Disadvantages of Binary Betting
For all the advantages of binary betting, there are also several correlative limitations that traders are advised to take into consideration. As with all things, there are pros and cons involved in binary betting, so it’s just a case of weighing up both sides of the equation as a balancing act to determine when and how best to utilize binary betting.
One of the main disadvantages of binary betting is their comparatively wide spreads in comparison to other instruments and trading styles. Because binary bets take no consideration of the extent of market movements in either direction, and in comparison to other forms of trading the volumes of binary bets placed are much lower, binary brokers need some way to enhance their profit portion to ensure binary bets are worthwhile, and this often results in wider spreads than with other investment opportunities.
Inherent in the makeup of binary betting as a trading style is the capping of both profits and loss, limited to the difference between the buy/sell price and the 100 or 0 settlement price. This is an advantage on the losing side, but also a limitation on the plus side.
For example, if you buy the FTSE 100 at a spread of 47-51, the maximum earnings you will receive from the market moving positively are equivalent, whether or not the market moves by 1 or 100 points. In contrast, a spread betting position could capitalize on a strong rise in the market multiple times over, thus for a ‘sure-fire’ position showing signs of a heavy positive movement, it may be more viable to opt for spread betting or some other trading style.
Likewise, there is no margin for stop losses (or limits) built into the binary betting transaction. This essentially means that there’s little scope for automatically cutting out of a losing position – by nature, the bet is binary, so losses are taken at 0 on a ‘buy’ trade. Of course, this does have the advantage of bringing certainty to the equation, in the sense that traders are aware of their potential losses before entering the position, but these may be higher than those that would arise otherwise in transactions where stops can be more readily placed.
Binary betting does have its fair share of drawbacks, but as with any method of trading, these tend to be outweighed by the positives, and in particular the flexibility binary betting brings to the trader’s arsenal.