(Please note: since this article was written the FCA has banned binary options and IG no longer offer the product).
It is no secret that in the world of trading and investing, the higher the risk the higher the return. What is also true is that the shorter the time scale the higher the risk. Therefore you’d have thought that in the world of binary betting where you can bet on market moves of 1 minute to 60 minutes the rewards would be high too.
Unfortunately not, the rewards are rubbish.
Do binary traders make money?
Stuart Wheeler the founder of IG has been quoted as saying that only around 20% of customers make money spread betting. This is true and to be honest probably on the generous side. It’s probably closer to 90% that lose money, 5% probably break even and the rest lose. Binary Betting is even harder to win at because of it’s absolute nature, so expect win rates to be even lower!
You just have to look at the annual and monthly performance from hedge funds in Euro Hedge. The best and highest-paid managers in the world make about 15%, some even consistently lose money. So if customers can’t make money spread betting, and the best fund managers in the world can’t make 100% (like binary betting marketing suggests) what chance does a “Mr Smith” have betting bad odds on a short term market move? Of course they don’t make money.
Why do people binary bet?
But binary betting is there for a reason. It fills the gap for punters that want a quick fix at beating the market. It’s exciting because the results ares quicker that spread betting on the FTSE and to a certain extent your loses are limited from the outset.
Just as sports spread betting on a horse can lose more than your fixed odds bet at William Hill. The same is true of binary betting, and yes, it is much like betting on a horse race, your losses are fixed and the outcome is about as random as it gets, no matter how good at intra-day technical analysis you are.
So if you want to gamble and don’t want to risk unlimited losses and accept the slim chance of winning it may be for you (if you’re lucky enough not to get scammed by your broker). If you want to make money, stick to the fundamentals and invest for the long run in funds and undervalued companies.
High Risk, Low Return
Despite what the marketing suggests the returns on binary betting are actually very low compared to spread betting. With financial spread betting you deposit initial margin and your profit or loss is potentially unlimited. However, with binary betting, you only get long odds if a probability is highly unlikely. Obviously, events with a low likelihood rarely happen and as such when you bet on binary events you get a very low return based on the risk.
Binary Options are NOT investing
As binary options are not really regulated there is no oversight on how they can be marketed. Binary betting is a high risk short term bet or speculation. Investing is based on sound fundamental growth prospects, which are not applicable to binary options.
Are there any good binary betting brokers?
If you must binary bet, you should at least go with a UK based and regulated broker. Don’t go near anyone regulated offshore or get drawn in by marketing that suggests you can double your money. There are only a few UK regulated brokers that offer binary betting. IG, of course, being the biggest and best, you can read up on IG here.
Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.