How to Choose a Binary Options Broker?
Trading in financial market has become more popular in recent times. With a large number of new financial markets emerging so quickly, keeping track of their credibility and sustainability also becomes a tedious task. One of such markets is Binary Options.
By definition, Binary Options are: A kind of financial option in which the payoff has just one of two outcomes – either a fixed monetary/units of some assets, or nothing at all. Binary options are also called “all-or-nothing” options. This method of trading emerged in 2008 when SEC (Securities and Exchange Commission) approved it.
As new markets emerge with time, more and more traders also come up offering the respective trade products. Binary options brokers, like other trading methods, come in both regulated and unregulated varieties. It would be wise to be wary of the unregulated kind. It is important to know which brokers to trust with your money, since Binary options trading can be rewarding and punishing, depending on the broker you choose. A sound and credible trading platform must be chosen to ensure you get the best out of your investment.
While there is a plethora of information available on binary options trading, investing in the same is as much a leap of faith as with other conventional trading options. It is important to get educated about binary Options trading because of the overwhelming amount of misinformation posted on the web by disgruntled traders and competing traders. Distinguishing a reliable broker in the herd of thousands of other brokers is a vital prerequisite.
For new investors, we’ve highlighted various important factors that need to be considered before opting for a broker. These factors are as listed below:
In the foreign exchange (Forex), a lot of traders prefer to trade with regulated brokers. Regulated brokers are an important factor while opening a trading account. On the other hand, there are those regions where unregulated brokers are preferred over the other kind. National Futures Association (NFA), the self regulatory trading compliance and governing body, has made policies that made the whole process of trading less fun than it used to be. Recent cases of trading top shots going bankrupt proved that being regulated does not guarantee the safety of your invested funds.
When we think about it, the base of operation and location where a broker is regulated is also a very important factor. Since majority of trading companies work on the global market, they are more like an Over-The-Counter (OTC) trading spots. Thus it becomes difficult for a trading firm to work under a single set of trading regulatory framework.
The issue at hand may be complex and confusing, but it is utterly important to have a financial regulation framework that governs the operations of a broker. A broker works from both sides of the market, i.e. the client side and the market side. Therefore, it becomes important to set some regulations and guidelines so that an investor feels safe about his investment.
SEC (Securities and Exchange Commission) and FINRA (Financial Industry Regulation Authority) are the governing bodies that set the rules and regulations and trading guidelines for the brokers in USA. These governing bodies also monitor and make sure brokers follow their regional regulatory guidelines diligently. The fiduciary standards set between the trustee and the beneficiaries are also monitored by SEC and FINRA.
The scenario postulated above holds true in a perfect world. The keyword being “Perfect”, the irony abounds here as well. The global financial market witnessed the U.S. mortgage market collapse in 2007/2008. This incident is a stark reminder that these regulations are not completely fail safe when it comes to protecting an investor’s funds.
Binary options differ from conventional trading methods. Being a recent method, many new brokers emerge dealing in binary options. With only 5% of the binary options brokers regulated, that too in regions like Cyprus, it is clear that this method understands the vulnerability of regulation standards. So the question comes, if regulations are not the governing factors while choosing a broker, what is?
It is always suggested to ensure the opted broker has enough capital to bring down the risk of losing funds as low as possible. In case you invested in a big winning trade or your broker goes bankrupt, your funds should not go down the drain. It is advisable to ensure you are able to retain at least your invested amount if anything goes wrong. NFA and Commodity Futures Trading Commission (CFTC) have made it mandatory for US based brokerage firms to have at least $20 million in capitalization to operate, they have list of firms that have adhered to this policy and this list is updated on monthly basis.
It must be noted that many binary options brokerage and Forex firms find this requirement a tough nut to crack and end up relocating their operational basis in Europe and other areas where trading regulations are not so strict and difficult to comply to.
When it comes to financial market, retail trading is gaining popularity and is legalized in many countries in Europe as well. This has resulted in Europe following USA’s footsteps in case of capitalization. Since majority of binary options brokers follow the practice of “risk hedging” with third parties. By doing so, they can afford to return your profits despite facing any risk of losing a hefty trade. This is a good back-up plan to guard a company from facing too much of loss in one trade.
It is important for you to know the capitalization of your broker and if they have any such back-up plans. Trading is a game that involves risk, and it is always wise to have a contingency plan.
Financial market offers many platforms for trading. Binary Options mostly uses web based platforms. While most of these platforms are not proprietary, brokers use white labels of other companies. Rest assured this is legal and perfectly normal method of trading.
Many types of vehicles are offered by brokers for trading on their platforms. The most preferred option is the PUT/Call or the UP/DOWN method. All companies offer this platform. Here, market movement is chosen, an expiry is set and then it is predicted whether the asset will move UP or DOWN when the expiry is reached. What you need to look for here is that, generally, you will have a chart at your disposal that you can refer for selecting an asset type.
Next comes One-Touch. The trade depends on touching a certain point till expiry. Your investment may stretch up to 550% of its initial value on this platform. The payout looks lucrative for sure, but it is also a long shot. Chart trends need to be studied well before marking a line (the point you expect the asset to reach). With a quick turnaround time of as fast as 60 seconds, One-Touch is one of the most desired trading platforms.
Some more about binary options trading platforms
It would be wise to opt for companies with that have a good timeframe history. Try to study weekly records of the companies. Companies with minimum down time on their server should be your top priority. The time between placing and execution of a trade is called slippage. Make sure slippage is as low as possible. After all, when you are trading in the 60-second window, every second counts. And every seconds makes a whole lot of difference.
Then we have web and non-web based platforms. Web based platforms offer mobility to the investor. This means he/she can see the market trend and invest using any computer. Non-web based platform required the investor to install a software on his/her computer. Since this software is on only one computer, the option is mobility is beyond question here.
Keeping that in mind, technology has surely come to the rescue of the investors. With everyone using smart phones, be it iPhone or android, brokers have come up with downloadable apps which can be installed on your mobiles. Using these platforms, you can do all the trading you used to do on your computer, including depositing funds. With everything “on the go” in this world, trading shouldn’t stay behind, and it didn’t.
When it comes to binary options, traders need to predict the direction in which the price of the asset will go at the expiry. With correct determination, a trader can reap a percentage based return on the initial amount of capital invested. On the other hand, the percentage of this return depends on factors like the percentage the broker offers, the traded asset and the expiry time chosen.
While some brokers calculate this return on the real time price of the asset, some binary options brokers calculate returns using their own proprietary algorithms. Keeping in mind the method your broker is using, it is crucial to take the final return in consideration and ensure your asset reaches at least 65% to 70% of its initial market price to make it worth of your investment and time. While PUT/CALL options reap a payout as high as 85%, One-Touch trading, with payouts as huge as 550% is what we call the most loved method of trading.
The sole catch with binary options is that if your trade is off by even one cent from the price you predicted. Your investment will go down to zero, after all, it is an “all or nothing” method. Therefore, along with keeping an eye on the returns, traders also need to consider the rate of payout in case the trades don’t succeed. Again, this figure depends on the broker you’ve chosen. Some brokers may pay out 15% of the original investment in case your trade is not successful and some “Purists”, who love the concept of “all-or-nothing”, don’t pay anything at all. Welcome to the world of risks I say.
Experienced traders like to use commodities and currency pairs for trading. While trading in binary options, it would be wise to stick to your preferred assets.
Binary Options trading offers flexible asset usage. Thus, traders can benefit from their investments while keeping the risk factors at a minimum. Therefore, maximum benefits can be derived while trading with binary options if traders make sure that the trading platform they choose supports as many currency combinations as possible, especially those involving major currencies like US Dollars and Euros. A trading platform that supports a huge number of currency pairs indicates a well researched trading architecture. In this way, you can take an educated guess whether a broker takes his business seriously or not. You should try to stay away from a broker that offers only a few currency pairs on his platform.
In case the currencies get unpredictable and too volatile to predict whether they are a Pull or a Call, it is wise to switch to trading commodities (or indices). Make sure your broker has a soundly populated assets list. The thumb rule is: Asset population on the list is directly proportional to the seriousness of the broker.
Secured Trading Environment:
Secured trading environment pertains to the safety of your trading on the internet. Internet security issues are not limited to binary options alone. All forms of Internet based transactions are subjected to risks and need to be taken very seriously. To ensure maximum possible internet security, your trading platform must be encrypted with a 128 bit Secure Socket Layer (SSL) encryption. Not encrypting your transactions may expose your financial data to hackers.
While you can search on online forums to research people’s reactions and reviews about the safety of the brokers you shortlist, you should take these reviews with an open mind. Quite often, some traders who have lost their money tend to cry scam to get back to the broker or get their funds back. In other instances, some competitor binary brokers write negative reviews and leave bad comments or call them “scam findings” to hamper the business. Such practices are not ethical, but they happen.
We can conclude by saying that it’s best to not to hurry while selecting a broker when binary option trading is concerned. This method that offers amazing returns also brings high risks in the package. Ensure legitimacy of the broker firm before investing. If you’ve slightest of doubt, don’t invest. Wise thing to do would be to open a demo account, test the offered platform. Get some idea about the firm, like:
- How well capitalized the firm is
- If your funds are kept secure client account. If yes, then where
- Method of depositing funds
- The time it takes to make withdrawal
- If you get free withdrawals or not
Though it doesn’t take an expert to understand how binary options trading works, it would be wise to go slowly and check all the hidden mines. Don’t get lured by high payouts. Ask the right questions from your broker can help you form a roadmap on how you want to proceed. As Warren Buffet once said, “Don’t test depth of a river with both your feet”. Take your time to consider the factors above. Select the right broker that can deliver as per your expectations. A well reputed binary options broker can help you get best returns for you investments. Wishing you great returns, it’s time for you to start researching now. Happy trading.