Why Trade Binary Options?

Why Trade Binary Options?

Why trade binary options when you can trade futures or forex and make more money? The answer is really simple — leverage. While most traders believe that leverage enables them to make more money quickly, they forget the downside. Leverage provides the opportunity to lose more money – including more money than you have in your account.

Why Trade Binary Options
Why Trade Binary Options Getty Images

Why Trade Binary Options? Leverage is the key.

Leverage works as an enticement to attract traders to the forex and futures markets.  By depositing a very small amount and maintaining the margin required the trader can control up to 100 times that amount.  Quick, easy profits, right?  Yes and no.  Leverage does allow traders to increase the trade size using a smaller account size but it also increases their potential losses.

For example, if a trader wants to trade a full contract ($100,000) on the EUR/USD, the margin amount may be $2,600.  This means that the trader would need a minimum of $2,600 in his account to control one full contract.  Each pip (one increment in price) would be equal to $10 in movement.  If price moves up ten pips, that would be a $100 profit or, if price moves down, then the trader would lose $100.  But what if price were to suddenly move fifty pips against the trader?  That is a very quick $500 loss.  Of course during market reports, price can move so quickly that it literally jumps over the trader’s stop — meaning his stop price was never touched and, therefore, he remains in the trade and suffers a huge loss.

Of course, during volatile markets periods, like market reports, the pip spread is often increased substantially so traders have to allocate for that when placing stops.  Otherwise, they will be stopped out only to have the market actually go in their direction.

Binary Options Alternative

With binary options leverage is never an issue because binary options do not use leverage accounts.  Instead, you decide exactly how much you are willing to lose.  For example, if you have a $1,000 account and do not want to risk more than 5% of your account, then cannot risk more than $50 on any one trade.  Using Nadex binary options, you have several choices using this risk parameter.

  • You can take two Out of the Money binaries with no more than $25 risk per contract (excluding exchange fees).  Since the strike width is four pips (meaning there is a strike every four pips this is relatively easy to accomplish).
  • You can take one At the Money binary option with no more than $50 in risk (excluding exchange fees).

In both scenarios, the trader cannot lose more than he paid on entry.  There are no margin calls.  There are no stops.

There are no margin calls.  There are no stops.

There are no stops to contend with.

Instead, the trader accepts the risk on entry and the maximum profit is $100 minus what the trader paid on entry.  A very logical and easy to understand trading methodology.

The information contained above may have been prepared by independent third parties contracted by Nadex. In addition to the disclaimer below, the material on this page is for informational and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Please note, exchange fees may not be included in all examples provided. View the current Nadex fee schedule. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representations or warranties are given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk and any trading decisions that you make are solely your responsibility. Trading on Nadex involves financial risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results. Nadex contracts are based on underlying asset classes including forex, stock index futures, commodity futures, cryptocurrencies, and economic events.

Trading can be volatile and investors risk losing their investment on any given transaction. However, the design of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.