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.