Binary options are an all-or-nothing option type where traders would risk a certain amount of capital that would either be won or lost depending on a factor. This factor is that traders would make a prediction on whether the price of an underlying asset would move to a specific price at a specific time. If a trader’s prediction is deemed to be correct, they will obtain the amount agreed upon. However, should the trader make the wrong prediction, the capital pledged by the trader would be lost?
However, Binary Options has widened throughout the years as in 2009, and the U.S.-based Nadex exchange created an option that would grant investors to buy or sell options at any time before the expiration date. This would lead to a wide array of scenarios and gave way for traders to exit the deal, only having to pay a small fine to escape a complete loss or profit case.
What are the risks involved?
As many would see, Binary Options in itself can be very risky, and the window for success can be very slim. While there aren’t any forms of investment that can be seen with zero risks, there are a lot of ways in order to minimize them. Before we can look into how to minimize potential risks, it is important to understand the types of risks involved when participating in a binary options trade.
These risks that one would often face are:
• Market Risk
Akin to all other forms of investment, Binary Options are also subjected to overall market risks. Trend movements in markets can often move in unpredictable ways and may even leave leading market analysts scratching their heads. Nevertheless, the best way to minimize market risks is the countless ways of forecasting market movements through technical and fundamental analysis.
• Fixed Profit Amount
Fixed or capped profit amounts are another risk that can prove to be a hindrance for binary options traders as it removes any probable unlimited upsides. In contrast, this may end up being a blessing as losses are also fixed, thus eliminating any potential downsides to the investment.
• Extremely Precise Profit and Loss Points
Binary Options stands out of other investment types in that even an inch of market movement can become the difference between a major profit or loss for investors.
• Limited Regulation
Binary Options brokers are oftentimes unregulated by trustworthy authorities or financial entities, which can give them various leeway to use their abilities in ways that may otherwise be deemed illegal under a proper watch. Research beforehand into a broker can certainly help.
How to minimize risk in a Binary Options trade?
Losses are inevitable, and even the most effective of traders hold their fair share. There are a few ways to reduce the risks involved, and many successful traders would say not to depend on luck or even confidence in how the price would end up. A solid strategy and formula are key to assess and manage risks effectively.
A crucial element of risk management in any form of investing is to limit the amount of capital wagered and only do so to money that one is willing to lose, no matter the confidence in the trade.