As an old saying says “When something is too good to be true, so should think more about it”. Since we’ve talked about four advantages of binary options trading in one of our previous material, we want to focus this time on four disadvantages of trading binary options so you won’t be aware of the risks involved in this area.
As a brief risk remainder, so should be aware that speculative investments carry risk and you can lose money, so before jumping into it you should understand both the positive aspects and the negative ones and only then see if it is appropriate to invest your money.
The main pitfalls of binary options trading
- Lack of regulation – since binary options are relatively new instruments, there is no significant regulation around it and because of that there are few agencies who can monitor this sector.
- Poor reward to risk ration – even though you manage to find good trading opportunities, with binary options you will make around 90% profit on a winner and lose 100% of your risk if the market will move against the direction you thought it will go. Having higher than 50% accuracy is a must if you want to generate long-term profits with binary options trading.
- Few order types – call/put options are, in general the only options you have available, since you just have to speculate the direction of the price over a given period of time. No limit of stop order, in comparison with the forex trading.
- No stop loss order – even though you see that the market is going against of your direction, you are not able to close your position, before the option expires. This is one huge disadvantage as being able to close it ahead of the expiration can help you reduce a huge part of the losses. Lately, some of the brokers begun to introduce that option as well.
This are one the most important negative aspects you should consider before starting to invest in binary options. Hope the material helped you understand some key concepts about this subject.