1.
Introduction
As trading in the
financial markets becomes more popular, it is part of the natural progression
for products and offerings to evolve. New virtual markets are created. When new
financial markets evolve too quickly, sometimes it's hard to keep track of the
sustainability and reliability of those products. Binary options is just such a
market. The emergence of binary options is a phenomenon in the same way as
Forex was- a true market explosion that is nowhere near maturity. Believe it or
not, binary options have only been around since 2008 when the Securities and
Exchange Commission (SEC) approved this form of online trading.
It goes without
saying, that with the emergence of new markets come handfuls of new brokers
offering the trading product. Often unregulated these binary options brokers
are an unknown quantity. If you value your money then you would be right to be
wary of the unknown. If you are new to trading in the financial markets, this
can especially lead to confusion. Binary options trading can be extremely
rewarding for professional traders and newcomers, however, how do you know
which broker to deal with and who can you trust with your money? What trading
platform should you be using?
These are some of the
basic questions that you will need to confront before you take the plunge in
the exciting world of binary options trading. Adding to this confusion is the
amount of information or misinformation that can be found on the internet
posted by disgruntled traders or even competing brokers! So how does one
distinguish a reliable broker from hundreds of other firms that are out there
on the web?
In this guide for
selecting the right broker for your trading activities, we've identified
various factors that a trader should consider before contemplating which broker
to trade with. Some of these factors are:
> Regulations
> Company
Capitalization
> Trading Platforms
> Broker Types
> Customer Services
2.
Regulation
In the Forex Market,
for a lot of traders, trading with a regulated broker is often the most important
factor when opening a trading account. By the way, some markets or regions are
unregulated meaning you may be better off with an unregulated broker if you are
based in those markets. Sometimes, like in the US with their strict NFA
regulation, trading can be no fun at all. Leverage offered is very low and
highly regulated brokers can offer very low spreads. Also, just like in the
case of MF Global who recently were all over the news, being regulated does not
necessarily guarantee the safety of your funds. Nevertheless, how a broker is
regulated depends on where it is registered and where its base of operation is.
This can be a complex issue especially when you are dealing with a global
market. The financial market is largely an Over The Counter (OTC) market and
this makes it difficult to subject a particular company to a specific set of
regulatory framework.
Although this is a
complex issue, one mustn't ignore the importance of having a financial
regulatory framework governing the operation of a broker. This is because most
retail traders or investors are unlikely to conduct their own research into the
feasibility of investing in a particular investment vehicle. With the fees or
commissions that are paid to the brokers by the investors, many investors actually
feel that this is part of the broker's obligations. In short, the broker is
supposed to act in the best interest of their clients. However when the broker
is also the Market Maker, ie. taking the other side of the trade, this isn't
always the case.
In the United States
(U.S.), brokers are self-regulated by the Financial Industry Regulatory
Authority (FINRA), a self-regulatory organization of the brokerage industry and
the Securities and Exchange Commission (SEC). For those brokers that are based
in the United Kingdom (UK), the task of regulating brokers falls under the
ambit of the Financial Services Authority (FSA), a quasi-judicial body.
Individual member states of the EU have their own respective regulatory bodies
that follow the recommended legal framework standards established by the
European Union. These are the main regulatory bodies that monitors and ensure
that brokers are held accountable to a fiduciary standard.
In a perfect world,
the above scenario is supposed to be the case. Unfortunately, the global
financial crisis that resulted from the collapse of the U.S. subprime mortgage
market in 2007/2008 is a stark reminder that financial regulations are not
everything for the protection of investors.
Binary options is
different. Every week there are ten new brokers popping up. 95% of all binary
options brokers are unregulated. The regulated ones are usually based in Cyprus
and so regulated by Cysec with registered offices in the BVI. So far I have
only come across a handful of regulated binary options brokers in the whole
market and those are not necessarily the best companies I've found to trade
with by far. So it seems that in this market, regulation is not one of the
governing factors to choosing your broker. So what is?
3.
Company's Capitalization
Another factor in the
selection of a broker is to look at their market capitalization. It is always
prudent to ensure that the broker shortlisted by you is well capitalized to
minimize the risk of losing all funds if the broker does go bankrupt or if you
have placed a big winning trade. Well when a company is regulated you know that
they are well capitalized, they have to have millions of dollars in their
accounts to even apply for regulation. Previously, firms with as little as
$100,000 operating in the U.S led to many of them having issues with their
clients' money when the market tanked. However, recent regulations have been
tightened in the U.S. that requires brokerage firms to have at least $20
million dollars in capitalization in order for them to operate. This
requirement is monitored by the National Futures Association (NFA) in
conjunction with the Commodity Futures Trading Commission (CFTC). To check
whether a firm is sufficiently capitalized, you can refer to the CFTC website.
They have a list which shows the capitalization of their members that is
updated on a monthly basis. However, it should be noted that many Forex and
binary option firms have difficulty in meeting this requirement and are forced
to relocate their operations outside of the U.S to Europe.
Nevertheless, as
retail trading in the financial market is becoming more popular and legitimized
many countries in the EU are also following the footsteps of the U.S in terms
of capitalization. In this respect, capitalization is becoming less and less of
an issue which a trader has to worry about. The reason for this is that many
binary options brokers are hedging their risk or underwriting their risks with
third parties. This means that even if they lose out on an elephant trade they
can afford to return your profits. Some brokers also take the other side of a
very large trade by trading it at another brokerage house. This guards the
company from losing too much in one trade.
It's a good idea to
ask the brokerage you are trading with about their capitalization and also
whether they hedge themselves or are underwritten by third parties.
Ensuring the
capitalization of the firm is one very important factor to consider when doing
your broker research and selection.
4.
Trading Platforms
There are many typesof trading platforms on the market. With binary options most of them seem to be
web-based. A lot of them are white labels of other companies platforms where
they have taken their own branding such as logos and placed it on the platform
ie. SpotOption and Tradologic platforms. That's ok it just means they don't
have their own proprietary platform.
So let's break it
down.
Binary brokers offer
different types of vehicles on their platforms. The classic option is UP/DOWN
or PUT/CALL. This is the platform you'll see offered by all the companies. Very
simply you choose the market movement at a set expiry and whether the asset
will have traveled up or down at that expiry. What to look out for here?
Ideally you will have a chart available to look at before you choose the asset
type. This will make your task easier and quicker.
The next platform
offering is One-Touch. Your trade depends on whether you think the asset will
touch a certain point by a set expiry time or not. Payouts offered on this
trading type stretch up to 550% of your initial trade amount. It's a massive
return, but it's also a long shot. The line is often far away from the charts
trend.
Boundary trading or
Range trading is assuming whether the asset will stay within a set range or
outside of that range by the pre-set expiry time. Some brokers even offer
60-Second options. This is a very desirable new trading type with a quick
turnaround.
With all of these
option types, look for companies that offer charts with a good history time
frame, ranging back at least a week. Look for a company that has very little
down time on their server or slippage. Slippage is the time between placing the
trade and execution of the trade. Seconds can make all the difference, especially
when trading the 60-Second options.
Web
Based or Non Web Based Platform
So what is the main
difference between a Web Based Platform and a Non Web Based Platform? A web
based platform is totally independent of the computer which a trader is using
to trade with. Non Web Based Platform normally requires users to download a
piece of software before they can start trading. What this mean is that a
trader will need to trade from that specific computer. If the computer that a
trader is using is a desktop, this would mean that the trader cannot trade from
anywhere in the world. In other words, he is not mobile.
Mobile
trading
Some of the better
brokers are even offering mobile trading types where you can open their
platform from your iPhone or Smartphone using a downloadable app. Your account
opens so you can keep an eye on your open positions, execute a trade and even
deposit funds.
5.
Payouts Offered
Below is a list of
features that you should look for before making your selection.
·
Sufficient
Returns on Money Invested
With binary Options
trading, traders have to predict which way the underlying asset's price is
going to go at the expiry time. If the trader makes the correct determination,
he will be able to reap a percentage return based on the amount of money
invested. However, this percentage return varies from broker to broker, the
asset traded and the expiry time selected. Some brokers calculate this return
based on the real time market price of the underlying asset while some broker
uses their own proprietary algorithms to calculate this return. Whichever the
broker that you selected is using, it is important to look at the final return
and see if it touches at least 65% to 70% to make it worthwhile for you to
invest in. The highest payout on the PUT/CALL options I have seen are 85%. The
highest payout I have seen for the One-Touch trading is 550%.
·
Payout
for out-of-the Money Trades
The main disadvantage
with binary options is that when your trade is even out by one cent from the
predetermined price, you will be out-of-the money. Hence, apart from looking at
returns, traders should also look at the rate of payout when their trades are
not successful. Again this figure varies from broker to broker. Some brokers'
will pay out 15% of the original amount invested when your trade is out-of the
money while some will not pay out anything at all.
6.
Assets offered
If you are an
experienced trader what do you like to trade? Perhaps it's commodities or
currency pairs. Perhaps your expertise is one major currency such as the
EUR/USD. If that's the case, stick with it with binary options. You'll already
have a feel for the market movements for that asset and the charts general
trend. You'll be used to reading relevant technical analysis and fundamental
analysis and perhaps will know what's coming next, as history repeats.
·
Support
Multiple Currencies Trading
Binary Optionstrading is very flexible and as such traders can benefit from the volatility of
the Forex market while at the same time minimize their risk. Hence, to derive
maximum benefits of being able to trade in the Forex market with binary
options, traders should ensure that their trading platform can support as many
pairs of currency combinations especially with regards to the major currencies.
A trading platform which can support many currency pairs is often indication of
a well thought out trading architecture. In this respect, you can indirectly
tell whether a broker is serious about their business or not. A broker which
provides a trading platform that can handle only just a few pairs of currencies
is certainly not one that you want to deal with.
·
Populated
Asset list
When the currencies
get volatile and unpredictable perhaps it's time to move to the commodities or
indices. Check that the broker you want to work with has a full and populated
list of assets to choose from. The general rule is; the more populated the list,
the more serious the broker.
7.
Customer Service
Customer service is
key! Check out the amount of languages offered by the trading platform. How can
you contact the customer services representative? How quick are they to
respond?
The level of the customer
service is often a key indicator as to the quality of the company. I tend to
test a broker before I deposit funds within, it's simple. Send them an email,
and see how quickly they are to respond. Get on the live-chat and ask them a
question about their trading accounts or welcome bonuses. From these
interactions you can get an idea of how serious the broker is and how much they
value their clients.
Most binary options
brokers offer welcome bonuses and trading promotions. Be sure to ask your
customer service representative what they are currently offering. Also find out
the trading conditions which apply to that bonus. ie. The broker may give you
100% bonus but when can you withdraw it? What trading volume must you reach
before you can take it?
Customer service
staff are not here to suggest trends or to give market information, although
they can train you on binary options trading and how to use their platform.
8.
Secured Trading Environment
By secured tradingenvironment, we are talking about how safe is it for you to be conducting your
trading on the internet. This security issue is not just specific to binary
options trading but affects all forms of web based transactions. To be as
secured as possible, you should make sure that your trading platform is
encrypted with a 128 bit SSL encryption key. If your transactions are not
encrypted, you will subject yourself to hackers can steal your financial data.
By the way you can do
searches on forums to discover people's reactions to the security and safety of
certain brokers, but overall you should take this with a pinch of salt. Often
traders that lose their money can cry, scam to try to get their funds back.
Other times competitor binary brokers can leave bad comments, or scam findings.
It's not nice, but it does happen.
9.
Questions to ask Before Opening an Account
Before
choosing a broker, be sure to ask the following questions:
> How well capitalized
are you?
> Who takes the
back-end of your trades?
> Are my trading funds
kept in a separate, secure client account?
> If so where?
> How can I deposit
funds?
> What welcome bonus
will I get?
> How long do
withdrawals take?
> Do I have to pay for
withdrawals of my funds?
> Is this something we
can negotiate between us?
Conclusion
From time to time
traders complain to me off scams they have dealt with when using specific
brokerage firms, I have looked into most of these and found them to be, the
trader that was unhappy at losing his funds too quickly. Of course scams happen
within any market, so move slowly.
Don't be pushed into
depositing your funds with any specific broker, take your time in deciding.
Deposit small amounts to start. Test the withdrawal processes and then once you
are sure of the legitimacy of the company involved deposit bigger over time.
Once you've started
trading, don't be pushed into depositing more funds if you're not ready.
Ask all of the above
questions and test out the customer services department.
Open a demo trading
account to test the platforms on offer.
Just like with your
trading strategies and your risk management strategy choosing a broker should
form part of this process.
Binary options
trading has many advantages over other trading types. You can know you initial
payout or risk even before you place the trade. Payouts are high as compared to
Forex and you don't have to be an expert trader to understand the mechanisms of
binary options trading.
But remember, a
careful trader is a happy trader.
FirstDepositInsurance Team
www.FirstDepositInsurance.com