Wall Street is often referred to as a casino, with investors placing their bets on whether a stock or index will go up or down over time. The big difference is that investors can often leave their bets on the table indefinitely, waiting out random price moves or short term market sentiments.
The fast-paced world of binary options is a different kind of casino, an all-or-none win-or-lose gamble on the price or direction of just about any security or asset. Winners can win big, possibly seeing a 70 to 80% return in a matter of minutes. However, a losing trade is a 100% loss of risk capital. The stakes are high.
Best Binary Options Brokers:
- Nadex – Open an account
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What is a binary options broker?
Binary refers to something having two parts. In binary options, you can think of these two parts as being two sides of the trade – but you can also think of it as a yes or a no, or an up or a down or a win or a loss. There’s usually no in-between with binary options, no small gains, and no small losses.
Binary options brokers, much like other types of brokers, facilitate the trade. However, there are some distinct differences because many binary options brokers take the other side of the trade as opposed to just working as an intermediary.
Binary options brokers also differ from conventional brokers in that there is no option to buy or sell the underlying asset. A binary option on the price of gold doesn’t entitle the trader to purchase (or sell) the gold at the strike price. It’s simply a bet on whether gold will reach a certain price within a certain time frame, often with trade durations measured in minutes or even seconds. Binary options are a lightning-fast market and can be electrifying if you guess right – or just as shocking if the trade doesn’t go your way.
What to look for in a binary options broker
For U.S. traders, CTFC regulation is an important consideration. To date, only a few exchanges are authorized by the CTFC in the U.S.
Transparency is equally important. With losses frequently 100%, it’s critical to know your potential profit or loss before you make a trade. Clear terms and conditions help to aid traders in making educated trading decisions.
Active traders know that fortunes can be made or lost in the inefficient chasm of a wide spread. An active exchange helps ensure a viable market with opportunities even on small moves in price.
Established brokerages or exchanges
Binary options trading is one area where new brokerages or exchanges should be time-tested before investing your money. Many brokerages have come and gone, or changed names overnight, feeding a healthy skepticism for binary options traders.
Red flags for binary options brokers
In many ways, binary options are the wild west of online trading, complete with the online equivalent of stagecoach bandits and fly-by-night snake oil salesmen. Brokerage contracts or terms and conditions may include limitations on withdrawals that can effectively trap trader funds and, in some cases, attempts to withdraw money may be refused. Before you move forward, check out the CFTC’s video below.
If a broker you were considering has recently changed names, investigate further. Well-established brokers or exchanges don’t often abandon their branding readily.
Discussion board spam and exaggerated profits
Some binary options brokers have aggressive affiliate programs that pay people to get new customers for the platform. If it seems to good to be true, it might not be true.
Where there’s smoke, there’s often fire. Customer reviews skewed toward negative user experiences provide enough reason to steer clear.
Traders should be wary of brokerages that contact them to upsell or solicit a larger deposit. Often this upsell is accompanied “insider information” or by an offer of “bonus money”, free money that will be deposited into your account.
This money often has strings attached, such as a requirement that you trade X amount of your own money before the bonus money is released for trading. Less-reputable binary options brokers know they will get this bonus money back as well as the money you deposited, so there is no risk to them in offering “free” money.
Brokers that take the other side of the trade
Average potential gains from binary options trades with many online brokers is between 70 and 80%. Potential losses, of course, are 100%.
Mathematically speaking, if you aren’t coming out on the winning side on a strong majority of your trades, the house will slowly take all your money. Sometimes, this process is much faster, like when you make large bets or bet everything you have in your account. Brokers who are trading against you should be a red flag for traders and could signal odds that heavily favor the house.
Methodology: How we chose
Finding the best binary options brokers for U.S. traders can be confusing for traders because there’s only a handful of exchanges regulated by the U.S. Commodities Futures Trading Commission (CTFC). Other brokers may accept trades from the U.S. but might stop suddenly. Others block U.S. traffic from their websites. The CTFC considers unregulated binary options trading to be illegal.
The CTFC-regulated brokers are better described as exchanges. The only other parties to a trade are other traders. For the purposes of choosing the best binary options brokers, it’s better to think of brokers as platforms where you can execute your trades. All the brokers or exchanges we considered offer that core functionality, but they may use different mechanisms to provide a market and only a few are CTFC-regulated.
With many binary options brokers that are not regulated by the CTFC, the broker takes the other side of the trade. This can create a conflict of interest because the broker controls the rules and mechanics of the trading platform but also has a stake in the outcome of the trade.
It isn’t uncommon for some less-reputable brokers to extend the expiration until the trade swings back to their favor or to implement some other digital chicanery to separate binary options traders from their money. Traders in these situations are often effectively powerless, many with no viable recourse other than to stop using the platform.
In an online search for binary options brokers, you’ll find that most do not accept U.S. clients, including many that are regulated by other jurisdictions, such as the UK’s FCA or Australia’s ASIC. Options are sparse for U.S. binary options traders.
Best binary options brokers
We chose to limit binary options brokers in our lineup because very few are CTFC regulated in an industry that has had its share of unpleasant user experiences ranging from unclear terms and conditions to unresponsive brokers when traders tried to withdraw funds.
If you search diligently, you might find another broker that accepts U.S. clients for binary options, but CTFC pressure on brokers has limited the market considerably and given some user experiences, that’s not a bad thing.
1. CTFC-regulated: Nadex
Founded in 2004, Nadex is a veteran of the industry and a proven exchange. Nadex, short for North American Derivatives Exchange is based in Chicago, was formerly known as HedgeStreet. In 2008, UK-based IG Group, a world-known forex and binary options company purchased Nadex, later ushering Nadex into the binary options market following IG Group’s lead. During its HedgeStreet days, the company was the first to be regulated by the CFTC and Nadex remains one of the few binary options brokerages or exchanges to be regulated by the CFTC.
Nadex operates as an exchange, meaning the company does not engage in trading and doesn’t take the opposite side of the trade. The company advertises itself as a referee, ensuring a fair trade, but not a participant in the trade. Traders can choose from options for indexes, currency pairs, economic events, cryptocurrencies, or commodities and a demo account allows new traders to learn the ropes.
The company makes money by charging a per trade fee. The cost per contract is $1, with a maximum cost of $50 per trade. If your trade is for hundreds of contracts, the cost is still only $50. There are no account fees or membership fees, but traders must fund their account with a $250 minimum initial deposit.
2. CTFC-regulated: Cantor
Cantor Exchange, also called CX, can be accessed through a sleek interface from Tradologic which puts technical charts front and center, allowing traders to see trading patterns instantly. The platform is also known for easier automated trading.
One criticism of the exchange has been liquidity, which can mean more limited trading options simply because the exchange is not as popular as its primary competitor, Nadex. Choices are also fewer, with Cantor focused on an offering of 6 major currency pairs as well as Gold (XAU/USD).
The exchange offers option expiry from as short as 5 minutes to end of day contracts. Traders can also enter positions with as little as 30 seconds remaining on expiry.
Cantor requires a $100 minimum initial deposit and positions settle for as low as $1 per contract. Other offerings include Bitcoin swaps and contracts based on weather events, including contracts for rain and landfall for storms.
Slippage control allows traders to limit exposure by limiting account drawdown for trades. This feature is attractive for new traders because Cantor does not provide a demo account.
3. CBOE and NYSE binary options
Traders can also trade binary options through a specialist futures and options broker on CBOE and NYSE exchanges. The binary option selections available through these exchanges can vary in structure from the options available through Nadex.
NYSE refers to these options as Binary Return Derivatives and classifies the instruments as ByRDs. In both cases, the CBOE and NYSE binary option variants, the option either pays $100 or $0 at expiry.
The allure of fast profits and a defined risk is what attracts traders to binary options. Many traders are part-time players and can’t always keep up with news or market swings.
Contracts with an expiry measured in minutes, however, fit busy schedules well and can provide handsome rewards for adept technical traders with an eye for a good opportunity. In an all-or-none wager like binary options, managing risk is paramount. Traders should always choose an exchange that is CTFC regulated to limit risks to those expected in the course of active trading.
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