Risks Involved In Binary Option Trading

Risks Involved In Binary Option Trading

Submitted by adil on Fri, 11/28/2014 - 17:29

Over the years traders have devised a number of strategies for trading in the binary options market. Although the chances of earning profit are relatively high in this market, but few are of the view that binary option trading has some level of risk. Some think of it as gambling. Every sort of trading whether it is forex trading or binary option trading has a certain level of risk. For this it is essential that the trader must develop an understanding about the various strategies, before actually investing their valuable earnings. The aim of this article to highlight the factors due to which binary option trading is considered risky and how to mitigate these risks.

Binary option trading is a gamble
Binary options are designed to be short term option contracts that have the potential to have big yields. Most brokers allow binary option trades for major indices, large blue chips and some commodities. The most critical reason why binary option trading is considered the same as gambling is the fact, that some of the trading platforms promise the traders a fixed amount of profit or gain. This leads to a false assumption that binary option trading is very easy and involves minimum risk. Most of the brokers are willing to pay 75-80% payouts, after a position has been won. On the same hand a major portion of the investment is kept with options expiring out of the money. This is the same approach which is adopted by any gambler, as no money management strategy is adopted.

Lack of money management strategy and Analysis
Another risk factor associated with binary option trading is the fact that most of the traders do not use any strategy for settling the trades. The traders do not depend on the underlying investment reaching a set or specified price, their trades lack proper analysis and planning; resulting in loss of invested funds. As no record is kept of the potential losses, ultimately the losses begin to add up for the binary option trader.

Difference between binary option trading and gambling
The pre-conceived notion of traders, that binary trading is the same as gambling is incorrect. As we all know that gambling is totally dependent on luck and there is no planning about the underlying strategies that are involved in this process. On the contrary, binary option trading attempts to mitigate this uncertainty with the analysis of probabilities. This can be done be observing the past trends and how these trends tend to effect the trading process. The traders make use of a number of technical tools and indicators like the option to ‘close early’ for reducing losses on losing trades and also the Option Builder tool which allows traders to customize risks.

Strategies for a Professional approach
An excellent way to improve the trading strategy is to do ‘pre-trade research’. This can be done by observing the past trends and the factors which have resulted in those trends. Setting goals for your trades is a very good idea to increases the profit. Always keep a check on your trading and make sure never to repeat the mistakes in future. And finally keeping a check on your underlying assets is the best way to reduce your risk in this market.