Binary options and choosing the right trading tools: The complete guide

Investors considering starting trading or expanding their portfolios often face a critical decision: which financial instrument to choose. Among various options, one instrument gaining increasing attention is the Binary Option, which operates differently from other trading methods.

Binary Options: Definition and Basic Mechanics

What are Binary Options? This is a question many people wonder about. The simple answer is that binary options are financial products that allow investors to bet on the direction in which the price of an underlying asset will move.

The basic structure is quite straightforward. Investors must allocate capital to establish a position, then predict whether the price will go up or down. The duration of binary options is very short, typically 1 minute, 5 minutes, or 15 minutes. The returns are all-or-nothing, (All or Nothing). When the trade ends, investors receive a fixed return of approximately 70-85% of their stake or lose the entire amount if their prediction is wrong.

How It Works and Usage Examples

Once we understand how binary options function, let’s look at a real example. Suppose a trader observes the GBPUSD currency pair at 1.3902. After analyzing, they believe that within 5 minutes, the price will go up. They then invest $100 in a Call Option position.

There are two possible outcomes:

Scenario 1: Correct Prediction After 5 minutes, GBPUSD closes at 1.3910 ( higher than the opening point). The position is “In the Money,” and the investor receives the full amount $185 ($100 cost + $85 profit).

Scenario 2: Incorrect Prediction Conversely, if the price closes below 1.3902, the position is “Out of the Money,” and the investor loses $100 the entire amount.

Trading Options: Call and Put

Binary options primarily come in two trading formats:

Call Option: Betting that the price will rise. Used when you have a bullish outlook and expect the price to surge.

Put Option: The opposite, betting that the price will fall. Used in a bearish market or during a downturn/sell-off.

Key Question: Is Binary Options Gambling or Investment?

This may be the most important question. The answer depends on the investor’s approach:

If you trade based on feelings, without a risk management plan, and make decisions driven by greed or fear, it is much closer to gambling.

On the other hand, if you have a clear plan, analyze data carefully, manage your funds prudently, and have a risk management system, it can be considered a strategic investment.

Global Legal Status

Binary options have vastly different legal statuses across countries.

In Thailand: There is still no clear legal framework regulating binary options trading. Thai investors bear high risks from intermediaries. If issues arise with foreign brokers, legal action is difficult and costly.

Abroad: Several regulatory bodies consider binary options to be high-risk and potentially fraudulent:

• Australia: ASIC found that only 20% of retail investors profit, leading to a ban on binary options for retail investors since April 2021.

• European Union: ESMA announced a ban on marketing and selling binary options to retail investors since March 2018.

• United States: FBI investigations have revealed most sites are scams.

• Belgium, Israel, Germany: All issued bans on trading binary options due to fraud concerns.

Comparison: Binary Options vs Forex

Similarities

Both binary options and Forex are popular online trading instruments. They allow trading with small capital, profit from both rising and falling markets, and if predictions are correct, both can offer good returns.

Differences

Trading Hours: Forex operates 24 hours, 5 days a week, while binary options depend on the trading hours of the underlying asset.

Instrument Duration: Binary options have durations of only 1-15 minutes, whereas Forex positions can be held for longer periods.

Volatility: Forex tends to be more volatile, but binary options have predetermined returns and losses.

Profit Potential: Forex offers higher returns ( possibly up to 200% or more), while binary options are limited to 50-80%.

Leverage: Forex allows leverage; binary options do not.

Recommendations for Choosing a Tool

Deciding between binary options and Forex depends on your goals and trading style:

Choose Binary Options if you:

• Want clear risk management ( with guaranteed profit and loss)
• Prefer short-term trading
• Are confident in winning consistently, with a success rate of 55% or higher ( need at least an 80%+ win rate for long-term profit)

Choose Forex if you:

• Seek high profit potential
• Want flexibility in managing positions
• Can accept higher risks
• Wish to use leverage to increase trading size

Whichever tool you choose, the most important factors are continuous learning, strict money management, and careful judgment in every decision.