The online trading industry experienced an exponential growth lately. No matter what traders’ background is, everyone seems to be attracted to trading. In a way, this is a normal reaction. Advertisements appear everywhere. From your favorite football team to your Inbox…it is virtually impossible to escape online trading temptations.
Besides Forex trading, binary options saw an amazing development. People from all corners of the world come to the binary options industry to make a quick buck. Unfortunately, most of the time they end up disappointed in the broker. Here are some things to look at when you want to compare binary brokers.
Short Introduction to Binary Trading
Like the name suggests, in binary trading, traders need to pick the direction of a trade. Or, of a market. Binary options brokers offer a few financial products or financial instruments to trade. Most of them are regular currency pairs from the Forex market: EURUSD, EURJPY, USDCAD, and so on.
On top of them, binary options brokers offer commodities (gold, silver, iron ore, natural gas, oil, etc.), indices (DowJones, SP500, Xetra Dax, Cac40, Nikkei, and so on) and even individual stocks (like the most popular stocks – Apple, Google, Facebook, Amazon, BMW, and so on).
These financial instruments differ from broker to broker. The offer is not the same.
In comparison, in the Forex industry, brokers’ offers are somewhat the same, with only a few differences. In the binary industry, huge differences appear. A binary trade is a dual trade. If you think the price of the underlying security will move to the upside, you’ll buy a call option. On the other hand, if you think it will move to the downside, you’ll buy a put option. See the difference with the Forex market?
You can only buy an option. Either a call or a put, but you can only buy one. In the Forex market, you can also sell a currency pair.
But this is just semantics. You’ll need to know where the market of that product goes. Moreover, in binary trading, traders must choose an expiration data. In other words, it is not enough to tell where the price will go. You must be able to tell where it will be at a certain date.
The actual distance traveled doesn’t matter. All traders need to point is if the price will be higher or lower at that date.
What is a Binary Options Broker?
The very definition of a broker refers to an entity that intermediates a trade. In other words, for the privilege of getting you access to the market, the broker charges a fee or a commission. In the Forex world, brokers charge a commission for every trade. Then, they route the trades through their liquidity providers and take the best quote from the interbank market.
As such, the broker earns money being the middle-man in the transaction. The trader wants to access the interbank market but he/she can’t do this alone. For this, the broker charges a commission.
The more active a Forex trader is the more commissions for the broker. However, not all Forex brokers route their trades. Some of them, the so-called market makers, have special trading departments. They simply mirror the quotes from the interbank market using sophisticated software programs and trade in the opposite direction of their customers.
Statistically, over 90% of Forex traders lose their deposit in the first six months. As such, odds are with the brokers that trade in the opposite direction.
The same is valid for the binary options industry. A binary options broker looks like a market-maker from the Forex industry. With a few exceptions. One would be that the broker doesn’t trade against you like the market-makers do. Instead, it uses reverse psychology to get you hooked.
Let me give you an example. Brokers advertise a rate of return/trade starting with 70% and all the way up to even 90%. For people not familiar with trading, this may seem a lot. They compare this return with what a bank deposit offer. And the difference is huge. However, no serious Forex trader would take this offer. A Forex trader always sets the reward bigger than the risk.
How to Choose a Binary Options Broker
Binary options brokers offer only subpar trades. Your risk is 100% and at best you’ll get 90%? Think of it!
This is not something that appeals to serious retail traders in the Forex market. Nevertheless, because the binary industry is advertised as being so easy to make a profit in the market (as a matter of fact, the Forex industry suffers from the same bad advertisement policies), people don’t think of it properly.
If you still decide you want to give it a try with the binary options industry, the first step is to choose the broker to trade with. This is an important thing as the broker should be your partner down the road.
There are multiple criteria to look for when choosing the right broker. Here are a few things to consider
This is the most important thing to look for. If the broker is not a regulated entity, try to avoid trading with it.
After all, think of it for a second. Why would you trust your money with someone that is not regulated? And, what does being regulated means?
Regulation comes from a financial authority in a specific region. To become regulated, brokers must meet some conditions and must conduct obeying a set of rules.
If the regulatory body gives a green light to a broker, the broker gets a license. This is a number and acknowledges the broker meets the highest industry standards according to its regulator.
As a broker, you’ll want to make sure your clients/future clients know that. After all, this is something that builds trust, and this is something that the binary industry misses.
In other words, if the broker is a regulated one, it will make sure you know that. How will it do that? One thing would be that the broker will post the regulatory body and the license number and all the required information on the homepage of its website. This is the first interface with a client, so you want to make a good impression, right?
Moreover, any advertisement will include information about regulation. This is how you build trust.
If you as a future trader, cannot find information about the regulatory body for your broker, it means the broker has something to hide. As such, avoid trading with it, for the safety of your funds.
Regulation is a costly process for the broker and deals with protecting the customers (traders). If anything will happen with the broker (like going bankrupt or something), the regulatory body steps in and customer protection covers traders.
Financial Instruments Offered
Assuming the broker is regulated by a financial authority, the next thing to look for relates to the financial products or instruments offered. Remember that binary options brokers will try all possible ways to make trading difficult for you. After all, a binary options broker makes money only if traders lose. In other words, you trade against the house.
Financial products play an important role. The binary options broker may advertise, for example, that it offers currency pairs to trade.
That’s excellent! The next question is: what currency pairs?
The thing is that each currency pair moves in a distinct way. For a binary options broker, the most difficult pairs to trade are the most appealing ones. Traders should now that every currency pair that has the U.S. dollar in their componence is a major pair. More than seventy percent of the world’s transactions end being cleared in dollars, as the dollar is the world’s reserve currency.
Having said that, they are the most liquid pairs in the Forex market. It means that every day, retail traders, financial institutions, brokers of all kind, liquidity providers, interbank dealers, commercial and central banks…they mostly exchange or “swap” dollars against other currencies.
So, the dollar pairs represent the minimum a binary options broker must offer.
Next, look for the most important crosses: EURGBP, EURJPY, and so on. You’ll find that most of the brokers barely often the currency pairs mentioned here.
Instead, traders must choose from AUDNZD, GBPCHF, and so on. These are difficult pairs to trade, as they range a lot, swing a lot, and when they travel, they take no prisoners, doing that with little or no pullbacks.
Expiration Dates Offered
The expiration date is the one thing that makes the difference between a profitable trade and a losing one. Brokers know that. As a trader, even if you know where the market will go, it won’t help you much. If at the expiration date, the price is not there, your options will expire out of the money.
This makes the expiration dates an important piece of the puzzle. Moreover, they are an important factor when choosing a binary options broker. One thing is for sure: ALL binary options brokers offer short-term expiration dates. Probably you already know why: it is extremely difficult to be profitable in the long run trading these expiration dates.
However, they appeal very much to the rookie trader. For whatever the reason, the possibility to make a 90% return on your investment in sixty-seconds seems an easy thing to do for many traders. Well, it is not, and binary options brokers know that.
Having said that, look for realistic expiration dates: end of the day, end of week and end of the month. Moreover, look for them to be spread over different asset classes, like different currency pairs, of all types, and other financial products.
To sum up, trustworthy binary options brokers are not easy to find. However, this doesn’t mean they don’t exist.
Usually, aggressive brokers will invest a lot in advertising. The idea is to attract as many clients as possible. These brokers rarely are regulated. Hence, they have a trust issue. This is the first thing to look for if you want to compare binary brokers.
Moving forward, pay attention to details: the expiration dates offered, the financial products…all these factors matter when choosing a broker to trade with. Secondary criteria depend on:
- the trading platform
- the customer service offered
- funds safety
- easiness to open an account
- banking (the funding methods offered)
- withdrawal commissions, etc.
Competition is tough in this industry. This is a characteristic of the Forex industry too. However, in the Forex area, most brokers are regulated. It’s not the same with binary options brokers.
If you must choose from the criteria explained in this article, don’t base your decision on the last factors listed two paragraphs above. Instead, focus on regulation and the expiration dates offered.
As such, when one wants to compare binary brokers, look for these two criteria to start with. After that, if the broker ranks in the top for the other factors listed in this article, that’s a good binary options broker.