Can You Win Consistently in Binary Options?
Binary options are making headlines in the financial world with promises of large gains and profits. However, every new concept should be treated with caution by people especially one that promised large gains with little to no effort.
In this article I’ll give a detailed overview about binary options and based on that try to figure out if this new form of trading and investing is actually worthwhile.
What Are Binary Options?
Binary trading is a new way of trading various financial assets such as currencies, commodities and stocks. It was introduced in 2008 in the United States, however the overwhelming majority of the companies that offer services of this kind operate from Europe or other jurisdictions.
Binary trading is in fact a combination of betting and investing. In binary options traders will have to bet on the future movement of various underlying assets. If their prediction will turn out to be accurate, then they will receive a commission based on the money they have invested.
Consider the following example in order to better understand how it works:
– BP’s stocks are at $100 at this very moment
– You predict that in 5 hours this will be above $100
Now, a broker that offers binary options might give you the following possibility:
– You can invest $100 by predicting that BP’s stocks will be above $100 in X hours
– The broker offers a payout rate of 85%
In case your prediction will come true, you will receive a total sum of $185 paid out by the broker. From this amount $100 is your initial investment that is returned and $85, which is 85% of your initial investment based on the payout rate promised.
However, if your prediction will not come true, then you will lose all the $100 invested.
Can You Really Win Consistently?
So, as you could see from the above example, you actually can win money in binary options. However, you will have to understand how the financial and business world works. If you just make random bets then obviously you will not win any money at all.
It’s not a secret that a lot of people who are interested in finances and business can accurately predict the future movements of various assets. This means that (at least in theory) these people are perfectly capable of making money with binary options.
There is a huge problem with the current state of the binary options business. It is that the overwhelming majority of binary options brokers offer extremely short expiration times. An expiration time is the deadline at which your prediction will have to come true for you to win money.
So, if a binary options contract says that BP’s stocks will have to be above $100 in 5 hours from now, it means that your prediction will have to be accurate the moment the 5-hour deadline expires.
But can you really make good predictions in just 5 hours? – Is it possible to accurately predict the movement of an asset in such a short time frame?
Well, it’s actually even worse. Expiration times in binary options trading are generally even shorter than 5 hours. Most commonly, they seem to be around 5 minutes to 1 hour.
Now, can you seriously make an accurate prediction in 5 minutes regarding the movement of an asset? – No, you cannot, no matter how much of an expert you are. It’s just simply not possible.
A Glorified Form of Sports Betting (for now)
So, at the end of the day, one has to conclude that binary options “trading” is no more than an over glorified form of sports betting. The way people are required to “invest” in binary options is nothing more than the way people bet on the outcome of sports events.
But the concept in itself is still interesting.
But as explained above, if expiration times would be much longer, say multiple hours but perhaps even several days and weeks, then binary options would definitely not be just a glorified form of sports betting.
In case expiration times would be much longer, real traders and investors would have a real chance of making accurate predictions based on real technical analysis and other methods. However, this is not the case at this moment.
Will it Ever Change?
Perhaps. Binary options are still new and this is also the main reason why the industry is still so “weird” at this moment. Many people are lured into this form of trading due to the fact that most people don’t yet understand what it actually is in the first place.
It’s expected that once the industry will receive mainstream attention – something that’s starting to happen right now actually – and people become more educated about the topic, brokers will be forced to revise their modus operandi and implement real online trading services much like the ones offered by mainstream forex and stock brokers.
It can’t be said for sure when exactly this will happen but many people believe that it’s going to take place sometime within the next 1-2 years. For example, recently US authorities such as the CFTC and SEC have begun to crack down on fraudulent binary options brokers. In the meantime they are working on developing on a new regulatory framework allowing companies to apply for a valid license.
The same is also happening in Europe where multiple countries including the United Kingdom and Italy announced that they would soon offer licenses to binary options companies that offer legal services. Once a critical mass of countries is reached, brokers will simply be forced to either offer real online trading services that respect the law or simply shut down.
Perhaps You Should Wait a Little
Binary options really sound interesting if you think about this concept for a second. However, as explained above, the industry is at this moment not yet ready to accept mainstream customers and traders. Most people involved today in this business are actually sports bettors or gamblers and not real investors.
But binary options definitely have a future in the investment world once they become properly regulated resulting in legitimate companies seeing the light of the day and fraudulent companies closing their doors. But until that happens, just stay away.