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Binary Options: The Facts And The Fiction

Binary Options: The Facts And The Fiction

Binary options are a rapidly growing business. More and more brokers with more and more regulations are popping up every day. The problem is that the industry is still operating on the fringes of the internet with regulatory agencies operating on a very localized basis. This, along with the high propensity for scams, has led to a lot of confusion about what binary options are, where they come from, and if you should be trading them.

The good news is: I have been tracking the industry for many years and am here to fill you in on the facts and the fiction surrounding this simplified form of trading.

Fact – Binary Options Are An Easier Way To Trade Financial Markets

As a tool for speculation they are easier to use than most. When compared to equity investing, standardized options, futures and forex it is better described as a simplified form of trading because the account requirements and mechanics of trading are much different. Futures, forex, commodities and standard options all require margin accounts and can expose you to unlimited risk. Depending on the type of trading, leverage can be as low as 10:1 and as high as 250:1 or more at some forex brokers.

Margin accounts are highly levered accounts that can make you a lot of money really fast, but can also completely wipe you out of the market at the drop of a hat. The most difficult aspect of trading futures, forex or options is taking profits. These types of positions are subject to every move of the market, many are affected by the passage of time and all are impeded by slippage. Positions that move as predicted don’t always generate profits.

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Trading binary is much simpler than that. You pay a set price at the open of the trade, are only exposed to that amount of loss, and have a fixed return upon expiration of the contract. All that is required is to move the underlying asset in the direction of choice.

Fiction – Binary Options Trading Is Easy

Let me rephrase that, successful binary options trading is easy. It’s easy to trade binary, all you have to do is do it, but being successful is not easy. By reading the average run of broker homepage, you’d think all it takes is to pick an asset, choose a direction and reap the profits but the reality is that more than 90% of all traders get washed out of the market. The same can be said for other forms of trading as well, it’s pretty easy to buy and sell securities, all it takes is an account with a broker and you are in business. Doing it successfully, making consistent profits, is very hard.

Profitable speculators spend years, if not decades, learning the market in which they trade. They have an in depth knowledge of market mechanics, as well as technical and fundamental analysis that allow them to form educated opinions, thus positioning their accounts to take advantage of these opinions. Just because binary trading is simplified in terms of account mechanics, margin and profit structure does not mean trading them is any less hard. The underlying market, fundamental and technical analysis are the same, requiring the same knowledge and experience to produce profits

Fact – All Binary Options Are The Same

In essence it’s true that all binary options are the same. Binary options are a fixed return investment vehicle with a fixed price, a fixed set of conditions to be profitable. and a fixed payout upon expiration. Regardless of the style of trading, all that is required is for the preset conditions to be met.

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In the case of call/put and high/low style trading, if a trader buys a call or high position all it needs to profit is for the price of the underlying asset to move higher than the strike price at which the option was bought. The same is true for puts, just in reverse. Prices must fall or move lower than the strike price to profit. One touch options require prices to touch a set strike only one time, while range options require asset prices to remain in a range.

Fiction – All Binary Options Are The Same.

The basic structure of all binary options is the same – if yes, then you profit; if no, then you lose. The reality is that not all binary options are the same. There are at least two major classifications with some smaller categories within those two. The most important difference to understand is the method of trading. One style is based on spot prices, the other is based on strike prices.

The first category is best represented by the CySEC style of trading which is popular in Europe and other international locations. This style has only one strike price, the price of the underlying asset at time of purchase. The price of the option is whatever amount the trader chooses, with payout equaling investment plus a set return.

The second style, found primarily in the United States, is based on strike prices and often referred to 0-100 options. This style utilizes a list of set strikes whose prices range between 0 and 100 depending on whether they are higher or lower than the spot price. Traders choose strike and expiry. If the asset spot price closes above/below that strike they receive $100 and profit the difference between purchase price and pay out.

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Fact – You Can Make Fast Money Trading Binary

It is true, payouts for most types of binary options start around 70% and go up to over 500% depending on what type of options you are trading. Believe it or not, US regulated exchanges like NADEX and Cantor Exchange have some of the highest payouts for standard call/put style binaries. An at-the-money option may cost $50 and pay $100 at expiration for a return of 100%, higher than the average 80% return you find at a CySEC/EU style broker. On top of high returns is a high speed of return. Some binaries expire in as short as 60 seconds, others range from 5 minutes to 1 hour, 1 day or 1 week.

Fiction – You Can Get Rich Quick Trading Binary

It is possible to get rich trading but it is not likely. First of all, trading is risky and difficult to do successfully. If it was possible to get rich quick then everybody would do it and no one would be able to make money with get-rich-quick-schemes. The speed of trading is also working against the average trader. It is possible to lose money just as fast as it is to win it. On top of that many brokers brokers have stops in place to prevent any wild successes. These are often found at off-shore style brokers. The most common way is to limit the size of the trades. If you can’t make a big trade then you can’t make a big win. Some will limit trade size to a percent of your account, so any trades above that amount won’t count toward your balance. This is an often overlooked fact that has caused confusion for many would-be traders in the past.

Fact – There Are A Lot Of Scams In The Binary Options Industry

You have to be extremely careful when looking at any broker, offer or service. Scams range from fake brokers to fake regulators and can include complex sales funnels, shady account managers, auto traders, trading software, robots, signals and just about anything else a crafty marketer can think up. One reason is a lack of international standard or regulation. The industry came to life in the gray areas between countries and regulations. Since the industry exists almost entirely on the internet regulating it is very difficult. Anyone with a URL and the money to buy a trading platform software package can open a new broker or signal service in a matter of days.

Fiction – All Binary Options Brokers Are Scams

This is not true. There have always been brokers operating legitimately and the number of those is only growing. At the same time, regulators around the world are stepping up and taking control of the situation in their region. The US was the first to adopt such rules and is the strictest of any jurisdiction. At this time there are only two places to trade, NADEX and Cantor Exchange – although Cantor Exchange is working with top technology providers to create opportunity for even more brokerages to begin business.

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Cypress started regulation in Europe when CySEC recognized binary as a financial tool and not just gambling. Since then, several developments have helped to cement this form of trading in the EU including a recent Dutch ruling on binary as well as impending regulation from Britain’s Financial Conduct Authority. Other nations which have adopted regulations include Japan, Australia, New Zealand and Canada.

The trouble for would be traders is two-fold. First, there are more website offering scams than there are fighting them and new scams appear every day. The second problem is how the lack of centralized regulation causes as much confusion as it solves. This 24Option scam review is a good example. This broker is well known (more on this below), has been in operation for many years, is CySEC regulated, and yet still receives warnings from the US and Canada.

Fact – Binary Options Is Here To Stay

Many have doubted the longevity of this style of trading but sources show it is only gaining momentum. In Europe, TechFinancials has become the first technology provider and broker to become a publicly traded company. This move shows the public’s acceptance of binary as a viable business model, if not a legitimate form of trading. At the same time, 24Options (the flagship brand of TechFinancials) has partnered with leading sports teams for mutually advantageous advertising, as well as having dozens of other brands. In the US, trading volume at NADEX grows rapidly and Cantor Exchange is on the cusp of opening the market wide open. Cantor is focused on bringing the same type of white label access to the US as is currently seen in Europe. This will allow new brokers to open up shop and provide binary alongside their proprietary products. Three technology providers are part of the process thus far: SpotOption, Tradologic and TechFinancials.

The Bottom Line In Binary Options

Binary options are here and they are gaining in popularity and safety. They are embraced by the worlds financial communities, entering the purview of regulators. Cantor Exchange and NADEX are leading the charge in the US, while at the same time others are making moves to solidify the industry in Europe. CySEC paved the way there and now other countries within the union are getting on board. The decision of the Dutch court to uphold CySEC, the MiFIB and EU Financial Passport is a landmark event and one that will have positive repercussions throughout the EU and possibly the rest of the world. This affect is already being seen in England where regulators and legislators are making plans to establish London as a hub of binary trading.

Meanwhile, the industry is still plagued by scams so it is very important for anyone pursuing this avenue to do their due diligence. There is a lot of gray area in which scammers and shady brokers can operate. There’s no end to depth of scams these people will perpetrate. The only true protection is to stick with reputable brokers that are regulated in the country in which you reside.

Featured photo credit: www.vpsi.org via commons.wikimedia.org

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Last Updated on September 2, 2020

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways to set financial goals and actually meet them with ease.

4 Steps to Setting Financial Goals

Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

1. Be Clear About the Objectives

Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

2. Keep Goals Realistic

It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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4. Short Term Vs Long Term

Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

How to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a two-step process:

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

Ensuring Healthy Savings

Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

If you’re not sure where to start when tracking expenses, this article may be able to help.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

3. Make a Plan and Vow to Stick With It

Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

Nowadays, several money management apps can help you do this automatically.

At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

  • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
  • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
  • If you go shopping, always look out for coupons and see where can you get the best deal.

The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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5. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

6. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

Making Smart Investments

Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

1. Consult a Financial Advisor

Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

2. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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3. Compounding Is the Eighth Wonder

Einstein once remarked about compounding:

“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

Use compound interest when setting financial goals

    Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

    Start saving early so that time is on your side to help you bear the fruits of compounding.

    4. Measure, Measure, Measure

    All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

    If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

    Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

    The Bottom Line

    Managing your extra money to achieve your short and long-term financial goals

    and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

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    Featured photo credit: Micheile Henderson via unsplash.com

    Reference

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