Trading Disadvantages with binary options
Trading with binary options offers the average trader a number of significant advantages that have driven the growth of these derivatives over the past few years. However, not everything is good news regarding binary options. There are a number of drawbacks when it comes to operating with these instruments, and this article has the objective of describing the most important and that must be known to all trader.
The main drawbacks of binary options are the following:
Lack of operations simulation tools
One of the great drawbacks of trading with binary options with respect to Forex and other instruments, is the lack of operations simulation tools supplied by the brokers for their customers. The number of brokers that offer demo-accounts of practice is quite limited, and this means that most traders start in the binary options market without a way to evaluate their trading strategies and improve their skills without risking money the process. In the case of the Forex market, many brokers even offer trading competitions for demo accounts with cash prizes.
This exposes the trader to a higher risk of losing money on the real market while learning the skills needed to become a successful binary-option operator.
Reduced payments for high-success transactions
The payments offered by binary options operations are drastically reduced when the chances of success (the probability of the market moving in the predicted direction and the expire in the Money option) of the operation are quite high. Although it is true that some transactions with regular binary options offer a profit of up to 90% (depending on the broker), such high payments are possible only when an operation is carried out with an extended expiration period, which establishes a relatively distant expiration date and time with respect to the time the option was placed. Of course, in such situations, the result of these operations is more unpredictable.
Lack of trading tools
Many brokers do not offer trading resources like advanced pricing charts and technical analysis tools for their customers, which is a serious limitation. Because of this, traders virtually operate in the dark when negotiating binary options. The most experienced traders use all kinds of resources that they find in other places as they know where to look for them, while the traders without experience and who are new to this market are not so fortunate.
Some traders open a demo account with a Forex broker and use their trading platforms to perform market analysis. Typically, these applications feature multiple market-analysis tools such as advanced pricing charts, up-to-date news, and even built-in technical indicators. In this sense, these platforms are much higher than the binary option brokers offer.
Limitations on risk Management
Unlike the Forex market in which traders can open accounts that allow to make transactions with fairly low volumes (minilotes, (microlots and even less), many binary option brokers set transaction limits, i.e. minimum amounts to operate on the market which depending of the company can be high. This makes it easier for a trader to lose all the capital of his account when operating with binary options.
For example, there are Forex brokers that allow you to open accounts with minimum deposits of $5-$ 200 and that offer the possibility to make small transactions with microlots or even smaller volumes. This allows the trader to expose only acceptable amounts of the account capital on the market. In the case of binary options, it is difficult to find brokers that allow operations with volumes smaller than $25 and even $50, even with a $200 account. In this situation, a few losing operations can end the account.
Fortunately, little by little more and more brokers offer contracts of options that require smaller amounts of investment, even of $5, however the offer in this aspect continues to be reduced.
Cost of losing operations (binary options Out the Money)
Related to the previous point, unlike other markets where the benefit/risk ratio can be controlled and specified in order to maximize profits and minimize losses, the odds and possible results of binary options tilt the benefit/risk ratio in favor of losing operations.
In other words, traders lose more money when their operations end up as "Out the money" they get when they end up as in the money. It is estimated that for every 70% of profits in transactions with binary options that end positively, the corresponding loss of the same operation if it ends negatively is 85%.
The implication of this is that for a trader to be at least at the point of equilibrium (without loss or profit) when operating with binary options, the percentage of winning operations must be at least 55%. Therefore, out of ten operations, at least 6 winning transactions are required to be in the benefit zone, but if 5 winning operations are produced and 5 losing operations then the trader will be in the loss zone. Many brokers allow to recover between 0%-15% in the options that expire Out the Money, however even in these cases the loss in these operations continues to be high and the benefit/risk relationship is still not favorable for these derivatives.
In the case of the Forex market, for example, with 5 winning operations and 5 losing operations the trader can still get good benefits if it significantly limits losses in negative transactions and maximizes profits in positive transactions, which is quite feasible.
Although some brokers allow to limit the losses of binary options operations by the anticipated sale of the option before the expiration of the contract (see article on function of the operation), what in practice allows you to close a losing position (an option that at the moment is out the Money) with a reduced level of loss, the binary options market still offers very limited possibilities to reduce the cost and impact that losing operations can have on The trader's account.
Management and closing of losing operations
In different markets such as Forex or stock exchange, it is possible to close a losing position with minimal losses and open a new position that generates profits, if a new market analysis reveals that the first position was a mistake. For example, in the case of the Forex market, a trader can open a position during the announcement of an important economic indicator and if he realizes that the market is moving against, you have the possibility to close the position quickly with a loss of say 25 pips, and at the same time you can open a new position in the opposite direction which have the potential to produce hundreds of pips of profit.
This scenario cannot be replicated with binary options. By the time the trader places a Cal or put option on the market, it is no longer possible to close it before the expiration of the contract (only some brokers offer this function and in a limited way as indicated in the previous point) and also the value of their investment in the operation is reduced to reflect the commissions per transaction that the broker charges. The payment of the reverse operation is fixed and cannot be used both to cover the loss of the first option that expires Out the Money and to generate additional benefits for the trader as the market moves in favor of this second position.
It is obvious from the aspects shown in this article that although binary options have multiple advantages that make them an attractive way to speculate in markets, they also have some drawbacks that any trader interested in these derivatives should know in order to get better results in their operations.
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