Trading Forex online used to be about buying currency in the spot market with an online broker. This allowed individuals to make a profit from the movement of forex values.
When trading spot FX, gains and losses usually went hand in hand. This is because brokers allowed trading on borrowed money (leveraged trades).
This increased risk usually meant that new traders were usually quite uncertain about dipping their toes into the market. However, it was the introduction of Binary options in 2008 that finally allowed retail investors to potentially profit from this relatively simple instrument.
A binary option, in it’s simplest form, binary options allow investors to place a bet on whether a security will increase or decrease in value over a period of time. The payout for binary options is either the full amount or zero (hence the term binary).
The reason that binary options are appealing is because maximum gains and losses are known at the beginning of the trade. Unlike spot forex trading, the maximum that an investor will lose is limited to the cost of the option. They are also an excellent way for someone to start trading without a large capital outlay. Investors may start out with a limited amount of funds and start trading. Although initially introduced for the Forex market, Binary Options are now available on all asset classes from Equities to Commodities.
Best Binary Option Brokers
Why trade Binary Options?
When it comes to financial instruments, Binary Options have the best risk / return profile. They provide a extremely high returns for the investor with a relatively limited capital outlay. Moreover, from the beginning of that trade, the investor knows how much return he will make (as well as potential loss). The returns an investor can expect range from 65% to 90%. Unlike traditional Forex options, Binary Option expiry times can be as short as 60 seconds. This means that the investor can make these returns in a very short period of time.
Unlike spot forex trading, you do not own the actual currency. You are merely taking a view on the direction of movement of the currency itself. Therefore, irrespective of how much the currency pair moves itself, as long as you predicted the movement correctly, your investment will pay off. Binary options on Forex are also a continuous market. This means that you are able to trade whenever you feel like it. From the early hours of the morning to late at night, there is always the opportunity to make money from trading binary options on forex.
Are Binary Options Regulated?
Many people are skeptical when it comes to investing in the financial markets. This is because of a number of recent crises where financial “experts” in highly regulated countries like the United States have lost a lot of money for their investors (and the U.S. Government). It is for this reason that normal people choose not to invest and trade online.
Given the introduction of Binary Options, many investors have seen a relatively easy way to partake in the financial markets. However, due to the fact that most of the brokers are located in Cyprus, they are more hesitant. They somehow view Cyprus as a “weakly regulated” and backward country chosen specifically by the Binary Brokers for nefarious reasons. This thinking has sadly led to many avoiding brokers who are located in Cyprus entirely.
This, however, is completely incorrect and off-base. The reason that Cyprus is chosen the prime location for binary option brokers is it’s favourable tax treatment. The corporate rate of tax in Cyprus is much lower than those of other countries such as the U.S. and other countries in Europe. This is a common practice among many multinational online companies. For example, Apple, Facebook, and Google all have their European branches headquartered in Ireland even though most of their clients are located in other countries within the E.U. Ireland, like Cyprus, has favourable tax treatment for companies. Why question the legitimacy of binary option brokers and not the credentials of Facebook and Apple?
If you are interested in more in depth analysis of the current Binary options regulations around the world we have covered it extensively. Although Cyprus tends to be the regulator of choice for most of these brokers, more of them are deciding to broaden their regulatory presence including with bodies such as the UK’s FCA or Australia’s ASIC.
An Overview of CySec and MiFID
It is also important to note that not only is Cyprus a member of the European Union but it is also in full compliance with the Markets in Financial Instruments Directive (MiFID). This directive was created in 2007 in order to harmonise regulation across the E.U. and increase competition and consumer protection in investment services.
This is an important point which needs to be noted. The individual investor protections are provided by the Cypriot regulations are stronger than many countries that are not in the E.U. The U.K. for example, was never fully compliant even though it was a member of the E.U. Now that the UK has chosen to leave the EU, it will not be bound by the rules and regulations that need to be followed by it’s members (these include the MiFID). Hence, over the near term, the investor protections that are provided by a broker registered in Cyprus are more favourable.
Moreover, given that binary options used to be traded Over The Counter (OTC), they were self regulated. The recent explosion in their popularity among average investors means that the rules and regulations in countries like the U.S. and the U.K. have not kept up pace. Cyprus, on the other hand is one of the only countries to have implemented regulations governing binary options. This means that the Cyprus Securities and Exchange Commission (CySEC) will act in the case of brokers who intend on manipulating investors.
This does not mean that some CySec regulated brokers have not acted with a level of dishonesty. Indeed, Banc de Binary which used to be one of the largest Binary Option brokers decided to close its doors and give up its licence in response to bad press. CySec wanted to be on top of the ball when it came to global binary options regulations.
Hence, in 2016 and 2017 CySec implemented some of the most sweeping changes to the Binary Options regulations which were aimed at reinforcing their oversight and shoring up trader’s confidence in the Binary Options industry.
Are Binary Options a Scam?
Binary Options are a financial instrument so it would be hard to classify them as a scam. There have indeed been a number of scam brokers and traders who have taken money from individuals. This is what could have created a certain perception that Binary Options trading was dubious. However, there have also been a number of reported cases of Forex brokers who have scammed individuals as well as stock brokers. Indeed, one of the best ways in order to avoid being scammed is to be able to spot a scam. There are a number of things to look out for in order to avoid falling into the Binary Options scam trap.
However in order to put your mind at ease, we here at FXaxe go to great lengths to appropriately review all binary brokers and make certain they meet our stamp of approval. Hence, if a broker is listed and reviewed on our site, you can be certain that they will have been thoroughly investigated.
Finding the Right Broker
When you start trading binary options, there are a number of important decisions that you must take. Indeed, some of these decisions are just as important as what types of options that you will invest in and what assets to trade.
One of those is the broker that you will be trading with. Indeed, choosing a broker can determine how profitable your trading experience turns out to be. This is because factors such as spread, platform functionality, regulation and payout policy are critical.
That is where broker reviews on sites such as FXaxe can be quite helpful. They allow the trader to read about the the broker’s offer and get a clean and unfiltered perspective on whether they should consider trading with the chosen broker.
Of course, the trader should always do extensive due diligence and compare a number of different review sites. Although most of them do try and provide their honest opinion of the broker’s platform, some may be affiliate marketers who have a vested interest in you signing up with a particular broker.
Moreover, given the number of brokers currently offering a binary option and CFD trading, it can be a bit overwhelming when it comes to finding the broker right for you. Even knowing what exactly to look for is not immediately clear. We have put together a guide that you can follow when choosing a broker
An introductory guide to Trading Binary Options
Binary options are one of the most simple financial instruments on offer for new investors. However, we at FXaxe want to make certain that you know as much as is possible about these investments. Along with our numerous training guides, we would like to make certain that you are able to make the best decisions with as much knowledge as possible.
We have previously explained binary options from the perspective of a new trader. However, below we given a short overview of some of the ways in which you can trade binary options, the instruments that you can invest in and the way their payout structure works.
Part One: What is a Binary Option?
A binary option is a simple example of more traditional stock and forex options. A traditional or “plain vanilla” option is a financial instrument or contract which allows the owner the right but not the obligation to purchase (or sell) a specific underlying stock, currency or commodity at a pre-specified price on some date in the future (expiry date).
Whereas traditional vanilla options may have a number of payouts at the expiry of the option, a binary option only has two; 0 or 1. This is where the term “binary” option comes from. In computer programming, the binary number system refers to numbers which are represented digitally by either a 1 or a 0. Hence, Binary options are also sometimes termed “digital options”.
When it comes to choosing what trading position to take, binary options also only have two possible trades one can place. These are to decide in which direction the price of the underlying security will go, either be above or below the price now at expiry of the option. Therefore, as a binary option investor, at the beginning of the trade, you have to decide on whether the currency pair (or stock or commodity) will go up or down in the life of the option (expiry time).
There are three key inputs that are required before you place any trade. These are the Strike Price, the Expiry Time and the Payout Amount.
The Strike Price is the price that you agree to enter the trade at the beginning of the trade. A strike price that is chosen to be the current level of the security (spot price) are said to be struck “At The Money”.
The expiry time is the period of length that you have chosen for the option contract to be valid for. It is the time difference between when you enter the trade and when it expires. This can be chosen by the investor at the outset of the trade and can range from a months down to as close as in 60 seconds time.
The payout amount is the percentage that a broker will pay on a winning trade. If, however, you lose a trade the money that you initially staked will also be lost. Yet, there are some brokers who offer some of the initial lost stake back as a proportion of the initial trade.
The standard binary option which allows you to bet on an up or down movement is more commonly called the “up down binary trade”. One can bet that the price is going to go up by buying a “call” option and bet that it is going down by buying a “put” option.
When it comes to determining the price of a binary option, it can be quite a complicated matter. In fact, this is something that quantitative analysts at large investment banks embark on. Binary Option pricing is calculated using a combination of the above factors together with others such as implied volatility and prevailing interest rates. For the standard retail trader though, understanding how it is priced is less important.
A Simple Binary Trading Example
For this example, we are going to take a look at an actual live trade at this moment. Currently, the spot price of pound sterling in dollars (GBPUSD) is $1.3295. Assume that you would like to stake $20 on this trade that sterling will go up and you have chosen an expiry period of 5 minutes. On this particular trade, the broker is offering a 90% payout ratio. If, after 5 minutes sterling has appreciated (increased in value) then you will have won the trade. The payout in this case will be your original bet back ($20) as well as an 90% payout of the original bet ($18). Therefore, the broker will pay you $38 for the winning trade. If, on the other hand, GBP has depreciated (decreased in value), you will have lost your initial bet of $20. Of course, the trade works the other way as well if you bet that Sterling will depreciated (decrease in value).
Part Two: Other Types of Binary Options
Although the Up Down binary option is the most standard binary option, there are a number of other binary option varieties that one can trade. The types of options that you will be able to trade does, however, depend on the type of broker. These are some of the other binary options that you can trade:
- 30 Second Trade
- One Touch Options
- No Touch Option
- Boundary Options
The 30 Second Binary Trade
As the name suggests, the 30 second binary option trade allows the trader to buy options with an expiry time of only 30 seconds. What this means is that there is more opportunity to bet within a defined period of time and make the most of a trending currency pair. Some binary option traders prefer to use 30 second options for two main reasons.
- Trading news events. News events such as Economic reports, company announcements etc have a large impact on the markets. They usually move the markets at such fast pace and usually can retrace and normalise just as fast. When making use of 30 second options, a fundamental analysis trader has more opportunity to take advantage of these extreme movements the moment they happen and profit before any adjustments
- Great for Making Smaller Trades. If a trader would only like to stake a smaller amount on a particular trade, using 30 second options means that they could still make gains similar to those provided by 60 second trading over an extended period
It is important to make certain that the broker you choose to trade with allows you to trade options over a 30 second timeframe. Currently, only 24Option and Finrally offer this.
One Touch Option
A one touch binary option allows an investor to bet whether the price of a security will touch a pre-defined level over the life of the option. If the option reaches the chosen level, the investor gets the full payout of the binary option. If, on the other hand, the option does not reach that level, the investor loses his initial stake on the option. The one touch level can be above or below the current spot price and can be a put or a call.
This type of binary option is ideal for an investor who is certain that the price of the security will reach a certain level but is uncertain as to whether it will remain above or below that chosen level. As seen with fundamental traders who use 30 second options, the price of a security can adjust and retrace which mean the investor may not profit from the initial movement.
No Touch Option
This is a simple variant of the one touch option above. As the name suggests, a trader will bet that the price of the security will not touch a certain level over the life of the trade. If at the expiry time, the no touch option has not reached the level then the investor will get the payout of the trade. However, if during the life of the option, the security has touched the no-touch level then the investor will lose the initial stake.
This type of option is ideal for an investor who is certain that a security will not cross a certain level. This is usually helpful for those investors who use technical analysis and resistance / support levels to inform their trading.
Boundary options are ideal for investors who prefer to “range trade”. An investor will have to decide whether a security will breach or remain within a certain range. At the outset of the trade, the broker will present the bounds of the trading range. If this looks familiar, it should be. A boundary option is just a combination of two one touch or no touch options.
This is beneficial for investors who have views either on a stable or a volatile price range. If an investor is certain that the price will remain within the range, he will place a trade on an “inside bounds” binary option. If, on the other hand, he is certain that it will breach this range and be very volatile (but is uncertain of exact direction) then he will place an “outside bounds” trade.
Some more Binary Trading Examples
The Euro is currently at 1.1147 dollars (EURUSD=1.1147). Germany is about to release some important GDP numbers that you are certain will move the Euro exchange rate. There are three different types of trades that you can place. These are dependent on whether you have a view on whether the number GDP numbers will have a positive, negative or uncertain effect on the exchange rate.
If you are certain that the GDP number will be better than expected and it will lead to an immediate jump in the Euro, you can enter a one touch call option at 1.120. If the exchange rate reaches 1.120 within the expiry time, you will win the trade. If, on the other hand you are certain that the number will underperform and disappoint, you can enter a one touch put option at 1.1110. If, during the expiry time, EURUSD touches this level, you will win the trade.
Of course, there may be a situation when you don’t know whether the GDP number will be above or below expectations. However, you are convinced that the number will surprise and have a large impact on the exchange rate. In this case you can enter an “Out” boundary option you are betting that the EURUSD will break through and out of a boundary. In this case, the boundary levels are 1.1210 (upper boundary) and 1.1100 (lower boundary). If the number does move the market as expected (either up or down) and breaks through the boundary, you will have won the trade.
If, on the other hand, there exists a situation when you are certain that the GDP number will be broadly in line with the consensus and have no effect on the exchange rate. In this case, you can enter into an “In” boundary option. In this bet, you are certain that EURUSD will trade within a defined range. So, looking at the above boundary levels, if at option expiry EURUSD has not touched the 1.1210 or 1.1100 levels then you will have won the trade.