However in roulette there is a number ZERO (single zero in European version, and double zero in American version of the roulette). If ZERO comes out you would lose your bet. This is called house advantage. The house advantage in single zero roulette is 2.7% and for the double zero game it is 5.26%. Statistically in long run you would keep loosing either 2.7% or 5.26% of your betting capital every time when you place two bets on two different colours at the same time, consequently it would be pointless to do so with the intention to make money.

Binary option trading is similar or even worse. If you bet on both (price going up and down) at the same time, you would always have less money after such a trade, because your winning bet earns you 80% but the losing bet lose all 100% . Let’s assume betting $100 on each outcome, then total bet amount = $200, balance after bets completed = $180, total amount lost = -$20, in percentages terms it is -10% .

That is much worse that playing roulette in the long run!!!

If you try to predict price movements you might get lucky couple of times in a row, but that is also a case for roulette players in casino. They might hit lucky winning streaks from time to time but in long term casino always wins. You should expect the same with binary options.

That 10% lose on binary option trading described above is like an equivalent of having enormously huge spread. Usual spreads with most trading instruments are much less typically well below 0.5%

You can check what are typical spreads for other type of markets on social investing platform eToro, where you can trade not only forex, commodities, shares, indices, but also crypto currencies (BTW: eToro allows you to copy other successful traders)

Why is it so difficult to make money with binary options?

Did you know that in order to become a profitable binary option trader your winning ratio needs to be much more than 50% ?

Please have a look at required wining-rates to just break-even, when trading binary option for couple of commonly used payout percentages:

for 90 % payout, to break-even required wining-rate = 52.6%
for 85 % payout, to break-even required wining-rate = 54.1%
for 80 % payout, to break-even required wining-rate = 55.6%
for 75 % payout, to break-even required wining-rate = 57.1%
for 70 % payout, to break-even required wining-rate = 58.8%

You might say, no problem – that is fine, because you have certain amazing binary option strategy, where you make enough money with winning trades to cover all the loses, but give me a second… Would that mean that you need much more winning trades than losing ones? Yes, exactly, but believe me it is not an easy task to achieve. Even some of the well known traders rarely have winning rate over 50%.

You might ask:

How is it possible to be profitable trader with winning rate below 50%?

The secret to profitable trading is to maintain healthy Risk v.s. Reward ratio.

In case of binary options trading the Risk-Reward ratio is not very healthy for sure, because you risk 100% to earn 80% when you lose you lose all, when you win you win only small set predefined percentage of initial investment. When trading binary option it is not possible to run you wining trades and cut loses on your losing trades.

When trading other financial instruments like, currency pairs, commodities or stocks, it allows me to let my winning trades run much longer, which gives me a chance to earn even couple of hundred % profit on each trade, where limiting my loses to just couple of percentage points. In long term having healthy risk-reward ration allows me to have as little as only 30% winning trades in order to be profitable overall.

Let me show you one example:

As you can see in the table below, there were only 6 winning trades out of total of 20 trades which represent only 30% winning rate, the remaining 14 trades were losing ones. Despite such a low winning rate of only 30% I was able to be profitable at the end, and the total balance of my trading account increased by $600 from $5000 up to $5600.

win risk ratio

For each trade we took fixed amount of risk $100, but wining trades were bringing us between 2,3 and 5 times more than that risk taken amount. Our risk-reward ratio was healthy, this gave us a luxury of having as much as 70% loosing trades, while making money at the same time.

The same scenario would never ever be possible when trading binary options, because risk-reward ratio is bad, which consequently requires trader to have much more than 60% winning trades in order to be slightly profitable at the end.

That is why we believe that trading binary option is cleverly designed trap to extract money from your wallet.

We hope that above article should serve as a warning signal for all traders willing to invest their money in binary option trading. We encourage to think twice before entrusting your money to binary option trading .

Warning: Trading carries risk. Only risk capital you are prepared to lose. Past performance in not an indication of future results.

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