This section of our website will focus on binary options brokers. Here we will try to explain how binary options brokers work and help you make informed decisions when it comes to binary options trading. As you probably noticed, most websites that speak about binary options brokers will just show you a “ranking” of brokers with good looking design, logos and reviews. But what is this ranking based on? How do the brokers receive their “rating” and are the reviews actually honest? I’ll let you decide that yourself after explaining how the binary options industry works.
In case you reached this page looking for the best binary options brokers, you’d better keep reading as this is probably the first website that will tell you the truth behind binary options brokers.
Sorry for grabbing your attention this way, but this is really worth reading
Binary options have become very popular among retail traders because they are very easy to use and require zero knowledge about financial instruments if you just want to trade them. The thing is, since they are easy to use anyone can try binary options, and this is why brokers are desperate to attract new clients. This encourages them to advertise on binary options websites and pay the website owners money in exchange for promotion. The result is website owners promoting the brokers that pay them the most in order to make more money. This is how the broker rankings end up being created, with the brokers paying the most ranking on the top spots and receiving the best reviews and ratings.
You will probably notice that most websites listing binary options brokers also have banners and other advertising material displayed as they try to maximize the money they get from the brokers. They may even promote shady “binary options robots” promising to make you thousands of dollars every day, as if such thing would be possible...
So, does that mean binary options brokers are not to be trusted? No, it doesn’t mean that, but it means you should be very careful what broker to choose. Advertising a business is a legitimate thing, and it is done by legitimate businesses in every industry, but it can also be done by shady brokers who may even be willing to outspend the honest ones. Then how can you distinguish between reliable brokers and scams? You must first understand how binary brokers work.
When you buy an option, you must buy it from someone, which will be your counterparty. Binary options are just bets on the outcome of the market movement on a predetermined timeframe. This means that when you buy a binary option from your broker, you actually bet against the broker. If your option is a winner, the broker will credit your account with the payout, and when the option ends ‘out of the money’ the broker will win the bet. It works in the same way as betting on sports against a bookmaker, only that in binary options you bet on financial assets, not on sporting events.
So, the broker makes money when you lose. This means that the broker must make sure it wins more than it loses, just like bookmakers do. How does the broker achieve this? Binary trading brokers will always have a lower payout compared to the price of the option, if we’re talking about simple Call and Put options which have a 50% chance of success. Let’s think about an option with an 80% payout and a 5% insurance for out of the money trades. If you buy such option 100 times at the price of $100 and you win 50% of the time, your payout will be the following: 50 x 180 + 50 x 5 = $9,250. However, the price you paid for the options was 100 x 100 = $10,000. This means that in the end you will lose $750 and the broker will make a profit of $750 even if your win rate was 50%.
But aren’t financial markets predictable? Isn’t it easy to have a high win ratio in binary options and beat the broker? Well, my answer would be that financial markets are not as predictable as many people think, especially in the short term. Also, most people trading binary options have no clue about what they are actually doing and they are just randomly betting on the market to see what the outcome is. In this case they end up with an average win rate of around 50%, exactly what the brokers wish.
Binary options brokers use two tricks to make sure they make more money than what they pay back to their clients:
1) They advertise in a way that encourages beginners to signup in order to make sure the majority of their clients are just novices who gamble on the markets. Such clients are trading mostly for the thrill of staking real money and they may trade again and again even if they lose some money, because just as in sports betting, sometimes they will win and will be happy about it.
2) They promote short term options such as ‘60 seconds options’ and other options with deadlines shorter than one hour. It is well known among experienced traders that only sophisticated trading algorithms can predict such short term movements with some success, and even such algorithms cannot have a sufficiently high win rate in order to beat the broker’s advantage caused by the lower payouts. Also, binary brokers have very simplistic platforms that do not allow the use of real trading robots, so any trading done on very short term options will have an average success rate of 50%.
Since most binary traders will just gamble with a 50% success rate, binary options brokers will be profitable against the majority of their clients, just like bookmakers are profitable against the majority of bettors.
Of course, there are also traders that are profitable and make money trading binary options, but they are just as few as the people making money from sports betting, and are a negligible proportion among the total number of traders. Brokers can just accept the loses on those clients because they make much more money on those who lose on a regular basis.
You may conclude that binary options brokers are just scams since they make money when the client loses, but this is a totally wrong assumption. Technically speaking, binary brokers are just market makers providing a pool of options that traders can buy. This is how most derivatives brokers work, and this includes many forex brokers and also CFD (Contract For Difference) providers. They can be regulated by financial institutions and as long as they conduct their business in a honest way they are legitimate businesses.
As I have just explained how binary options brokers make their money, the question that comes next is, are all binary options brokers reliable? Since the broker makes money from the client’s losses, wouldn’t some brokers try to cheat and block traders from withdrawing their winnings?
The sad truth is that the binary options industry is plagued by scams who only want to cheat their clients and take their money. Many so called brokers (because they cannot be called brokers) are just shady companies that will accept deposits and let you play on their platform as long as you lose, but will start to cheat if they see that you are winning. They may manipulate the price feed in their favor and they may even delay your withdrawal request in order to play with your nerves until you decide to cancel your withdrawal and gamble your money away until you lose them. Some fake brokers may offer you bogus bonuses with a lot of restrictions attached, that will make it impossible to request withdrawals until the bonus conditions are met. Those conditions are usually absurd as they require you to place tons of trades that will most likely result in the loss of your balance.
While there are many fake brokers that appeal to some of the ugly tricks described above, there are also some reliable brokers that are regulated and conduct their business in a honest manner. The honest brokers are safe to use as they will always pay your winnings and will not cheat against you. Just as there are honest and reliable online bookmakers (such as Bet365) there are also safe and reliable binary options brokers.
The sad thing about the binary options industry is that many shady brokers pay a lot of money in advertising because they keep all the deposits they receive without paying back their customers’ winnings. This has the ugly effect that sometimes you will see shady brokers ranking on the top spots on binary options reviews websites and having banners all over the internet. The final effect is that many people lose faith in binary options after being cheated and tend to think that all brokers are the same, which is not true.
A first step in avoiding binary options scams is to avoid brokers that are not regulated and that don’t have clear information about the company on their website. While there can be honest brokers that are not regulated, the risks are just much higher.
Another thing to avoid are the so called “binary options robots” that will show you a very well made marketing video explaining how they are making thousands of dollars every day, and how they will let you use their robot and make tons of money for yourself because they are generous, or because they “need your help”. There are hundreds of such so-called robots that are nothing else but marketing tricks to attract new clients for shady brokers. The robots will just randomly trade on your behalf until you lose your deposit.
Anyway, as a general rule in investing, what sounds too good to be true is actually a scam. You should also be cautious about recommendations from websites that are filled with banners and that speak about bonuses. They are usually just advertising the brokers that pay the most.
So, considering all warnings described above, should you still be trading binary options? You can safely do it if you choose one of the large regulated brokers. Those brokers have a very large client base and have no problem in paying traders who win. They are serious businesses that want to work long term and know that in order to be successful in this business in the long run, a broker must be reliable and have a good reputation.
I would recommend 24Options as the best binary options broker, since it is the largest binary broker by number of clients and it was one of the first brokers to get regulated. Another safe broker that is regulated and has a very large client base is Stockpair.
While there are other regulated brokers as well, I would not go as far as to recommend them because I haven’t tested them myself.
Anyway, my advice is to trade only longer term binary options and avoid 60 seconds options unless you just want to have some fun and you don’t care if you lose.
There is also a new broker that has caught my attention as it proposes a different approach to binary options trading. The broker is named TradEqual and it proposes a platform working like a binary options exchange where clients buy and sell their options among them while the broker charges a small commission on winnings. In this case, you will not be betting against the broker, but against other traders. This model is very promising, but I can’t say much about the company since it is very new on the market and I haven’t tried it yet. Anyway, I thing they are worth having a look at.
It is unfortunate that US citizens cannot register to the regulated brokers. This is because of the FATCA legislation that makes business with US clients very expensive for foreign financial companies. Because compliance with FATCA is extremely expensive most non-US financial institutions have given up on US clients, and this includes banks and brokerages alike.
I know there are very few binary options brokers still accepting US customers, and those who do are not regulated. If you are from the USA and still want to try some binary options, you can check the broker Finpari, as this is the most well known binary broker still accepting US clients. However, you should keep in mind that they are not regulated, so it would be wise to deposit only small amounts of money with this broker, if you decide to do it.
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1. Binary Option (Wikipedia article about binary options)
2. Derivative Instruments (Wikipedia article about derivatives)