“Nobody can predict the future. A Harvard PhD and a high school dropout have equal skills at prophecy.” – James Altucher
It’s no longer a secret that Forex market is the biggest and the fastest-growing market in the world. It’s also not a secret that majority of Forex traders end up sustaining negativity, simply because they don’t know or they fail to do what can really make them profitable.
As a result of this, many people have been singing praises of binary options* as a wonderful alternative, casting aspersions on Forex. They think it’s easier to make money from binary options than from Forex. Is that correct? What are binary options? Investopedia defines it as a type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money. The success of a binary option is thus based on a yes/no proposition, hence “binary.”
“Binary” means “two parts,” since a speculator will only need to predict that an instrument would rise above (Call) or fall below (Put) a certain price level in a given day or week. Unlike Forex, in which you essentially trade currencies, binary options traders can trade indices, Forex, stocks, and commodities.
Sports, markets and businesses are all zero sum games. Then what about binary options?
Is it possible to make money trading binary option? Is it possible to make money trading Forex?
The answer to both questions is yes…. If a binary options trader is much conversant with, say, oil market, he can make money predicting whether the price would rise or fall above certain price level in a day or a week.
However, contrary to popular opinion, Forex has certain advantages when compared to binary options. The seeming simplicity of binary options trading – only Call or Put – doesn’t mean it’s easy for enjoying long-term success.
Forex vs. Binary
I’m a living witness to this fact. A trader who uses a system that has only 50% accuracy can survive in Forex, but there is no way she/he can survive with 50% accuracy when trading binary options. A trader with only 25% accuracy can make money in Forex, but she/he will quickly crash when approaching binary options with a system that has a hit rate of only 25% accuracy.
I can risk $50 or $100 to target $200 in Forex, but that’s never possible with binary options. The risks are always higher than the rewards, and that’s a worse expectancy. In binary for example, you can risk $100 to gain $50 or $70 or $85 or even $90, but no broker will ever give you a risk-to-reward ratio of 1 to 1, let alone 1 to 2. Forex inherently gives you a risk-to reward ratio of 1 to 10 or 20 or 30, depending on how long you’re willing to let your profits run. We can enjoy everlasting success with positive expectancy only.
Let’s say a broker allows a reward of $80 for every $100 you risk for each binary prediction, you’ll then need to achieve at least 70% accuracy to survive in the long-term. Believe me, this is very hard because the future can’t be predicated. With 70% hit rate, you’re likely to experience 4 or 5 losses in a row with 1000 trials, and with this, someone with a small account can deplete it before a winning prediction comes around. With rewards that are smaller than risks, chances of long-term survival using 70% accurate systems are slim indeed. Researchers have confirmed that people have trouble surviving with even 80% hit rate, owing to psychological factors.
In Forex, people have made fortunes with trading systems that have reliability of around 25% – 35%. They do so by following the timeless Golden Rule of trading: Cut your losses short and let your profits run. You can’t do that in binary options. You succeed when an average loss is smaller than an average gain, not the other way round.
We enjoy everlasting success as traders because there are many things we can control, save the market itself. We can control risks and manage our trades effectively. But in binary options, you can’t control anything, for you’re at the mercy of the market forces once a position is triggered.
If a market moves in my favor before going against me, I can eliminate the risk or negativity with a break-even stop, so that a movement against me won’t result in negativity. This is not possible with binary options, for you lose your entire stake irrespective of the fact that a selected instrument first moves in your favor before reversing against you. Though some may say that binary makes you win even if an instrument first moves against you and later moves in your favor, before the expiration. This is also true of Forex; a position that is in a negative territory can later turn positive.
I can decide to cut my loss before my stop is hit, so that my loss is even limited more effectively. If I gain, say about 200 pips in a trade, I can lock part of it and ride the move even further. I can even take part of the profit and ride the move further. These things aren’t possible with binary options. I’m happy when I see that my losses are smaller than my profits. I know if I traded binary, my stakes would be higher than my rewards. Trading binary options is inherently a negative expectancy game. If other financial markets are zero (0) sum games, the binary options is a minus (-) sum game.
For those who don’t agree with the point raised here, only their personal experience after years will prove the point.
Conclusion: I’m not discouraging people from binary options. There are successful binary traders out there, but I’ve realized that Forex gives me far more freedom to choose my fate in the markets. When you trade a market that you’re very good at, you make fewer mistakes and improve your results. Investing in what you’re conversant with is essential to your financial well-being. Genuine wisdom is scarce, and therefore, success is attainable only when you do what you’re good at. That’s why I enjoy trading Forex: that’s my area of competence.
Please read the quotes above and below, and ponder them. The quotes below are from Markham Gross. They end this article:
“A good trader by contrast will be focused on running a repeatable system having positive mathematical expectancy without need or regard for knowing or talking about the future.”
“It would be impossible to have gains without some loss along the way. My strategy actually results in more losing trades than winners, which is sometimes shocking to people. We win by keeping losses small.”
*Please note that there are differences between regular options and binary options. This article addresses Forex and binary options (not regular options, a good investment vehicle). In order to know the difference between binary options and regular options, please see this link.
This article was first published on ADVFN.
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