Binary options are simple contracts that work both over long and short terms. However, there are certain disadvantages of trading binary options too.
In this post we’re going to take a look at some of the disadvantages of binary options trading and how to smartly overcome them:
Limited Choice of Assets
The binary options market is a relatively new market. As a result, the binary options brokers haven’t yet attained enough maturity level and offer limited choices of assets.
For example, only some of the brokers offer stocks, stock indices and commodities such as oil and gold, in addition to a large selection of Forex pairs.
This restricts trading and investment opportunities for traders who are looking to make more money or trade their favorite assets.
Before signing up with a broker, it is a good idea to contact their customer support and ask which assets can you trade on their platform.
High “Spread”
When investing with some brokers, especially unregulated ones, they tend to hide an extremely higher (i.e. around 40 percent) spread for certain assets. Thus, traders must always have a lot of money every time they are looking to offset high spreads before they can return profits.
This is one of the top reasons to be using a well reputed broker, and especially a broker that’s regulated by its country’s financial authorities.
Short Term Outlook
The expiration period of the binary options trading is either daily or hourly and thus their market outlook is only for a brief period. Given that the market makes a number of random price movements in a short period of time, it’s difficult to predict the exact direction in which the market would move. Thus, if a trader isn’t very sharp at forecasting the price movements and market directions, he’s bound to incur losses.
In this case as well, if you’re new to trading and still not proficient in analyzing market movements, it might make more sense to use a signals service.
A Large Number of Scammers
Given that the binary options market is new and upcoming, it is full of scammers who use faulty practices to make money. We’ve recently found a site that actually exposes many of these scams.
Before investing in any binary options offer or broker, be sure to research them online and verify that they have not been found to be scams.
Lack of Trading Tools and Demo Accounts
Yet another disadvantage of binary options trading is that it does not offer enough trading tools as well as demo accounts.
Many binary options brokers, especially the small ones, do not provide many trading tools, charts as well as technical analysis tools to their users.
Thus, traders really don’t have any idea about how exactly they are trading their assets. While, experienced investors are able to source such tools from elsewhere, novice traders have little idea about it.
Additionally, many binary options brokers also don’t provide their users with demo accounts. This can make things difficult for new traders who have little to no knowledge about binary options trading – go for brokers who do provide demos.
Huge Losses
In case of binary options trading, if the trader loses trade, he/she ends up losing all the money. Thus, the trader loses a hundred percent of their principal invested amount. This can have a negative impact on a trader who places huge trades. Thus, you should always stick to small trading amounts, especially in the beginning.
Limited Risk Management
Unlike forex trading where investors have access to accounts for trading micro and mini lots, the binary options brokers specify the minimum amount that an investor can trade within the binary options market.
Be aware of the possible risks and always use the smaller trade sizes that the broker makes available.
Broker’s Fee
In the case of binary options, the broker doesn’t charge a transaction fee, unlike other types of markets. However, the payout is a kind of fee that’s being paid, but it depends on the outcome of the trade.
Thus, when a trader purchases a binary option and goes on to win the trade, then the broker pays around 71 to 85 percent.
On the other hand, when the asset expires, some binary options brokers refund only a minor percentage of the principal amount.
This is inherent to the way that binary options work, and it becomes less of a concern when your percentage of winning trades increases with experience.
