10 Binary Trading Myths Busted
There are a lot of misconceptions about trading binary options which confuse newbie traders and would-be traders alike. These myths do nothing to help new traders learn the ropes and stay safe and profitable. Some of the myths concern regulations and trading companies, while others involve trading strategies. Probably the most damaging myths involve unrealistic expectations about trading outcomes. Let’s look at 10 of the most pervasive binary options myths, and then correct them with facts.
- It is illegal to trade in the USA.
- Binary options trading is a scam.
- A demo account is not really important.
- You cannot trade with a small account.
- Trading bonuses are free money.
- With a perfect system, you can win 100% of the time.
- You can make $1000 an hour.
- It is okay to trade 20% of your account.
- You can rely on your gut to win.
- Most binary options traders win.
Myth #1: It is illegal to trade in the USA.
A lot of traders are under the impression that they absolutely cannot trade binary options if they live in the United States. This is a misconception. To correct it, I will let the CFTC respond to the myth for me:
“It is against the law to solicit U.S. persons to buy and sell commodity options, even if they are called ‘prediction’ contracts, unless they are listed for trading and traded on a CFTC-registered exchange or unless legally exempt.”
In other words, it is totally legal to trade in the USA as long as:
- Your broker is located in the United States, or ….
- Your broker is registered with the CFTC, or …
- Your broker denies you commodity contracts.
So yes, you can trade in the USA, and you can even trade with an offshore broker in Cyprus. There are a lot of brokers out there that accept USA traders. A few of them are even opening an account with. Be discerning though, because a lot of companies that cater to USA customers are not on the up-and-up. Some of them are not even aware of the legalities set forth by the CFTC! Do not accept second-best just because you are located in the USA.
Myth #2: Binary options trading is a scam.
While on one hand there are many new traders who believe they cannot trade binary options, on the other there are many would-be traders who avoid trading altogether because they believe they should not trade. These traders have been told that binary options trading is a scam. They may also believe that other types of trading are scams as well.
Where does this myth come from? It probably stems from two different sources when it comes to binary options trading:
- Con-artist brokers. Yes, sadly, they do exist, and there are dozens of them out there. These brokers are not real businessmen. They exist only to take your money. They will cheat you out of winning trades, make it impossible to withdraw your money, and may even try to steal your identities. But they do not represent all binary options brokers! They are posing as legitimate binary options brokers in order to trick you. There are honest brokers out there trying to do real business. Trade with one of those brokers, and you will be good to go.
- Foolish traders. There are always traders who are ready to throw away their own hard-earned money by trading without regard to whether they know what they are doing or not. These traders are all too willing to be scammed. They believe they can make a fortune overnight without knowing anything about the markets. They believe many of the myths on this page. In effect, they have scammed themselves. Once they lose all their money, they will go on to tell other traders that somebody else robbed them. As a result, other traders believe that these traders were victim to a con, whereas they only conned themselves.
Binary options trading is not a scam. It is a legitimate trading vehicle. You just need to find a good broker and take a responsible, knowledgeable approach to trading in order to profit.
Myth #3: A demo account is not really that important.
Why should you waste time trading with virtual money before you trade with real money? Because when you first get started, even if you have done a ton of research and testing, you are probably going to lose a lot of trades. If you are losing fake money instead of real money, you are saving up your real money for when you actually know what you are doing. The idea may make you impatient at first, but it will ultimately save you time. It will also teach you how to be patient and responsible, which are critical skills for binary options success. So yes, a demo account is important. In fact, it is arguably essential.
Myth #4: You cannot trade with a small account.
Has anyone ever told you that you cannot start up a trading career with a few hundred or a few thousand dollars? This is a myth, though it has a basis in fact which you should be aware of. If you use sound money management principles, you can only risk a tiny percentage of your account on each of your trades (about 3%). So you will be making hardly any money if you open an account with a couple hundred dollars—at first.
Eventually, your account will grow if you trade well. And someday, that 3% will represent a lot more money, and a lot more profit. So the question really is whether you have the patience to trade with a small account without violating your rules and blowing it. If you do, there is no reason you cannot start that way. Small risk is perfect for practice anyway. And as you get better at trading, your account will grow. Click here for binary options brokers that let you start small.
Myth #5: Trading bonuses are free money.
“Get $500 free when you deposit today at Binary Broker X!” Ads like this are all over the internet nowadays, and tend to be a major selling point for brokers. A lot of newbies assume that they really are receiving a gift of free money. If you read the terms of service, however, you will discover that accepting a bonus means signing a turnover contract. Until you turn over the volume of the bonus money 20 to 40 times, you will be unable to withdraw the bonus as cash. You can use the money to trade, but not for anything else, until you meet the requirement. There are a couple inconveniences here:
- Trading on leverage is dangerous. It means investing more money than you can really afford to lose.
- Withdrawing any of your winnings can get complicated when bonus money is involved.
This is why you must learn to look at bonus offers as leverage for trading, and not really as free money. You have to decide for yourself whether a bonus is going to be worthwhile for you.
Myth #6: With a perfect system, you can win 100% of the time.
This is one of the most damaging myths out there, but you will see so many con-artists successfully selling their scams with it. They may not promise 100% returns, they may promise 98% or 99%, or thousands of dollars an hour—but whatever it is, they are preying on the blind misconception by new traders that there is such a thing as a perfect system.
The fact is plain and simple: Binary options is a business of risk.
There is nothing that can remove 100% of the risk from trading. A good system that you know how to use effectively can reduce the risk and help you to control it, but you will lose trades. Anyone who says otherwise is lying—and probably selling something.
Myth #7: You can make $1000 an hour.
This is an unrealistic expectation not because it is impossible, but simply because it plays to a weakness. You should not be focused on how many thousands of dollars an hour you can make, or whether you can become a millionaire next year. You should be concentrating simply on making consistent, reliable gains. And if you have a small account, those gains are going to start out pretty small. You might make $10 during the course of an hour. Just remember, if you make those gains regularly, and you trade long enough, someday it will be $1000 an hour. But it is not going to happen overnight. This is not about fast profit. It is about long-term growth.
Myth #8: It is okay to trade 20% of your account.
This is an arbitrary number, but it is simply too large. You should be aiming to trade no more than 3-5% on each of your binary options trades, if not less. The most successful traders know that they will have losing streaks. If you risk 20% on each trade, you could blow your account in just five trades! Risk 30%, and you get only three. Yet every day, new traders invest huge portions of their accounts on trades they cannot afford. And then they wonder why they wash out of the market so fast.
Myth #9: You can rely on your gut to win.
A lot of traders like to believe they have a magical ability to predict the movement of stocks and other assets. They feel they have an instinct for the market, some kind of deep, metaphysical connection which only they can understand. This gives them a feeling of prestige and significance. They love to tell others about how their gut is always right. And they often try to trade on that gut instinct, because the idea that they have a mystical connection to the market (and to success) is so exciting.
Nobody has a mystical connection to the market. However often your gut is right, it will ultimately fail you when it comes to trading binary options. Binary options trading entails risk, and risk is all about uncertainty and chaos. You want to bring order to trading in any way you can. Your instincts are chaotic, just like the market. That’s about as far as the connection goes. Only consistent, reliable, proven methods can help you to win over the long term. Anything else just increases your risk exposure.
Try these to ensure you are on the path to success.
Myth #10: Most binary options traders win.
You may have a mental image of a thriving binary options community where thousands of traders just like you are making a living trading around the world. You might envision a lot of men and women quitting their day jobs, telling off their ex-bosses, and embarking on a life of wealth and adventure.
The reality however is that only about 10% of those thousands of traders are likely to profit for any length of time, and even fewer are likely to be able to trade for a living. Think of a number closer to 2% if you want to be realistic. It is hard work learning how to trade binary options profitably. If you divest yourself of these myths though and start learning the facts, you will be well on your way. And if you can join that 2%, you will have the honor of being a part of a very small, very elite community of successful binary options traders.
Learning on how to handle your wins and losses will help you be a successful trader.
Common Misconceptions About Binary Options
There are many misconceptions about binary options, so it is important that traders understand exactly what they are–and are not–in order to use them effectively.
Here’s a look at some of the more common misconceptions.
Binary Options are Just Gambling
At least on the surface, binary options are structured just like a $100 bet on a football game: You buy the team you like or you sell the team you don’t. A binary is just a simple yes/no trade. The yes trade means you agree with the binary statement—that the market will reach a certain level before expiration, for example—while the no trade means you disagree. The pricing of the binary is between zero and 100 throughout the lifetime of the option.
Unlike football where the underdog will receive odds, the binary has a multitude of strike prices that have a variety of fixed odds.
If you buy a binary priced at 20, there is a low probability of it paying off. Your cost is $20, while your potential profit is $80.
If you sell a binary priced at 20, then there’s a high probability of it paying off. But your cost is $80, while your potential profit is $20.
You can trade binaries on stocks, futures, foreign currency and ETFs as long term investment and or flip them as a speculative short term trade.
Binaries can also be used as a hedge just like standard put options. The difference with binaries is that your potential loss is limited, you can have a very short time horizon and your payout is either all or nothing.
Binary Options May Only Be Bought Not Sold
As you look at the various strike levels of a particular binary option, you’ll see the similarity to call options. As a binary buyer, you’re bullish about the underlying market. The binary at expiration is valued at $100 if underlying market finishes above the strike so the various strike levels will draw similarity to in the money, at the money and out of the money call options as to the relationship of the underlying to binary strike. The at the money binary will be priced around 50 and the pricing is limited to the trading range of zero to 100.
You will not find the binary option chain for the puts. To sell a binary you are taking the opposite view, you’re bearish the underlying market and think it will finish at or below the strike at expiration. So to sell a binary, you go short the binary at the trade price.
Remember that the binary contract is fully collateralized.
AUD/USD >.9140 (3PM) traded at 28
Binary Buyer: is long at 28 trade price and his cost is $28 per contract.
Binary Seller: is short at 28 trade price and his cost is $72 per contract.
Fully Collateralized: buyer cost $28 + seller cost $72 = $100 Expiration payout
You Are Required to Hold Your Position Until Expiration
Binary options are not buy and hold contracts until expiration. At any point prior to the expiration, the binary position can be offset to cut your trading losses or lock in an early trading profit. When you initiate the binary position, your initial trade cost is your maximum exposure, so you’re either long or short the binary at the binary trade price. In a long binary position, you want the price to rally to 100, while in a short binary position you want the binary pricing to sell off to zero.
Binary Options are Not Regulated
Many binary options that are traded over the counter outside of the US are not regulated.
In the US, there are three exchanges, regulated by the CFTC, offering binary options trading, Nadex being the first and largest for retail traders.
Binary Options are Not Transparent
If you are trading binary options on a regulated exchange, you will be provided accurate and up to date time and sales data on all bids, offers and trades throughout the trading session. That’s because the exchange is simply matching buyers and sellers on every trade.
Trading Binary Options Requires Enormous Capital
All binary options are priced between $0 and $100 and the minimum amount to open an account with Nadex is $100. Since you are never trading on margin, your account always needs to have sufficient funds to cover the initial cost of the trade plus trading fees.
With binary options, the maximum risk and the potential profit are clearly defined to the terms of the trade assuming a favorable expiration payout. To trade on Nadex, the initial cost is a fraction of the leverage markets on which the Nadex products are based.
As we have seen there are many misconceptions about binary options. We hope we’ve dispelled the most common ones.
Futures, options and swaps trading involves risk and may not be suitable for all investors.