Like any other form of trading, binary options comes with an inherent list of advantages and disadvantages, some of which are more obvious than others. Many individuals feel the risks of trading binary options outweigh other asset classes such as foreign exchange (FX), etc.
One thing you do not need to worry about with binary options trading is psychological weakness. Many factors of psychology are removed from binary options. The most prevalent ones are impulsivity and greed. When these two qualities are combined they manifest in the following: premature closing of positions, and holding on to positions until the breaking point of a stop-out.
Another component of binary options trading that can usually be seen as a positive is the inability of losing more than you invest in a single position. Binary options are a fixed risk and fixed return instrument. There is no leverage (credit from the broker), there are no margins. If you invest a certain amount into a position, then that amount is the maximum you can lose. This in contrast to Forex, where due to leverage provided by your broker, you can lose more than you invested (your “Used Margin”) in a single position.
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Finally, traders can paint with more broad strokes and not be so mindful of price movement. This might be paradoxical, since binary options are all about speculating on price movement vs the strike price. However, with binary options you are merely speculating on whether the price of an asset will be higher or lower than the strike price in an “x” amount of time. This means that even a 0.1 pip difference (in the case of 5 decimal pricing) decides the result.
Things You Need to Worry about with Binary Options
Psychological weakness is indeed something that must be considered. (Yes, dear reader, I did say that this was something that you didn’t have to worry about.) However, as some psychological factors are removed, others are enhanced. The most prevalent “enhanced” psychological weakness in binary options is compulsive gambling. During trading this manifests into the inability to stop trading until your balance is empty. Your balance will become empty no matter how many “wins” you have in a row, because you are unable to stop. This weakness can be present in Forex as well, but it rears its ugly head in binary options.
Lastly, it is of paramount importance that traders select the right broker. While this isn’t part of the trading process, it’s a crucial step to begin the trading process. My suggestion is to choose a broker who also offers a regulated Forex solution to traders. In summary, there are a lot of entities and trading venues out there that sometimes lack the proper authority and regulation.