Binary Options or Forex and CFDs?

Binay Options for trading?

 

It is amazing how fast things change. Just a few years ago, in 2008, a new market for trading appeared.

Strangely enough, it was during the meltdown of 2008 when this kind of “brokers” came to existence. And as far as we can see, they have been very successful.

If you look for binary options in Google, there will be hundreds of webs dedicated to the promotion of this kind of trading.

The number of brokers is growing wildly and is already quite big. They make so much money, and so easily, that is one the most lucrative business in the net.

I think that the amount, and the speed at which the customers lose money, must be outstanding. And no wonder, since to win in binary options you need to be more than a good trader: you need to be a splendid trader, and have luck.

If it is already very difficult to win consistently in stocks, CFDs, futures, forex, etcetera, it is exponentially more to do so in binary options.

Binary options fun

On the other hand, fun is guaranteed.

When you are a trader, it is very difficult to stand your ground and see how you trade rises 20% and still not sell it. That is not funny really.

Everybody wants to take profits when the asset has risen two points.

A veteran trader knows that he has to let profits run though. But the “fun side” of trading is in the short term swings as know as day trading. And the brokers and industry more “day trading” focused is the binary options one.

People go and bet there as if they were in the horse races though, in the horse races of old days; the chances were not that bad.

What is the problem with binary options?

Before I will explain very simply how binary options work.

A classic binary option is a financial bet about the next direction an asset will take. Let´s say you bet that the €$ is going to go up the next 10 minutes, so the house gives you a fixed return in advance; normally around 80 %. So if we bet 100 $ and we win, the house gives us 80 $, and if we lose we give the house our 100 $; simple, is not it?

The problem is that, as you can clearly see, if we win we get a lot less than if we lose: 20% normally.

 

Binary options advertising

The brokers use advertising, and aggressive marketing campaigns pointing out that “you can win 70% in one hour”.

A lot of novice traders and seekers of easy adrenalin open an account in less than 2 seconds.

A 70% win is quite big, yes, but a 100 % loss is bigger.

Binary options bonus ?

Another trick the brokers use to attract customers is the famous deposit bonus. They come in the guise of “guaranteed profits” like: “we give you back 15% of your losses”, or “deposit 1000 $, and we give you 500 $”.

The problem with these offers is that they come with some requirements. The most typical is that you have to play a minimum of times before that bonus is given to you.

Normally you will be lucky if you do not lose all your money before the expiration of the terms of the offer.

Trading in binary options for a trade that lasts a few days is like trading forex with a profit and loss targets of 100 pips, but with a 15 or 20 pips spread.

Nobody can win like that.

Binary options payout

The payout offered by these brokers rarely goes beyond 85% for the most liquid instruments, and normally is between 70 and 80%. That means that if you do not want to lose at the end of the year, we should be right about 56 times out of 100 (and no more than 44 losses).

The biggest problem of this instruments is that they encourage day trading more than any other one.

The great majority of the volume of bets they manage is in trades of less than an hour. If you try to guess where an asset is going to go in the next hour you, will find it extremely difficult to be right more than 50% of the times after a while.

You can be right a few bets or days, but after 1000 bets like this you will find that you will lose approximately 50 % of times.

Binary options day trading randomness

That is the problem of day trading: that randomness is n charge there.

The market makers (binary options brokers for instance) know that, and make you believe that day trading is not “random”. That you can beat the market; but believe me, you cannot.

If we do day trading in intervals of half an hour – the typical binary options bet – we will find assets like the €$ that will normally not move too much (depending on the volatility).

We could expect a 15 or 20 pips move on average.

The probability for the € to rise ten pips, or to fall another 10 pips in the next half an hour is the same. Let´s assume a payout of 83%.

Do you think that it is intelligent to bet on a 50% outcome and make 83 $ if I win and lose 100 if I lose?

Binary options or Forex trading

In this regard, binary options do not differ much from forex or another market. Since any market in which you try day trading for half an hour you will find the same obstacle: randomness plays by the side of market makers.

So the general idea should be not to do day trading at all.

There is also the problem of some problems with brokers that did not honor the money the owed their customers. This problem is typical of shady brokers that plague this markets, as well as forex and CFDs.

A regulated broker is the best solution for that.

Another problem I see with binary options providers is the fact that many of this providers offer minimum bets of 25 €; what I think is a bit excessive. It is not a problem if you have a 10.000 € account, but many novice traders that go there open accounts with 400. And when you bet almost 10% of your account every trade and doing day trading (as most people who join binary brokers do) you go bankrupt in a few days, notwithstanding bonus or whatever benefit.

If you want to have fun with binary options then bet 1 $, at least you will not lose your money that quickly.

Are binary options interesting for medium term trading?

When a swing trader is going to use stocks, CFDs or forex, he knows the costs in advance.

For instance, we buy a stock a 100. Our stop is at 96. Imagine we pay a spread of 0,1% approximately for some CFDs brokers, or a commission (10 $ per side), and a small spread for other CFDs and stock brokers. We take our profit at 104 (a trend trader would look for bigger profits, like 115 of 120).

Binary options swing trading strategy?

If we buy 100 stocks, we may win 400 $.

If we count the commissions, the spread, and the financial costs, we should have a winning loss ratio of approximately 90/100 (1).

Its gets better if we increase the duration of the trade or the size (less commission per volume).

The problem with binary options for a similar duration trade is that they usually pay 70/100 or less (I have seen 65). I mean, it is impossible to win like that.

While it is true that we avoid stop loss hunting in binary options or things like that, it is true that the current medium term trades payouts are terrible. For them to be competitive, from a trend trader perspective, should pay 95%. But I do not think they will do that.

Binary options worth it?

If the conditions remain the same, the binary options market is not attractive for an experienced trader.

Why should I want to trade with a broker that makes medium term trading difficult?

It seems obvious that these brokers only want the “hour trading” guys.

Maybe there are people who make a living trading binary options but I somehow doubt it.

As for me this type of business is another kind of modern casino, where the odds are in favor of the house, and where you are pushed to do pure and random gambling.

Traditional traders prefer to trade the traditional products. Binary options are not for me.

 

  1. If we use a cfd broker with a 0.1% spread: 400$ -(2( 0.1%*10.000)) – financial costs = 380 – financial cost (not significant if a trade lasts one or two weeks). The loss should be 400 + 20 + financial costs.