Binary options have been banned in a lot of countries around the world and I am going to tell you why this is a good thing.
ESMA, the European Securities and Markets Authority banned binary options as part of a comprehensive review of retail trading back in July 2018.
I hate binary options. I never traded them because I know what I am doing. Even if they are unbanned, or you circumnavigate the ban by trading offshore, I want to explain to you why you should avoid them.
Traditional options can be very useful products to hedge risk and make money. Binary options may have the name ‘options’ in them, but don’t be confused. These are not the sophisticated investment products that traditional options are.
Binary options are usually a bet on whether price will be above or below a certain level at a specific time. For example, in an hour’s time, will the market be above the current price (the blue zone), or will it be in the red zone?
It will be in one or the other, and you will either win or lose at the expiry, thus the ‘binary’ nature of it.
You may think you have a strategy for this, but the binary brokers have that bit covered. They generally structured a ‘expected negative’ return (more on that shortly).
So what were the reasons for them being banned? These are the primary reasons why:
ESMA, who we mentioned earlier found that, “The risks related to the inherent features of binary options, such as a structural expected
This meant that the odds were in favour of the broker. If you took 10 binary trades you were very likely to lose money, regardless of whatever ‘strategy’ you thought you were going to use.
If you won, they’d pay you 40% to 60% of your initial stake.
So if you bet £10, you’d win an additional £4 to £6.
What do you think happened if you lost? Yes, you lost it all.
I’m sure you can work out you needed an exceptionally high and unrealistic win % to make profit.
There were a lot of off-shore brokers targeting European clients and basically taking all their money (regardless of the outcome of the bet) and not allowing them to withdraw any deposit money.
Traders can still use off-shore brokers (if they are stupid), but the lack of marketing etc in the EU from legitimate brokers who can no longer offer the products reduces the awareness and desire to trade them.
There were significant issues with mis-selling the products and not adequately explaining the risks to the prospective traders. This also included the brokers taking on clients they knew, or should have known, were unsuitable for any type of trading. Complaints are never a good thing for a product and certainly helped the binary option ban.
Brokers saw the demand for binary options so created ridiculous markets where people could bet on whether price would be higher or lower in 5 minutes in even one minute.
Which leads me on to the main reason…
CFDs, spreadbets and options are classed as ‘complex investment products’. They’re meant to be used by sophisticated investors who understand the risks involved. Binary options were aggressively marketed at people who had no idea what they were doing.
They, especially the really short-term expiry ones, encouraged gambling-like behaviour and they were found to serve ‘no useful investment purpose’.
Surely it must be obvious?
They were a scam designed to transfer the client’s money to the broker’s bank account as efficiently as possible.
I’ve heard a lot of horror stories from people who’ve lost large sums of money on these products in the past. People who could, with a proper trading plan, have traded things (like spreadbets and CFDs) which could have actually made them profits.
Who knows what the future holds? Will the binary option ban cease? It’s theoretically possible that the products will be unbanned in the future. But who cares? If, after reading this article you’re still interested in binary options then there’s not much more that’s going to help you. You are destined to lose money.
Trading is hard enough as it is (as we show in our live trade room on a daily basis). Don’t make it impossible by trading products which are designed to make you lose money.
If you’re trading for a quick thrill or ‘rush’, then perhaps trading isn’t for you.
Good question. Don’t be tempted to go off-shore to try and get access to binary options. You’ll just lose money.
Have a look at some of my trading strategies for an idea of how to trade properly.
Get stuck in to those and they’ll relive take away any disappointment of binaries being banned.
If you need anything else, then please feel free to message me on WhatsApp or Telegram below.
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