1. Odds Heavily Stacked Against You
Too many unversed in odds and trading the kind of returns you can make from trading binary options appear to be pretty good. That is until you realize that even with a 75% rate of return on an option you would have to predict correctly over 55% of the time. Again to many this doesn’t appear that bad but many trading systems are not profitable due to how often they correctly predict price movements but rather are successful due to how they manage risk. Many successful trading systems are very effective at running with a profitable position while cutting the losses quickly. I have known some very effective Forex strategies which only correctly predict price movements with about a 25-30% accuracy.
2. Simple Win or Loss Instrument
Again this relates to the first point but the fact that a Binary Options bet is a win or loss scenario both limits your chances of being profitable over the long run and your trading options. For example typically option contracts are priced with a variety of formulas, the most famous being the Black Scholes Model. With profits being made by trading options which are incorrectly priced. In the fact the Black Scholes Model can be adapted for Binary Options but not when they offered in the way the majority of providers in the industry choose to price them, i.e namely as a percentage return. For example the binaries on offer at GFT can be evaluated by Black Scholes Model etc. However GFT are in a minority with the majority of binary option providers offering poor value binary bets.
3. Lack of Regulation
While CySec recently made the move to regulate Binary options as financial instrument the majority of financial regulators throughout Europe and the rest of the world choose not to regulate binary options. This has allowed many operators to operate without any kind of oversight and infact the majority of companies in the industry seem to have managed to avoid regulation by claiming that the regulation of their white label partners do not require they become regulated themselves. This is an obvious problem and has rightfully put many people off trading binary options.
4. Better Instruments Available
One of the ways Binary option providers try to tout themselves to their potential customers is by selling the ease of using Binary options to play the financial markets. But however if you live within in Europe there are huge number of regulated derivative providers who offer Contracts for difference. CFD’s are a type of derivative that allows you to trade financial instruments without owning the underlying physical instrument allowing you to avoid brokerage fees and commissions while still being able to play the financial markets. While the spreads are greater when using such an instrument the development of CFD’s has led to unprecedented market access for the average man and woman.
If this hasn’t put you off trading Binary Options (with the exception of the FSA regulated Binaries offered by GFT and IG Markets), then I don’t know what will you. However I suggest any one who has been tempted by the possibility of trading binary options look into CFD’s or other derivatives such as financial spread bets.
