From Speculation to Strategy—How Binary Options Gained Credibility

By Emma Mackenzie, Senior Marketing Executive, HotForex

Binary options has progressed from the traditional hedge fund manager’s “bit on the side” to a respected and credible trading practice, attracting traders of all levels of experience seeking to diversify their investments with a quick return on investment. The exposure of binary options to the mass market combined with 60 second trading, the appeal of quick profits and “known” risk has propelled binary options to the forefront of investment trading.

Understanding binary options

Before we delve deeper, I will clarify exactly what binary options is. Binary options, as the name suggests, is a form of trading that results in one of only two possible outcomes: win, or lose. To better explain, a trader predicts whether the price of an option, such as currency pairs, stocks, indices or commodities, will be above or below the strike price at a predetermined point in the future. The trader simply selects “call” (above) or “put” (below), depending on whether he/she believes the option value will be above or below the strike price. If you win, you will typically make 70-to-90 percent profit on your trade. Its simplistic nature precedes it and is fueling the rapid growth in interest from amateur and expert traders alike.

The rise of binary options

The industry has witnessed exponential growth year on year since 2008, with a significant hike in interest from traders post 2012, when binary options was reclassified, in some jurisdictions, from a gambling product to a financial instrument. It has, de facto, become a “mainstream” way of trading.

Binary options is regulated as a financial product in two European Union (EU) jurisdictions, namely Cyprus and Malta. The Cyprus Securities and Exchange Commission (CySEC) became the first regulatory body to announce regulation of online binary options platforms operating in Cyprus, and OptionTrade was one of the first brokers to acquire this licensing. Malta Financial Services Authority (MFSA) also followed suit by regulating binary options as a financial instrument. Binary options is, however, still regulated in other EU member states, such as the UK, Germany and Italy, under their respective gambling regulations. It is believed, though, that it will only be a matter of time before the UK’s Financial Conduct Authority (FCA), and others, jump aboard the regulatory bandwagon.

This wave of regulation and classification of binary options as financial instruments has given the industry—previously mocked as a “financial Wild West” in a 2010 Forbes article—mass credibility. In turn, the industry has experienced substantial growth in recent years and currently boasts 2.5 million active traders worldwide. Japan’s binary options market alone traded volumes of 48.73 billion JPY in July 2015; 10.5 percent higher than June’s trading volume (Finance Magnates). This is an impressive figure due to the fact that leverage is not given when trading binary options, which means that 48.73 billion JPY is the actual figure traded and not inflated due to virtual monetary leverage as applied in forex (foreign exchange markets).

How does binary options compare to forex?

Forex and binary options are the most popular investment trading methods available today, and while there are many similarities between the two, there is no comparison when it comes to the matter of simplicity.  Other significant differences and trends applicable to forex and binary options were noted by Optimove, a retention automation platform developer.

Optimove conducted an analytically focused report on the differences between binary options and forex traders, with rather remarkable findings. They proved that binary options trading has surged in recent years, and in most instances, actually overtakes the forex industry in terms of trade frequency and conversion rates. According to statistics revealed by Optimove last year, the “conversion rate of binary options traders is 34 percent higher than that of forex traders”. This shows that the desire to trade binary options tends to be stronger than the initial interest by individuals seeking to trade forex. The frequency of trading is also higher with binary options traders (30 percent higher than forex traders), which again, identifies the growing trend that binary options is the investment trading practice of choice for traders.

Myths expelled

Despite it being one of the more simplistic forms of investment trading available, many people mistakenly believe that there is only a 50/50 chance of winning a trade—making it, in effect, gambling—but this is far from the truth. Education in binary options trading, as with forex, is a must if you are going to trade to make money. The more you understand the markets and your choice of underlying asset, the more likely it is that you will be able to determine the direction of the asset’s price. The 50/50 theory is often mistakenly used to analyse the probability of winning, but it is in fact used by experts in the field to describe the outcomes of a binary options trade, which as mentioned previously is either win, or lose.

Here are some other important facts to consider with binary options trading:

• Unlike forex and other trading alternatives, the risk in binary options is known. You can see the amount you will profit and lose on each trade made.
• Traders can liquidate (sell to close a trade) prior to the expiration time, giving them more elbow room if they see their trade moving against them.
• Unlike gambling, binary options requires traders to be knowledgeable about the markets, macro economic factors and to understand technical analysis charts. The more educated one is in their chosen underlying asset, the more likely they are able to win their trades.
• Binary options bonuses have gained a bad reputation in the industry and are largely considered as a marketing ploy to keep traders’ money tied up in accounts with no option to withdraw (unless a specific volume is traded). While this may be the case with most brokers, OptionTrade places no restrictions on withdrawals from its 100-percent cash-bonus account, meaning traders can withdraw their initial deposit and profit whenever they wish, and their trading volume will remain in place regardless of withdrawals. This is why it is paramount to do your research before selecting your chosen broker. 

Importance of education and understanding financial markets

Education in binary options trading is essential for traders to formulate a degree of “know-how” when placing their positions. Yes, the industry was previously shunned by many professional investors when binary options first became accessible to the average retail trader, but since its regulation as a financial-investment product, it has gained mass appeal and credibility in the financial-investment sphere.

Like many other reputable brokers, OptionTrade places great emphasis on educating traders in the field of binary options. From providing demo accounts to offering a comprehensive binary options trading academy with helpful video tutorials, they have it covered for new traders. By using educational tools and resources, the average trader can go from an amateur trader to investing intelligently.

If you are new to the binary options or forex industries, it is vital that you take time to learn both fundamental and technical analysis methods. If you are placing trades without any knowledge of how and why an asset’s value has moved up or down, you cannot realistically expect to go into any trade without it being considered a gamble.

Binary options takes “quid pro quo” to a new level; essentially, the more you invest, the larger your returns are if you win. And this is where uneducated traders become consumed by the possibilities of large profits and sink before they can swim. Yes, the more you invest in a trade, the larger the return, but you must also acknowledge the risk involved, too.

It is down to the individual trader to turn their speculative investments into a viable strategy. They need to study fundamental analysis, follow news reports, research market movements, read technical analysis charts and determine their own risk-management strategy to ensure maximum gain and minimum risk on each trade.

Why choose binary options?

Aside from the obvious simplicity of binary options, it is incredibly exciting to get involved with; that’s just the nature of the beast! The excitement of fast profits draws in people who would otherwise never consider investment trading. Fortunately, the risk-to-rewards ratios mean traders are fully aware of how much they can win or lose at any time, thus lessening the emotional attachment per trade.

Simplicity, however, is the name of the game, and with the easy ability to both execute and monitor trades, people are becoming self-made trading professionals. Unlike forex, in-depth market knowledge is not required before placing trades (although it is still advised), and with the opportunities for high profitability, it is obvious why binary options has gained so much traction in the world of financial investing.

All markets can be traded with binary options, from currency pairs and stocks to indices and commodities; duration trading can range from 10 seconds to one year; and payouts can be as high as 95 percent. The level of flexibility and fast-track route to becoming a skilled trader, combined with low minimum stakes (as low as $5), no stop outs and no commissions, elevate binary options above most other trading platforms. To an extent it is a risk-free choice for traders as they do not buy the asset; they simply predict its price movement.

What can we expect to see from binary options in the future?

Binary options trading volumes are growing, most likely because regulation throughout Europe is expanding, and with tighter regulations come stricter requirements that brokers must meet. Traders should be highly selective of the broker they decide to choose as only the best brokers in the industry will meet the regulatory criteria to maintain a fully licensed and regulated status.

Binary options will remain popular in Japan, and will likely continue to gain mass interest throughout Asia with the heightened regulatory framework introduced for this type of trading.

Lastly, bitcoin as a trading asset and payment alternative looks set to become common practice in the future with most licensed brokers due to the number of advantages associated with bitcoin integration.

In short, binary options is a keeper. Like it, or loathe it—it’s a trading method for which one size fits all.

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources, and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFD products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.