Guide to selecting a binary options broker
Introduction
As the negotiation in the financial markets becomes more and more popular, it is natural to change and evolve the supply of investment products and speculation to adapt to the requirements of investors looking for increasingly innovative and profitable ways to place their capital. In this way, new virtual markets are created. When new financial markets evolve too fast, it is sometimes difficult to track the sustainability and reliability of these products. Binary options are precisely one of these markets. The appearance of binary options is a phenomenon that has been developed in a similar way to Forex when it emerged at the end of the decade of 1990 and the beginning of the new century – a real explosion of a market that is currently at a stage of maturity.
Binary options made its appearance officially in the 2008 (although it was already negotiated with similar products in OTC markets since the decade of 1970 for example) when the SEC (Securities and Exchange Commision) of the United States approved this form of online trading in the markets.
Logically, the emergence of new markets has seen the emergence of a series of brokers offering new products to traders eager to find novel anyway to speculate on financial markets. In the case of binary options, these brokers, which usually do not have regulation, increase their number year by year. For those who value their money, it is important to be cautious about the unknown, especially for those who are beginners in the market and who can feel confused and even overwhelmed by the wide offer of brokers offering binary options. Negotiating with these derivatives can be extremely profitable both for professional traders and beginners, however, it is essential that they select a company that provides them with the best operating conditions and in which they can have the confidence that their money will be safe. (The most recommended are IQOPTION and ETORO Clik in each one for more information)
This is where the fundamental question arises:
How can I select a binary option broker that is reliable and that at the same time I offer the conditions I need?
In order to choose the most suitable broker, the trader must answer some basic questions to confront before taking his first steps in the trading world with binary options. For the novice trader can be confusing the great amount of information-good and bad-that can be found on the Internet with respect to the brokers. Sometimes it is difficult to discern what information is reliable and what is not. For example, sometimes a negative review of a broker on a blog or Internet forum might have been written by a competing company or an angry customer who lost his money quickly and on his own guilt. Or, on the contrary, a too-positive review could have been written by the same broker to attract new customers.
Therefore, another important question is the following:
How can we distinguish a reliable broker from the hundreds of signatures that exist on the Internet now?
Is this guide to selecting a binary options broker, we will explain the different factors that a trader can consider before opening an account with a broker. Some of these factors are as follows:
Regulation
Capitalization of the company
Trading platforms
Broker Type
Customer Service
Regulation
In the Forex market, for many traders, trading in the market with a regulated broker is usually the most important factor they consider when opening a trading account. However, in some countries like the United States and its strict regulation of the NFA (National futures Association) For example, the negotiation in the markets can be more complicated, cumbersome and even less lucrative. The leverage offered is lower than in other countries and there may be more restrictions for small traders and investors in terms of minimum account sizes, operating conditions and other factors.
In addition, as shown in the case of MF Global, which in 2011 was a focus of financial sector news due to fraud and bankruptcy (a series of liquidity-perceived problems and large penalties and sanctions imposed on MF Global in 2008, it led the company to bankruptcy in 2011.), regulation does not necessarily guarantee the total security of the funds. We also have the case of IOption, which broke at the end of 2013 despite being one of the biggest brokers in the binary options sector and being regulated by CySEC.
However, how a broker is regulated depends to a large extent on where it is registered and where its base of operations is located. This can be a complex issue when we are dealing with a global marketplace. In the case of binary options, this financial market is mainly an OTC (Over The Counter) Market and this makes it more difficult for a company to be subject to a specific regulatory framework.
Although this is a complex issue, trader cannot ignore the importance of having a financial regulatory framework that controls the operations of a broker. This is because the majority of traders and minor investors do not have the means to carry out their own research on the reliability of a particular investment vehicle or simply do not want to do so due to an excess of confidence. Partly this is because due to fees or fees that are paid to brokers by customers, many traders consider this to be part of the broker's obligations. In other words, the broker is supposed to act in the best interests of its customers. However, when the broker is also a Market Maker, that is to say that it becomes the counterpart of the clients in their operations, this is not always the case.
In the United States, the brokers are regulated by the FINRA (Financial regulatory Authority), a self-regulating agency of the brokers Industry and the SEC (Securities and Exchange commision). For brokers that are based in the United Kingdom, the task of regulating the activities of these companies falls under the scope of the FCA (Financial Conduct Authority), a quasi-judicial organism. The member countries of the European Union have their respective financial regulatory bodies that follow the standard legal frameworks established by the MiFID. An example of these agencies is the CySEC of Cyprus, which regulates a large number of Forex brokers and binary options that have been installed in that jurisdiction. These are some of the main regulatory agencies that monitor the brokers and ensure that these companies offer the due conditions to their customers, including proper management of their customers ' capital and their own finances.
In a perfect world, financial markets should be safe and fair for all their participants, both for large investors and small investors. Unfortunately, the financial crisis that resulted from the collapse of the US subprime mortgage market in 2007-2008, is a harsh reminder that financial regulations are not always adequate enough to protect investors.
Returning to binary options, this market is changing very quickly. At least ten new brokers appear each month, even if it seems exaggerated. We can certainly say that more than 90% of binary option brokers do not have any regulation. Those that are regulated are usually based in Cyprus, have a CySEC license and have offices registered in the British Virgin Islands or other New Zealand countries is another country where the binary options brokers are beginning to settle. So far, only a small percentage of the brokers in this market are properly regulated, but surely this will change in the years to come. Because of this, it cannot be said that regulation is a major factor at the time of choosing a broker, but if it should be taken into account, especially if the trader wants a higher level of security both in the management of his capital and with regard to the practices of the company.
Capitalization of the company
Another factor that should be considered when selecting a broker is the capitalization of the company. It is advisable for the trader to verify that a broker that is considering opening an account has a good capitalization to minimize the risk of losing all funds in case of bankruptcy, or to ensure that he can pay if he has obtained high profits in their operations which he wants to collect. In the case of a firm that is duly regulated, the trader can be sure that it is well capitalized, because it has to have millions of dollars in its accounts only to be able to apply to the regulatory entity and obtain the regulation.
Previously, firms that had a low level of capitalization, even just $100000, and operating in the United States, had many problems with their customers ' money when there was a fall in the market. This led to the implementation of a number of regulations in that country that demanded among other things that the brokers had at least 20 million dollars in capitalization so that they could operate. This requirement is controlled by the National Futures Association (NFA) in conjunction with the Commodity Futures and Trading Commission (CFTC). To check if a broker in the United States is sufficiently capitalized, a trader can consult the website of the CFTC. This organization has a list that shows the capitalization of its members, which is updated monthly. However, it should be noted that many Forex brokers and binary options have had difficulty meeting this requirement and have been forced to move their bases of operations outside the United States and place them in Europe mainly.
However, as retail trading in financial markets becomes increasingly popular and legitimate, many countries in the European Union are also following the United States ' steps in terms of capitalization. In this regard, capitalization is gradually becoming an aspect that the trader must worry about less and fewer. The reason for this is that many binary option brokers are covering their risks with third parties. This means that although these companies lose large sums due to the high profits of the customers in their transactions, they are able to pay the benefits obtained by these. Some brokers even take the other side of a particularly large operation by opening the same position with another broker. This protects the company from suffering too large a loss in a single operation.
It is advisable for the trader to ask the broker who is operating information regarding its capitalization and whether it covers the risk on its own account or uses a third party for this purpose.
Without a doubt, the capitalization of a firm is a factor of paramount importance that a trader should consider when conducting the investigation for the selection of a broker.
Trading platforms
There are many types of trading platforms on the market. With binary options, most are web-based, so they do not require downloading or installation. Many of these applications are white labels developed from the platforms of other companies in which the brokers have placed their own brand, logos, etc. Two of the most important companies in the development of platforms for binary options brokers are SpotOption and Tradologic, whose applications are used by a large number of firms, including regulated brokers. This means that many brokers do not have their own software developed to operate with binary options, but they use systems designed by third parties and that have adapted to their needs.
Currently the brokers offer different types of binary options on their platforms, first of all we have the classic binary options, also known as High/Low, Up/Down, Above/Below or simply Call/Put. This product can be found in virtually all platforms because of its simplicity. The trader only has to determine the direction of the market for a pre-determined expiration period and whether it will end up or down a specific price level (exercise price), which in most cases is the current price at the time the position was opened. For these operations, the platform usually displays a simple pricing chart along with a selection of the underlying assets offered by the broker. In this case, the trader selects the underlying asset and the expiration period of the option, and opens the position by clicking on the button that says Up (option Call) or Down (Put option), depending on its prediction with respect to the market. This way, operations with these binary options run fairly simple.
In most binary options trading platforms we have a fairly simple interface that shows the underlying asset, the target price or exercise price, the payment offered if the option ends In the Money and the expiration period of the contract as shown in the following image:
Usually, we also have a more graphical interface like the one shown in the following image:
Through the same trading platform, many brokers offer One Touch options. In these operations, the trader must predict whether the price will reach or not a pre-determined price level during the expiration period of the option. The gains offered by these options can reach 500% of the amount invested in the transaction. It is certainly a massive return, but the chances of success are also minor. Generally, the price level or barrier is located quite far from the trend and the current price in the chart. The following image shows a typical platform to operate with one Touch binary options:
Another type of binary option that is regularly found on trading platforms is range options, in which the trader has to predict whether the underlying price will end in or out of a default price range after the expiration period of the option ends. Some brokers also offer 60-second options (they allow for fast operations that offer gains in a short time), Ladder Bet options, and even options on asset pairs. This has significantly increased the supply of bargaining products for these companies.
With all these types of options, the trader must look for companies that offer graphics platforms that have a wide variety of time frames, which allow us to study the history of the price of the underlying assets up to a week ago at least. In addition, the selected broker must provide the assurance that the platform and the Web site will be online almost 100% and that the price slip will be minimal. Slippage is the time lapse between order placement and operation execution. A few seconds can mean the difference, especially when we operate with options of 60 seconds of maturity.
Downloadable or web-based trading platforms
What is the main difference between a web-based platform and a regular platform? A web-based platform is totally independent of the computer used by the trader to operate on the market. On the contrary, regular trading platforms require the user to download a software and install it before they can start operating. What this means is that the trader has to negotiate from the specific computer in which he installed the platform. If the computer used by the trader is a desktop PC, this means that the trader cannot operate on the market from anywhere he wants. In other words, it has no flexibility as it lacks mobility.
Platforms for mobile devices
Some of the best brokers also offer applications through which the trader can open the trading platform from mobile devices such as iphones or smartphones with Android technology, through a downloadable app. With these applications, the trader can open his account, open new positions, control open operations even deposit funds.
Payments offered by the broker
Below is a list of features related to the payment that we need to analyze before selecting a broker:
-Returns on the amount invested
In trading with binary options, traders have to predict in which direction the price of an underlying asset will be moved for a specific period of time (the expiration period of the option). If the trader makes the correct prediction with respect to market behavior, he gets a fixed return percentage based on the amount of money invested. However, this return percentage varies from one broker to another, and also depends on the underlying asset and the selected maturity period. Some brokers calculate this return based on the market price of the underlying asset in real time while other companies use their own algorithms to determine this percentage of profit. Whatever the broker selected, we must analyze what the profit it offers, and if this reaches at least 65%-70% of the amount invested to be worthwhile to operate with this company. The highest payment offered by the brokers by the high/Low options is 90%. In the case of One Touch options, the return can reach up to 700% of the amount invested.
-Return for the options that expire out the Money
The main disadvantage of binary options is that if the trader is wrong about its market forecast and the price ends even 1 cent below (options Call) or above (Put options) of the default price (strike price), then the option expires Out the Money (losing operation). Therefore, apart from analyzing the returns, traders should also look at the payment or return offered by the brokers when the operations are not successful. Again, returns vary from one broker to another. Some pay up to 15% of the amount invested by the options that expire Out the Money while others pay nothing.
Underlying assets offered by the broker
Traders who have experience with different types of underlying assets will feel comfortable with binary options because these derivatives offer access to a wide variety of markets. If a trader operates regularly with commodities or currency pairs for example, it is best to keep these assets when it starts trading binary options, as this increases the chances of success in its first operations. This is because it already has the general knowledge about these markets and can predict more accurately the price movements. Also, you will be more accustomed to perform analyses of these assets either by means of technical or fundamental analysis.
Because of this, experienced traders are encouraged to look for brokers that at least offer the underlying assets they operate on a regular basis. In the case of traders interested in diversifying their transactions, they should seek out the brokers to negotiate with as many underlying assets as possible. Most binary option brokers offer currency pairs, stocks, indexes, and commodities as underlying assets. The general rule is that the broader the list of the underlying assets of a broker, the more serious the company is.
Customer Service
No doubt the customer service is key. First of all, the trader must review the number of languages offered on the trading platform. You should also find information about the means of contacting customer service and how fast you respond.
The level of customer service is usually taken as a key indicator of the quality of a broker. Some traders tend to try a broker before depositing funds. For this, we can send you an email and see how long it takes to respond. We can also connect to live chat on the website and ask questions about trading accounts and welcome bonuses. From these interactions we can have an idea of the seriousness of the broker and to what extent they value their customers.
Most binary option brokers offer welcome bonuses and other promotions such as risk-free operations. This is why trader should ask the company representative about their current offerings. With respect to the bonds, it is advisable to ask what the conditions of the promotion are, especially those that refer to the withdrawal. For example, sometimes a broker offers its customers a 100% bonus, but occasionally it does not allow the bonus money to be withdrawn under any conditions. In other cases the conditions for withdrawal are almost impossible to meet (a negotiated volume is required too high).
In some brokers, customer service personnel train new customers regarding the use of the trading platform or provide them with an education with respect to binary options for example. Some companies even offer training 1 to 1.
Safe negotiating environment
By safe negotiating environment, we refer to the security level offered by the broker when it comes to conducting market operations over the Internet. The issue of security is not specific to binary options because it affects all forms of web-based negotiation. In order to be as safe as possible, the trader must operate with a trading platform that is encrypted with a 128-bit SSL encryption key. If the transactions are not encrypted, we run the risk of falling victim to a hacker stealing our financial data.
It is recommended to research in specialized forums to see the opinions of the people regarding the security that certain brokers offer, although this should be taken with care. It is very common that traders, especially beginners, who lose their money in the market, claim that they were victims of some hoax to try to get the broker back their money in order to avoid bad publicity. Other competitor brokers may leave bad comments or "proofs" of deception to adversely affect the competition. Although it is a dirty tactic, it happens more than many believe, as competition in the sector has intensified.
Questions to make a trader before opening an account with a broker
Before choosing a broker, the trader has to ask the following questions:
How well is the company capitalized?
Is the company regulated? If so, what is the regulatory entity in which it is registered?
How does the broker cover its own risk for its customers ' operations?
Who takes the other side of the trader's operations, ie who acts as the counterpart?
What welcome bonuses does the broker offer?
Are customer funds kept in secure and separate accounts? If so, where?
What means does the broker accept for the deposit and withdrawal of funds?
How long does it take to withdraw funds?
Is it necessary to pay commissions for the withdrawal of funds?
What security measures does the broker apply?
Conclusions
It is not uncommon to find on the Internet traders ' comments and complaints that they feel defrauded by the services of a broker with which they opened an account to operate with binary options. In many of these cases, the real cause of the problem is that the trader is annoyed at losing his funds quickly and on his own guilt. Of course, as is the case in other markets, there are also brokers whose services are really deficient and even fall into practices that can only be described as deception.
For this reason, the trader must move carefully and not rush to deposit his funds with any broker. The best thing a trader can do is to invest the time needed to make the best decision. In the beginning, it is advisable to deposit small amounts to evaluate the services of the broker little by Little. You should then test the withdrawal process and once you are sure about the company's legitimacy, you can deposit additional funds.
Once we start trading with a broker, we should not rush to deposit more money if we are not ready.
Before making even the first deposit, we must ask the questions described in the previous point to the Customer service department of the broker.
If the broker offers demo accounts, it is advisable to open one to evaluate the company's trading platforms.
Like trading strategies or risk management methodology, selecting a good binary options broker is extremely important for success in the marketplace.
Trading with binary options has several advantages over other ways of operating in the financial markets. First of all, the trader knows in advance the risk and the gain that he can obtain before opening the position. The yields it offers are quite high and the trader does not need to be an expert to understand the mechanisms of binary options. Despite this, it also has its drawbacks, and therefore the trader must always look for the broker to provide him with the best conditions.
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