Binary Options: How to Spot & Avoid Scams

By: Richard Cox   Date: 30 August 2013

About The Author

Richard Cox

Richard Cox is a university teacher in international trade and finance. Lessons in macroeconomics

Richard Cox, EW Contributor

 

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30 August 2013

The online trading environment has developed rapidly over the last decade. But while this has immensely leveled the playing field for individual investors, it is important to remember that not all brokers, trading instruments, and strategies are created equal. Unsurprisingly, online retail trading has opened the door for the unscrupulous to take advantage of those new to the industry. Fortunately, scam operations are relatively easy to spot (and avoid) if you know what to look for in a new broker arrangement.

Unfortunately, however, there are not many resources that are dedicated to exposing the disreputable parts of the business, as most websites are simply focus on ad revenues or affiliate marketing. For those interested in Binary Options, one helpful resource can be found at BinaryOptionsThatSuck.com, or BOTS, which is an online community of options traders that is directly focused on exposing scam outfits and educating traders about the common pitfalls of options trading. Here are some of the key lessons taught on the site:

1. Understand the Regulatory Environment

In most countries, the financial markets are highly regulated, which means there is a government body in charge of broker oversight and in making sure that traders are treated fairly (and that their money and positions are safe). When you trade in an environment that is well regulated, it is difficult for scammers to operate, and if traders do find themselves to be a victim of fraud, there is recourse available. Before signing up with any broker, make sure you know the name of the entity that regulates the trading agreement in order to make sure that the company is credible.

2. Avoid Under-Capitalized Brokers

An unfortunate reality of the trading environment is that companies that are better capitalized are often more scrupulous and dedicated to the success of their traders. This is essentially because larger companies have more to lose if any wrongdoing is seen. In addition to this, larger companies are much less susceptible to bankruptcy risk, which means that your deposited funds will be safer and returned to you when you decide to make a withdrawal from your account. Under-capitalized brokers might offer terms that seem excellent at first glance, but if those companies are unable to actually make their payouts, major problems can occur. For these reasons, better capitalized companies with larger user bases and exposure in more regions tend to be safer for binary options traders.

3. Don’t Be Tricked by Incredible Deposit Bonuses

If an advertised deal looks too good to be true, assume that it can’t be true. The binary options market is highly competitive and many brokers are trying to attract your attention and gain your business. To achieve this, ad marketers will promise large bonuses or amazing payout potential for each trade that is made. Unfortunately, these benefits are rarely seen by individual traders. For example, a website might advertise a deposit bonus of $1,000 but only for initial deposits of more than $10,000 (which isn’t appropriate for many new traders).  In addition to this, these types of bonuses are typically tied to a certain number of required trades. If you have not made the required number of trades, you will not be able to withdraw that bonus money -- so it is really as though the bonus never existed in the first place. It was just a clever tool to get your attention and encourage you to open an account.

4. Read Your Terms and Conditions

Reading your broker terms and conditions is something most of us avoid. But it is important to remember that this is your hard earned money being put at risk, and every trade you make could result in significant losses. It is important to understand what will be happening to your money each time you open a position, and the only way to do this is to read your terms and conditions before any real trades are placed. Of course, it is a boring activity but this could save you a lot of time and effort at a later date.

5. Research Online Reviews

Last, and probably most important, is to read and see what the binary options trading community says about your broker.  Does your broker have a reputation for executing trades at the right price? Is there a wide variety of trading instruments available?  Are the reported payouts accurate? Is the charting software easy to use?  Is customer service responsive? Are there any problems withdrawing your gains? These are all topics that tend to be discussed in forums and binary options trading communities. In cases like these, there is no better source than your fellow traders.

By Richard Cox

Richard Cox is a university teacher in international trade and finance. Lessons in macroeconomics and price behavior in equity markets. He writes for MarketBulls.net, BinaryOptionShark.com, TheStreet, Seeking Alpha, and the Motley Fool.  Investing strategies in these articles are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities).  Trade ideas are generally suggestive of time horizons of one to six months.

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