Avoiding the pitfalls of trading binary FX options

The idea behind binary FX options is simple: pick a market and a time horizon and if you’re in the money at expiry you get a fixed return. If you’re out of the money you lose the stake. That either/or aspect is why they’re called binary.
But investors still need to do their homework, especially when it comes to choosing brokers and strategies. Currency Investor spoke to veteran analyst Vince Stanzione to get the low down.

Choosing your broker
“If you’ve never traded binary before, start with a virtual account so then you can practice trading. Most of the companies offer free virtual accounts,” says Stanzione.
Once you’ve put in the hours and decided to give it a go, it’s time to choose a broker. Binary companies typically let you dip your toes into the water with small amounts.
“Try to go with an established company. Don’t go with something that’s opened six months ago. The firm I mainly use is Binary.com. I opened an account with them in 1999. They’ve been around a while,” states Stanzione.

Investors should also be wary of eye-catching bonuses. “I have people saying, ‘Oh, this guy is giving me $500 back’. You Avoiding the pitfalls of trading binary FX options
know, you don’t get something for nothing. Companies do offer some free bonuses but if they’re too big I would worry.”

It’s a tool
Now you can think about risk appetite, instruments and trade horizons. “People say ‘binary’ and they think it’s all high risk. It’s not. It’s a tool,” says Stanzione. He noted many firms offer the chance to sell back a trade before expiry, either to take a profit or to minimise a loss.

Investors are not limited to trading the majors. Many companies offer emerging FX binaries. Stanzione prefers longer-term horizons. “A lot of people don’t do that because it costs more and they think, ‘I want as much leverage as possible, I want as much bang for my buck’.” But an investor may have the right trade only to get caught out by a short-term blip. His sweet spot is around seven to 14 days.
The plethora of new binary products is testimony to their popularity. But Stanzione advised against trading binaries exclusively. He says they work well as secondary tools, allowing investors to augment existing trades. For instance, say an investor has a profitable long-term euro/dollar position from a spread bet. Shorter-term, the investor may want to trade around that via binaries.

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“Also, some binary companies sometimes offer ways to make money on sideways markets,” he said. It may be possible to do such trades directly in the options market but it can take effort.

Currency Investor Newsletter Vince Stanzione

Conclusion
Stanzione’s final advice: use sound money managementtechniques and don’t get carried away, “I’ve seen it before where someone will have done really well and then they’ve gone through what I’d call a crazy phase, where they think they can’t do anything wrong. They start taking serious bets and become reckless and before you know it they’ve wiped out their account.”

Learn more at www.winonmarkets.net

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