Why Binary options trading is a risky bet for beginners but a worthy one for Pros?

03 Feb

Twin Peaks - Binary Options TradingThere is a considerable amount of risk with all categories of investments and binary options are no exception to that. While binary options are popular among novice investors because of the simplicity of its concept, it is still considered a risky bet for beginners because it is purely based on predicting the future market trendsof the underlying assets. It can be difficult for any novice investor who does not have enough market knowledge of the assets to predict their price movement accurately. If you are new to the market, you will not be aware of various technical analysis tools which can be used to accurately predict the future price movement. Hence you won’t be able to choose successful positions and make money by trading binary options.

The market can often fluctuate in different directions without any warning based on various financial events. Although there are techniques available to predict market movements, it is difficult for any beginner to understand these techniques as they will not have sufficient practical knowledge and market expertise to do such analysis. But a professional trader who is aware of all the technical analysis tools like MACD, Directional Movement Indicators (DMI), Commodity Channel Index (CCI), Stochastic oscillator, Pivot points, Candle-stick charts etc., will be able to predict the market movements more easily and make money with binary options.

A professional trader will also have good trading skills and expertise in using various technical indicators including support and resistance levels to accurately predict the price movements of various underlying assets. Professional traders will also generate signals based on technical analysis or news events to keep track of the market trends and execute their trades based on that. Professional investors will also have good money management skills and know how much money to invest in each trade based on their experience. But a newbie will often get excited even with a small success and start investing too much on a single trade. Beginners are always prone to losses as they get emotional in making their trading decisions which can be a risk when investing in binary options.

A novice investor is also not aware of trading strategies like hedging, breakout trading strategy, trendtrading strategy, risk-reversal strategy, news trading strategy etc. But professional traders are aware of these trading strategies and followthese techniques to improve their success rate and limit their risk. An experienced trader will always hedge his positions by investing in multiple assets at the same time. Beginners are not aware of important trading concepts like asset allocation, money management and diversification of portfolio which are important for success in binary options trading.

Some experienced professionals follow a risk-reversal strategy to minimise their losses by placing both “Put” and “Call” option simultaneously on an underlying asset which is fluctuating constantly. If you are a beginner, it is very difficult for you to understand the nitty-gritty details of such trading strategies and make use of technical indicators to predict future market trends. Hence you won’t be able to place successful trading positions and there are possibilities that your option may expire out-of-the-money in most cases. For every unsuccessful trade, you will lose the entire amount invested in that particular trade and unless you have a good strike-rate, you will never be able to make money with binary options.

The odds are biased in favour of binary options brokers in case of a beginner. The maximum payoff percentage any broker will offer is 70% and even if your broker offers a rebate of 15% for lost trades, you still need to have a success ratio of 55% to break-even without incurring any loss in capital. Hence the risk-to-reward ratio with binary options are not even 1:1, which means you can’t make any significant gain as long as you have a success rate of more than 60%. Unlike other investment options like stocks, commodities or spot forex trading with leveraging support, the risk-to-reward ratio is very less in binary options. anyoption trading is preferred by many experienced investors as the payout offered by this broker is higher and they don’t charge any hidden fee or commissions.

As a beginner, it is very difficult to speculate the price movement of the assets under fluctuating market conditions and most novice investors will lose 80% of their trades. Your odds of success are better at a roulette table than investing blindly in binary options. The market is very dynamic and fluctuates often based on various financial events like interest rate hikes, jobs report announcement, quarterly reports of various companies, investor sentiment, political changes like new president coming into power in the USand other geopolitical factors. If you don’t watch the market news regularly and keep track of various events in the economic calendar, it is highly impossible to speculate the movement of any underlying asset whether it is stock, commodity, currency pair or market Index. Only a professional trader will know how to use support and resistance levels and other technical indicators to place successful trades based on market analysis.

In binary options, both the potential loss and profit is limited based on the payout percentage offered by your broker which means there is no unlimited upside potential like margin trading. However, the positive fact is that risk is also capped which means you can never lose more than the amount you invest in a particular trade. This is a benefit for a professional trader who clearly understands the risk-to-reward ratio and has the required trading skills to make the most out of binary options. Also in binary options, the value of positions are determined by 3 to 4 decimal points which mean even a slight move of 0.0001 points in opposite direction can lead to an unsuccessful trade. Hence you should be very careful and keep watching the price movements very closely.

Considering all these factors it is clear that binary options can be really risky for beginners who don’t have sufficient market knowledge and trading skills. Only a professional trader with good market expertise and knowledge of technical indicators can become successful with binary options. If you are a beginner and you still want to invest in binary options, then probably the best way is to open a demo account and start practising to improve your trading skills and market knowledge without risking real money. Once you have gained enough trading expertise like a pro, you can also start investing with real money.

Photo credit: Paul B. (Halifax) via VisualHunt / CC BY-NC

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