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A CBOE options market-maker once said something that has stuck with me forever. “Take any athlete you know”, he said, “and I bet I can make them miss. Suppose you are playing with a great golfer and he is about to putt for par. Now before he makes a move, tell him that you’ll pay him $10,000 dollars if he sinks it, but he will have to pay you $10,000 if he misses.”
“Most people,” said the market-maker, “will miss, because they stop thinking about the shot and start thinking about the money.” The market-maker was simply expressing the truth about financial markets that is almost always overlooked. Amongst all the talk of strategies and tactics, statistics and backtests everyone forgets that none of those things matter, once money comes on the line. Every single mistake we make (and I don’t mean the mistakes we make on individual trades, but rather structural mistakes such as changing the stop, lifting it altogether and trading unprotected or adding to a position beyond your strategy limits -- all those mistakes -- are always the result of money playing games with our psyche.) The bigger the money, the bigger the games.
That is of course what makes trading FX such a challenge. It’s not just the need to find an edge on the market, but it’s also the will to ignore the minute by minute pressures of watching your money rise and fall. Even if we master the first part, the second part usually takes years to perfect.
Yet as tough as it is to trade FX spot, there is one product that I think should never be traded at all.
That is truly an instrument from hell. Now let’s just set aside all the regulatory issues with the product. There are actually plenty of places you can trade it in a fully secure, fully regulated manner including several US exchanges. Let’ put aside the few traders who actually have the superhuman skills to succeed at trading this product. Let’s just understand why most of us will fail miserably at trading it.
Binary options contain three variables -- price, volatility and last but definitely not least -- time. Time is the killer variable here that most traders woefully underestimate. When you make a spot trade you only need to be right about direction. In theory, you can hold your trade forever until it resolves. Not so for binary options. You need to be right about both time and direction. That second condition makes it inordinately harder to win at the game. Time is an ever wasting asset, and much like money on a sports shot it acts as a relentless pressure point in every trade you do.
That’s why binary options are a sucker bet.
Don’t waste your time.