“What is riskier, Binary options or Forex?” is one of the most frequent questions being asked. In this article, we will review the answer to this question for the brokers, while the next will tackle the issue from the client side. There are many claims of binary options being extremely risky for the broker, and many fear in-house risk management as a result.
Let’s begin with the fact that you cannot compare two different financial instruments in terms of risk. You have to look at it from your own risk management perspective. Forex can also be extremely risky if you do not use the tools at your disposal. That is why dealing or risk management departments tend to be important for forex brokers. The fact of the matter is, that to successfully manage risk in binary options you must learn and develop a strategy that will minimize it. I will provide some tips further on how to achieve this.
Binary Options Industry Still In Its Youth
I would like to make a point that binary options is still a young industry. There are no liquidity providers, clearing houses, or large pools of brokers passing on binary trades. That is of course, if you are not a white-label of some software provider. Therefore, to manage risk, you are facing trades that are cleared in-house. This is traditionally known in the Forex industry as B-booking. Now, this isn’t bad by itself (it is no secret that if clients lose then the binary broker makes money and vice versa), but to do this successfully you must be transparent.
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Transparency is the key to reducing client complaints, and building your reputation as a brand. This transparency should first and foremost come from pricing. Your clients should know where your pricing is coming from, but it’s more important that you do and have control over it. If you don’t, please read my previous article. This is the most important tool in your arsenal as a binary broker, and this is where you build the foundation for your risk management.
With transparency out of the way, here is a very basic how-to manage your binary option risk in-house.
Step 1: Collect Data
This applies to every binary broker looking to manage their own risk, it does not matter if you are established, thinking of launching or just launched. You must collect data on client trading patterns. The best way to do this, and easier done if you have not launched yet, is to offer demo accounts to your potential clients with exactly the same limits you would have on your real accounts and many instruments. This will give you valuable insight into your clients’ needs that will allow you to enhance your offering.