Dealing with Binary Options Better: Understanding and Alleviating Risks

by Bill on November 8, 2013

No matter what you do, you will still encounter a certain level of risk when you trade with binary options. The upside though is that while you can never really get rid of risk, there are a number of ways you can employ to lessen it as much as possible. Just because you’ve admitted that you cannot beat risk does not mean that you’ll go down without a fight. Trading is exciting because you just never know what’s going to happen until the moment it does. For the most part though, knowing what you’re dealing with is the best way to alleviate risks associated with binary options.

Along that line, it is a good idea to brush up on the different kinds of risks binary options may bring. Knowing what you’re up against, after all, will help you figure out how to deal better. These risks include:

  • Market risk. How the market moves on the overall will affect how much risk you take on. And while market movement can be predicted, predictions are not 100% accurate.
  • Fixed profit. Strike prices are set so your profits are limited to what has been agreed upon. You can’t earn any more than what your option will allow you to, no matter what other factors are in play. But in the same way that profits are fixed, losses are capped too so you already know what you’re going to lose when the option expires.
  • Not a liquid investment. Unlike other types of investment, binary options are not liquid, meaning you can’t use them any time you want. You have to wait until the expiration set for the option before you can take your profits or deal with your losses. Having to wait may delay other trades you might be interested in.
  • Underlying assets are not yours. Binary options simply give you stake at how an underlying asset will move, and not actual ownership. If wagering on something not tangible is uncomfortable to you, then binary options may not be a good choice for you.
  • Limited regulation. OTC markets are not regulated so while trading may be generally organized it is not impossible to run into unscrupulous practices. This means that no matter how much you play by the rules, there may be players who won’t play fair.

Now that you have a good grasp of the many things that could get in the way of your success with binary options, here are some ways you can limit those risks:

  • Hire a broker. A broker knows the ins and outs of trading so they’re better suited at analyzing markets, and therefore advise you on the best course of action. If you feel that hiring a broker takes away your participation in a trade, you can have it set up in such a way that you still have the final say so you get to make use of the broker’s expertise while still indulging your need to be part of all the action.
  • Educate yourself. Keep learning new strategies for trading. There are plenty of resources available on the web including in other languages. In addition, many online brokers have education center on their websites.
  • Set a limit. To a certain degree, trading is like gambling—when you’re on a roll, it’s hard to stop. Unfortunately, just like gambling, one move can easily take away everything you have. Yes, there is always that possibility that you can still get more profits but it gets more dangerous the longer your streak is. Set a limit to how much profit you want in a day, stick to it, and live to trade another day.
  • Hedging. When it’s clear to you that you’re not going to benefit from a certain option, you can terminate the contract so you don’t end up taking the full force of a loss. You will still lose a bit of your investment with this move but at least you won’t be reeling from a bigger loss.