There is an upside to these trading instruments, but the upside requires
some perspective. A major advantage is that the risk and reward are
known. It does not matter how much the market moves in favor or against
the trader, there are only two outcomes: win a fixed amount or lose a
fixed amount. Also, there are generally no fees, such as commissions,
with these trading instruments (brokers may vary). The options are
simple to use and there is only decision to make: is the underlying
asset going up or down? There are also no liquidity concerns because the
trader never actually owns the underlying asset,
and therefore brokers can offer innumerable strike prices and
expiration times/dates which is attractive to a trader. A final benefit
is that a trader can access multiple asset classes in global markets
generally any time a market somewhere in the world is open.
At first glance, it seems like an easy way to get rich, yet there is a downside and one point in particular which violates what is often considered a cardinal trading rule. The major drawback of binary options is that the reward is always less than the risk. This means a trader must be right a high percentage of the time in order to cover losses. While payout and risk will fluctuate from broker to broker and instrument to instrument, one thing remains constant, losing trades will cost the trader more than they can make on winning trades.
At first glance, it seems like an easy way to get rich, yet there is a downside and one point in particular which violates what is often considered a cardinal trading rule. The major drawback of binary options is that the reward is always less than the risk. This means a trader must be right a high percentage of the time in order to cover losses. While payout and risk will fluctuate from broker to broker and instrument to instrument, one thing remains constant, losing trades will cost the trader more than they can make on winning trades.
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