It is common among people looking to get into trading or into a particular form of trading new to them to not spend much time at all in deciding which broker to start out with. This is especially true with new binary options traders, who tend to be the least sophisticated form of new trader out there.
Many new binary options traders are attracted by the simplicity of binary options and view this form of trading as similar to casino betting. They often will have experience betting on casino games in online casinos, which tend to be substantially similar to one another, and think that the same is pretty much true with online binary options sites.
It’s not that we don’t need to be selective in choosing online betting sites, and we have seen some online betting sites that people need to steer well clear of in the past, but the great majority of them are reputable and you really can’t go too far wrong not spending too much time deciding on one.
The Transparency of the Online Realm
We still should be doing our homework here though and especially checking out online feedback, where if a site has some real issues you can count on people making them known and complaining about them on the internet. This takes a minimal amount of effort and since we are looking to give our money to these sites we should at least have a good sense of whether they can be trusted with it.
We certainly should be doing this with binary options brokers as well, and the beauty of the internet is that it not only gives us great access to gambling sites and online brokers, it also serves to make their operations far more transparent than we would ever see with offline businesses.
In the past, the only way we’d be aware of negative experiences is if they met the high threshold of warranting media coverage, and often times the media can color their reporting with quite a bit of bias, to make the stories more interesting. They are in the business of entertaining people for the most part and they may even allow the personal biases of reporters to color the stories as well, as we would see in editorials.
A good example of this is the way that the media seeks to portray binary options in fact, and the sense you get from reading these reports is that binary options are dangerous and undesirable and these reports tend to be not very well informed at all. It makes for good copy though and that’s the point.
When we read online reviews and experiences of binary options brokers though, we also need to be aware of the potential for bias here. If someone is looking to convince you to sign up at a certain broker, they may be getting compensated for this and therefore may be seeking to paint a good picture, where disenchanted clients may be out to paint a dim one.
We therefore have to take all of this stuff with a grain of salt and look to interpret what we read, but what we don’t want to see is people claiming to be cheated or even receiving poor service. Public trading forums are a good source of information overall, and when we see things that we don’t really want to see with a broker, we should at least be paying attention.
The majority of binary options brokers are reputable though, just like most online gambling sites are, although there are cases where brokers are not and those are the ones we want to always avoid. Checking out their reputation online is an invaluable tool.
Binary Options Broker Regulation
Anyone with the means to do so can set up an online binary options brokerage, and all you really need is the software, the know-how, and enough capital to cover the day to day operations. Binary options brokers really don’t take on much risk, as brokers tend not to anyway, as they operate with a clear mathematical advantage, like a casino does.
If we have to win 56 out of 100 trades to break even, this means that the advantage is on the side of the brokers, and a random distribution would net brokers an advantage of 6 trades out of 100. Any given set of 100 trades will have a certain variance here and some may win less than 50, providing a loss to the broker, but their drawdown exposure is quite low and it doesn’t take that much reserve capital to manage this.
Even so, some brokers may be poorly run or may even have a criminal intent, not being satisfied with enjoying their trading advantage over time and wanting to bilk their clients. This is very unusual though given that running a binary options brokerage can be a quite profitable affair if you have a good client base, but this does not mean that there aren’t people who may not be capable of running a successful brokerage or building up their business and may instead look to cheat and steal.
This is where regulation comes in, and binary options brokers are regulated in the same way that other brokerages are, ensuring that their business practices are up to the high standards set by the regulators.
For those familiar with online gambling, financial regulation is much more robust than we see in the online gambling world, which has a pretty minimal degree of regulation but is certainly preferable over no regulation at all. For the most part, online gambling sites pay fees to regulators to oversee them but the oversight is not that significant in many cases.
Financial regulation, on the other hand, actively monitors and assesses a brokerage’s operations and does a lot more to ensure that clients are sufficiently protected. This does not mean that regulated brokerages do not fail, but this is rare and when this happens, the assets of clients are segregated and protected.
It is therefore very important to deal only with regulated binary options brokers, although it is not necessary that the broker be regulated by authorities in your country of residence. If you do live in an area that regulates brokers though, it is an advantage for sure to have them regulated by your country, or region in the case of the Eurozone.
Regulation is just one factor among many that may influence our decision to go with a certain broker, and given that the majority of binary options brokers are regulated and therefore meet the minimum standards of safely trading with them, we still should go beyond this and assess the stability of brokers based upon things like size, experience, client feedback, and the like.
Other Criteria for Selecting a Suitable Binary Options Broker
With our concerns about safety being taken care of, we then need to compare brokers based upon the features that they offer, and this can differ quite a bit across different brokers. At least some of this will be based upon how well a broker suits one’s particular needs, for instance one having a smaller minimum deposit than another won’t matter to people who can easily afford to meet the requirements of both.
The first thing to look at is if a broker accepts traders from your country. For people living in the United States, this is all made incredibly easy as there is only one option that makes sense, Nadex. Nadex is very tightly regulated and also is a very high-quality binary options broker, and binary options traders in the U.S. have it very good indeed.
For those residing in other countries, they are faced with deciding between a number of binary options brokers competing for their business, and their features may differ quite a bit.
Comparing the payouts between brokers for similar trades is something we all need to be doing, much like we’d be comparing commissions with stock trading or the spread with forex and contracts for difference trading. Price is very important here and can make the difference between trading profitably and trading at a loss.
The breadth of a broker’s offering may also matter quite a bit, and if you like to trade a certain type of asset and one broker offers it while another doesn’t, this can influence your choice. We still want to be paying attention to the costs of trading and higher costs mean that we’re going to need to be right more to break even, which is why price is such a fundamental requirement.
Some brokers may offer the ability to close trades while in progress, before expiration in other words, and if you are a trader who likes to trade this way, having this ability may be quite important to you. For the majority of binary options traders though, holding to expiration is preferable anyway, as trading before expiration is more complex and should be left to more skilled and experienced traders.
Minimum and maximum trade sizes may be an issue as well, depending on your needs, and we never want to go bigger than we’re comfortable with to meet higher minimum requirements. We also may not want to go smaller than we like if we’re limited to that.
The options for funding your binary options account may matter a lot as well. If a broker doesn’t allow you to fund your account in a convenient and timely way, or if withdrawals aren’t convenient either, this may cause you to choose a more suitable broker, even though we need to take all factors into account and arrive at the best overall decision.
The quality of a broker’s trading software may matter at least somewhat, although this probably won’t be much of a deciding factor for most traders. The ability to use simulated trading and use it for as long as you need it should be considered to be very important to newer traders, as we should at a minimum be able to be profitable using a demo account before we start trading with real money.
Some brokers will limit people’s time on demos or look to pressure clients into moving to real money before they may be ready, and if we cannot train enough with a broker than it’s time to move to a more accommodating one. Brokers don’t make money when you trade demo accounts, but you don’t lose money on it either, and our not losing excessively should obviously be the concern here, not the broker’s lost profits.
Finally, the quality of client service matters quite a bit, although this is something that we tend to become more familiar with after we’ve started trading with a broker. Still though, we can get a good feel of how good the service is while we’re trading on a demo or early on if we’re trading with real money, and we shouldn’t hesitate to consider switching brokers should they not provide good service.
There are quite a few things to consider when looking to select a binary options broker, and the time spent considering this prior to opening an account with one will be time well spent.
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.