Over the past decade, the average investor has taken his bruises in the market, typically buying on the peaks and then selling on the dips, the exact opposite of what every tutorial on the topic shouts from the rooftops. Having lost confidence in the stock market but still looking for a place to put his idle cash, he will generally move to another investment medium or even try his hand at active trading. The world of foreign exchange has been the latest “siren” of choice, gaining enormous popularity due to its ease of access and flexibility.
Trading currencies is high risk. Legal disclaimers scream this fact, advising the newcomer to practice, practice, and practice some more. There is no shortcut for experience, but free demo systems provide “virtual” cash that can be traded, using real-time quotes to mimic an actual trading environment. Education is a cornerstone for success, too, and after experience and knowledge, the “wannabe” trader must attend to his ability to control his emotions.
Experienced and successful veterans will devote as many as six months to prepare before putting real capital on the line, but beginners often cringe when confronted by this commitment. Lacking the necessary experience, neophyte traders easily succumb to impatience, take reckless positions in the market, and suddenly become an early casualty statistic if they are not careful. Trading “spot” or retail forex can be complex. Assessing risk/reward potential, recognizing a high probability set up, and then acting in a disciplined manner to advantage can test a broad range of skills. Not everyone is cut out for an active management lifestyle, but there is an alternative.
Sensing the need for a cleaner and less complicated trading regimen, the forex industry responded a few years back with what are called “binary” or “all-or-nothing” options. As the name implies, these instruments offer a simplified “win or lose” proposition. In the “vanilla” high/low version, you are presented with a price history chart, for example, the “EUR/JPY” forex pair, traders’ sentiment, and asked if you think the price will go up or down by the end of a predetermined expiration period, typically 30 minutes. You choose the amount to bet, subject to broker limitations, and if you guess correctly, then the payoff percentage, 73% in most cases although it can vary, is applied to your wagered amount. If you are wrong, then you lose all or a portion of your principal, depending on your broker’s trading rules.
For a beginner, this approach wipes away many of the troublesome decisions that must be made if you are active in the spot forex market. Stop-loss orders become a thing of the past. Margin calls do not exist. Your risk parameters, as well as position size, are set at execution, and you know exactly what your upside potential may be. This latter fact alone addresses one area of difficulty that every newcomer always wrestles with – the ability to let a winner run. Most beginners cut their winners too early, while getting emotionally involved with their losing trades and letting them run instead, the exact opposite of the cardinal rule of trading.
There are no fees or commissions to be paid. Broker costs are covered by their system of payouts and loss margins. It would be safe to say that binary options sound a lot like legalized online gambling, but broker websites tend to describe everything in investment terms to obscure that fact of reality. Competition may eventually tighten existing margins, but, for now, you would have better odds at Vegas with a roulette wheel.
About the Author
Tom Cleveland has had an extensive career in the international payments industry with over 30 years of experience in executive management, corporate governance and business development. Tom served as CFO for various Visa International entities from 1980 until 1999, retiring with the title of Group EVP and Treasurer. Currently, Tom guest commentates for Forex Traders with his newer knowledge of investments and the economy.