Binary Options In the Context of Global Financial Crisis

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World Crisis: Pros and Cons

Over the past months, a wave of questions has not abated: Will there be another crisis? Will the Eurozone fall apart? In the end – what is considered objective criteria for the beginning of a problem period in a country’s economy? Let us compare the criteria by which they judge the onset of a crisis with fundamental facts and social facts (basically, we take news from the media).

The crisis? This is how to look!

Awareness of the crisis in the global economy today fades into the background after political eventssuch as problems in the Middle East, pogroms in Egypt, the hype around Snowden and others. At the same time, a lot of really fascinating things are happening in the world economy at this time.

So, we disassemble and check some hypotheses:

  • the global economy is in crisis;
  • the European economy is also in recession, and this has been officially announced;
  • The American economy is also in crisis, but due to fabricated reporting and leading places in rating agencies, it tells us the opposite.

If we talk about indicators that are really important, then we note the following: GDP, inflation, unemployment, interest rates, level of public debt.

Recall US began to recount GDP, attention, according to a new method! And according to these data, the country’s GDP has grown significantly, and a huge public debt has declined decently.

Lies, blatant lies and statistics

Why is this done? Who needs this? Recall the words of Benjamin Disraeli: “There are three types of lies: lies, blatant lies, and statistics.“. So, these statistics are used to build public opinion, which directly and indirectly affects the stock markets in which we see soap bubble in the form of growing indicators of various indices. The figure below shows the volume of GDP by country, and the color indicates the state of affairs with interest rates.

Fig. 1. GDP and interest rates.

Now let’s look at the level of employment in the world and separately in the USA.

So, world unemployment is high. This can be judged even by the creation of new non-governmental organizations aimed at drawing attention to employment.

Fig. 2. The global unemployment rate.

I would like to single out the countries of the Eurozone separately from civilized countries: Spain, Greece, in which the unemployment rate is 26% and 27%, respectively, to some extent France and Italy also show unfavorable growth rates of unemployment.

Fig. 3. The dynamics of the unemployment rate in France.

Fig. 4. Dynamics of Italy’s unemployment rate.

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In the USA is celebrated positive dynamics, again judging by official statistics. According to unofficial figures – 2-3 times higher. This is explained by different factors: the government hides the real numbers, the population applies less for benefits and others.

Fig. 5. The dynamics of the unemployment rate in the United States.

Let’s look at inflation rates (see fig. 6). The map is very simple – the darker the higher the inflation rate. Russia on this map looks like a noticeable problem field with official inflation of 6,5%. But, living people in Russia know which one actually inflation, and in the context of: energy, food products, etc. In addition, since the beginning of this year, both Europe and the United States are ahead of their GDP growth indicators in terms of inflation.

Fig. 6. World inflation rates.

The Great Depression – reload

Many economists consider the Dow Jones index at 16500-17000 units critical, S & P500 – 1800 units critical. Only after reaching these indicators fall will begin, and it will not be smooth, but as in the 2008th year.

What about oil? While the price is above $ 100, everything is fine. But what really happens? Is oil getting more expensive or is the dollar getting cheaper? All methods point to the second, and scientists-economists, not politicians-economists, which is important, unanimously declare similarities of the current situation with the events of 2008 and 1929-33when there was the Great Depression in the USA.

How many factors do you need to make an objective forecast? There are wonderful scientists A. Akayev, V. Pantin, A. Ayvazov, who have already calculated everything. Aivazov made the schedule that excited the public back in 2020.

Fig. 7. The graph of the forecast of world GDP A. E. Aivazova.

According to him, “the world economy is gradually plunging into a protracted and deep economic crisis, which will last until 2020, already in 2020 the world is waiting for the most powerful financial and economic shocks, and the crisis will peak in 2020. The Fed, the ECB, the Bank of Japan, the Bank of Great Britain and other financial institutions of developed countries, using primitive money printing and lowering refinancing rates, are actually trying to zero “Pour” their economies with cheap liquidity“. One of the conclusions that should also be taken as a basis is the development of the economy not linearly, but discretely, i.e. intermittently.

Now let’s look at the Kondratieff cycles.

For your information:: The theory was developed by the Soviet economist Nikolai Kondratiev (1892-1938). In the 1920s He drew attention to the fact that in the long-term dynamics of some economic indicators there is a certain cyclical regularity.

So, looking at one example of spectral analysis (see Fig. 8), you can see at what stage the world economy is now and visually predict the near future for GDP growth.

Fig. 8. Change in world GDP, Kondratieff cycles.

It is important that this theory has not yet received worldwide recognition, but at the same time respected by many recognized economists, since it interprets events in the world economy very well, especially recessions.

Let’s look at the map through the eyes of one of the leading international rating agencies – Moody’s (see Fig. 9).

Fig. 9. Analysis of world economic conditions from Moody’s Analytics.

Moody’s Analytics carefully monitors economic conditions in the world and summarizes the results in this interactive map. Analysts are researching wide range of indicatorsto find out the position of countries in the economic cycle. In particular, they use such indicators as the level of employment, industrial production and retail sales – high-frequency indicators that reflect the breadth of economic activity. Countries in which indicators are falling are marked as “in recession.” Those where the decline has slowed are “stabilizing.” Countries in which indicators began to grow again are “recovering”. Economies that have already overcome their previous growth peaks are marked as expanding.

From these indicators it can be seen that many processes are exacerbated. It remains to wait for that critical pointwhen countries will not be able to meet their obligations. When the circle closes at which the Treasury issues the Treasury (bonds), and the US Federal Reserve also buys them with freshly printed money. And when successful Eurozone countries will stop lending to their “dying” colleagues.

Official statistics for us only opens the tip of the iceberg. It is important to consider other factors, carrying out a full-fledged, comprehensive analysis to obtain conclusions. Good trading to all!

The financial crisis

The financial crisis

The financial crisis has its origin in the US housing market, though many would argue that the house price collapse of 2007 – 2009 is a symptom of a problem running much deeper, revealing a fundamental weakness in the global financial system.

Origins

From the 1970s onwards, US and UK banks started to widen the scope of their business models by selling off their own credit risk to third parties. Increasingly they became reliant on computer-based systems for assessing that risk. Many have argued that personal judgment, perhaps the key attribute of the traditional bank manager, gave way to decision making by computer software.

(Source: Financial Times)

Relaxation of the rules regarding capital movements between countries, widespread de-regulation of financial markets during the 1980s, and a number of banking mergers also dramatically changed the global financial landscape at the end of the 20th Century.

During the 1970s and 1980s, increasingly complex financial products were developed and traded, providing a speculative income for traders and a method of spreading the risks associated with financial trades. New financial products, such as ‘derivatives’, ‘options’, and ‘swaps’, joined more traditional products, like mortgages and bank loans, in an ever-widening array of financial goods and services. In addition, this period saw the increasing securitisation of assets, most notably mortgages.

Securitisation

The increasingly complex nature of financial products did not deter banks from diversifying through increased securitisation.

Securitisation, which started in the US and spread to the UK in the late 1980s, is the creation of asset-backed debt. The assets used generate a flow of income, and the commonest asset is a mortgage, from which a regular flow of income is generated. In recent years a much wider variety of assets has been used, including income from credit cards and even from pub chains and football stadiums. (Source: HM Customs and Excise.)

One particular feature of the 2008 – 2009 financial crisis was the difficulty faced by many insurers, including the American giant, AIG. AIG, and other insurers, became heavily involved in insuring other institutions against credit defaults. Specifically, investors who wish to protect themselves against defaults on mortgage-backed securities may buy credit default swaps (CDSs). As an insurance against credit default, CDSs are bought and resold, and may end-up on the balance sheet of a wide variety of financial institutions. It has been estimated that, if one player in the market were to go bankrupt, it could take a decade to untangle the complex network or contracts between the financial institutions and intermediaries. It is primarily for this reason that the US Federal Reserve bailed out AIG and Bear Sterns.

Toxic assets

A bank or other financial institution, like all firms, must create a balance sheet which values its assets and liabilities, and from which it can calculate its net assets and its capital.

The value of a bank’s assets, that is, what it owns, is largely determined by how ‘healthy’ the debts are that borrowers must repay. A fundamental problem of the highly globalised financial markets at the time of the US housing crisis was that many of the mortgage backed debts on the balance sheets of the banks have turned out to be extremely ‘unhealthy’, referred to as toxic debts. The problem of the toxic debts, resulting from loans made to the sub-prime housing market, became more severe because banks could not quickly or accurately calculate their exposure to these debts. This was largely a result of the highly complex nature of their investments, including those related to derivatives and options.

Asymmetric information

What is clear is that financial markets failed partly because of the problem of asymmetric information.

In the context of financial markets, this means that parties to a transaction do not have access to the same quantity and quality of information. Considerable information is needed in order to assess potential risk and reward, and to make a rational decision about whether to purchase a financial product or not, and how much to pay for it.

The emergence of complex derivative products in the early 1980s, and the increased popularity of securitisation in the late 1980s, increased the inefficiency of many financial transactions. This inefficiency was the result of one party, usually the seller, possessing much better information than the other party, usually the buyer. Furthermore, with the rise in the importance of specialist third parties, like hedge fund managers, the actual buyer and seller may be unaware of the actual risks associate with a given transaction, and oblivious to the source of the investment income. Therefore, in 2007, when the mortgage market started to collapse in the USA, the scale of the problem remained largely hidden.

This failure of information could also be referred to as an example of the ‘principal-agent‘ problem, though many of the ‘agents’ involved were indeed fairly ignorant themselves!

Banking collapse

As the scale of banking losses were announced, and following the failure of leading investment banks like Lehman Brothers, growing uncertainly prevented the banks from lending to each other as they would normally do, and encouraged them to retain as much liquidity as they could. The result was that banks were failing to fulfil a key banking function, namely to make loans and ensure the adequate flow of liquidity into the economy.

Policy options

There are three fundamental issues facing policy makers:

  1. How best to control or regulate banks
  2. How to get liquidity into the global system
  3. How to deal with the after-effects of the banking crisis

Nationalisation

One response to the banking crisis was to nationalise a number of key banks, including Northern Rock, and part-nationalise others, including the Lloyds Banking Group and the Royal Bank of Scotland (RBS). Many others have been heavily supported by their governments by extensive ‘re-capitalisation’.

Regulation

Since 2001, financial market regulation in the UK has been the responsibility of the Financial Services Authority (FSA).

The aim of the FSA is to ‘promote efficient, orderly and fair markets and to help retail consumers achieve a fair deal.’ (Source: FSA)

Given that asymmetric information is a serious problem in financial markets, regulatory reform will involve the promotion of a more transparent system, with financial institutions forced to provide higher quality information on risks.

Some critics of the US regulatory system allege that it is too rules-based and should move towards the European model of principles-based regulation.

With rules-based regulation, the regulators interpret the rules as laid down in law, and there is little room left for judgement or interpretation.

Under a principles-based system, as well as having extensive rules, the general principles of regulation are contained in legislation. It is argued that this gives extra powers to regulators to assess the behaviour of financial or other institutions in terms of whether the general principles are being adhered to.

The London G20 Summit, held in April 2009, recommended the establishment of a Financial Stability Board to provide an early warning system of problems in the global financial markets. It also proposed close scrutiny of the activities of hedge funds.

Monetary stimulus – quantitative easing

Quantitative easing is a process whereby the Bank of England, or another central bank, under instructions from the Treasury, buys up existing government bonds in order to add money directly into the financial system. The process of doing this is called open market operations, and it is regarded as a last resort when low interest rates fail to work.

When an economy is in recession and official interest rates are close to zero, further interest cuts are impossible. This is the situation that faced most national economies and monetary unions during 2008 and 2009. In this situation, quantitative easing may be necessary to boost liquidity and stimulate lending.

Fiscal stimulus

To help their ailing motor industries, several national governments provided special assistance, including loans and loan guarantees, and specific subsidies which enabled prospective car buyers to trade in their old cars for new ones – the so-called scrappage scheme.

One of the first measures taken by the UK government was a reduction in VAT, from 17.5% to 15%. (It was raised to 20% in 2020.)

As well as establishing a global regulatory regime, the G20 countries also agreed an extra $750 b stimulus package, in addition to the measures taken by national governments.

A Tobin Tax

A Tobin tax is a special tax on currency transactions, designed to penalise excessive short-term speculation in the currency markets. Advocates have suggested that such a tax could be imposed on a wider range of financial transactions to reduce speculation in financial markets and help restore some stability. The formal name for a Tobin tax is a securities transaction tax.

How to Succeed with Binary Options Trading 2020

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What is a Binary Option and How Do You Make Money?

A binary option is a fast and extremely simple financial instrument which allows investors to speculate on whether the price of an asset will go up or down in the future, for example the stock price of Google, the price of Bitcoin, the USD/GBP exchange rate, or the price of gold. The time span can be as little as 60 seconds, making it possible to trade hundreds of times per day across any global market.

Before you place a trade you know exactly how much you stand to gain if your prediction is correct, usually 70-95% – if you invest $100 you will receive a credit of $170 – $195 on a successful trade. This makes risk management and trading decisions much more simple. The outcome is always a Yes or No answer – you either win it all or you lose it all – hence it being a “binary” option. The risk and reward is known in advance and this structured payoff is one of the attractions.

Exchange traded binaries are also now available, meaning traders are not trading against the broker.

To get started trading you first need a regulated broker account (or licensed). Pick one from the recommended brokers list, where only brokers that have shown themselves to be trustworthy are included. The top broker has been selected as the best choice for most traders.

If you are completely new to binary options you can open a demo account with most brokers, to try out their platform and see what it’s like to trade before you deposit real money.

Introduction Video – How to Trade Binary Options

These videos will introduce you to the concept of binary options and how trading works. If you want to know even more details, please read this whole page and follow the links to all the more in-depth articles. Binary trading does not have to be complicated, but as with any topic you can educate yourself to be an expert and perfect your skills.

Option Types

The most common type of binary option is the simple “Up/Down” trade. There are however, different types of option. The one common factor, is that the outcome will have a “binary” result (Yes or No). Here are some of the types available:

  • Up/Down or High/Low – The basic and most common binary option. Will a price finish higher or lower than the current price a the time of expiry.
  • In/Out, Range or Boundary – This option sets a “high” figure and “low” figure. Traders predict whether the price will finish within, or outside, of these levels (or ‘boundaries’).
  • Touch/No Touch – These have set levels, higher or lower than the current price. The trader has to predict whether the actual price will ‘touch’ those levels at any point between the time of the trade an expiry.
    Note with a touch option, that the trade can close before the expiry time – if the price level is touched before the option expires, then the “Touch” option will payout immediately, regardless of whether the price moves away from the touch level afterwards.
  • Ladder – These options behave like a normal Up/Down trade, but rather than using the current strike price, the ladder will have preset price levels (‘laddered’ progressively up or down).These can often be some way from the current strike price.As these options generally need a significant price move, payouts will often go beyond 100% – but both sides of the trade may not be available.

How to Trade – Step by Step Guide

Below is a step by step guide to placing a binary trade:

  1. Choose a broker – Use our broker reviews and comparison tools to find the best binary trading site for you.
  2. Select the asset or market to trade – Assets lists are huge, and cover Commodities, Stocks, Cryptocurrency, Forex or Indices. The price of oil, or the Apple stock price, for example.
  3. Select the expiry time – Options can expire anywhere between 30 seconds up to a year.
  4. Set the size of the trade – Remember 100% of the investment is at risk so consider the trade amount carefully.
  5. Click Call / Put or Buy / Sell – Will the asset value rise or fall? Some broker label buttons differently.
  6. Check and confirm the trade – Many brokers give traders a chance to ensure the details are correct before confirming the trade.

Choose a Broker

Options fraud has been a significant problem in the past. Fraudulent and unlicensed operators exploited binary options as a new exotic derivative. These firms are thankfully disappearing as regulators have finally begun to act, but traders still need to look for regulated brokers.

Note! Don’t EVER trade with a broker or use a service that’s on our blacklist and scams page, stick with the ones we recommend here on the site. Here are some shortcuts to pages that can help you determine which broker is right for you:

  • Compare all brokers – if you want to compare the features and offers of all recommended brokers.
  • Bonuses and Offers – if you want to make sure you get extra money to trade with, or other promotions and offers.
  • Low minimum deposit brokers – if you want to trade for real without having to deposit large sums of money.
  • Demo Accounts – if you want to try a trading platform “for real” without depositing money at all.
  • Halal Brokers – if you are one of the growing number of Muslim traders.

Asset Lists

The number and diversity of assets you can trade varies from broker to broker. Most brokers provide options on popular assets such as major forex pairs including the EUR/USD, USD/JPY and GBP/USD, as well as major stock indices such as the FTSE, S&P 500 or Dow Jones Industrial. Commodities including gold, silver, oil are also generally offered.

Individual stocks and equities are also tradable through many binary brokers. Not every stock will be available though, but generally you can choose from about 25 to 100 popular stocks, such as Google and Apple. These lists are growing all the time as demand dictates.

The asset lists are always listed clearly on every trading platform, and most brokers make their full asset lists available on their website. This information is also available within our reviews, including currency pairs.

Expiry Times

The expiry time is the point at which a trade is closed and settled. The only exception is where a ‘Touch’ option has hit a preset level prior to expiry. The expiry for any given trade can range from 30 seconds, up to a year. While binaries initially started with very short expiries, demand has ensured there is now a broad range of expiry times available. Some brokers even give traders the flexibility to set their own specific expiry time.

Expiries are generally grouped into three categories:

  • Short Term / Turbo – These are normally classed as any expiry under 5 minutes
  • Normal – These would range from 5 minutes, up to ‘end of day’ expiries which expire when the local market for that asset closes.
  • Long term – Any expiry beyond the end of the day would be considered long term. The longest expiry might be 12 months.

Regulation

While slow to react to binary options initially, regulators around the world are now starting to regulate the industry and make their presence felt. The major regulators currently include:

  • Financial Conduct Authority (FCA) – UK regulator
  • Cyprus Securities and Exchange Commission (CySec) – Cyprus Regulator, often ‘passported’ throughout the EU, under MiFID
  • Commodity Futures Trading Commission (CFTC) – US regulator
  • Australian Securities and Investments Commission (ASIC)

There are also regulators operating in Malta and the Isle of Man. Many other authorities are now taking a keen a interest in binaries specifically, notably in Europe where domestic regulators are keen to bolster the CySec regulation.

Unregulated brokers still operate, and while some are trustworthy, a lack of regulation is a clear warning sign for potential new customers.

Recently, ESMA (European Securities and Markets Authority) moved to ban the sale and marketing of binary options in the EU. The ban however, only applies to brokers regulated in the EU. This leaves traders two choices to keep trading: Firstly, they can trade with an unregulated firm – this is extremely high risk and not advisable. Some unregulated firms are responsible and honest, but many are not.

The second choice is to use a firm regulated by bodies outside of the EU. ASIC in Australia are a strong regulator – but they will not be implementing a ban. This means ASIC regulated firms can still accept EU traders. See our broker lists for regulated or trusted brokers in your region.

There is also a third option. Traders who register as ‘professional’ are exempt from the new ban. The ban is only designed to protect ‘retail’ investors. A professional trader can continue trading at EU regulated brokers such as IQ Option. To be classed as professional, an account holder must meet two of these three criteria:

  1. Open 10 or more trades per quarter, of €150 or more.
  2. Have assets of €500,000 or more
  3. Have worked for two years in a financial firm and have experience of financial products.

Strategies and Guides

We have a lot of detailed guides and strategy articles for both general education and specialized trading techniques. Below are a few to get you started if you want to learn the basic before you start trading. From Martingale to Rainbow, you can find plenty more on the strategy page.

Signals and Other Services

For further reading on signals and reviews of different services go to the signals page.

Beginners Guides

If you are totally new to the trading scene then watch this great video by Professor Shiller of Yale University who introduces the main ideas of options:

Education for beginners:

Types of Trades

How to Set Up a Trade

The ability to trade the different types of binary options can be achieved by understanding certain concepts such as strike price or price barrier, settlement, and expiration date. All trades have dates at which they expire.

When the trade expires, the behaviour of the price action according to the type selected will determine if it’s in profit (in the money) or in a loss position (out-of-the-money). In addition, the price targets are key levels that the trader sets as benchmarks to determine outcomes. We will see the application of price targets when we explain the different types.

There are three types of trades. Each of these has different variations. These are:

Let us take them one after the other.

High/Low

Also called the Up/Down binary trade, the essence is to predict if the market price of the asset will end up higher or lower than the strike price (the selected target price) before the expiration. If the trader expects the price to go up (the “Up” or “High” trade), he purchases a call option. If he expects the price to head downwards (“Low” or “Down”), he purchases a put option. Expiry times can be as low as 5 minutes.

Please note: some brokers classify Up/Down as a different types, where a trader purchases a call option if he expects the price to rise beyond the current price, or purchases a put option if he expects the price to fall below current prices. You may see this as a Rise/Fall type on some trading platforms.

In/Out

The In/Out type, also called the “tunnel trade” or the “boundary trade”, is used to trade price consolidations (“in”) and breakouts (“out”). How does it work? First, the trader sets two price targets to form a price range. He then purchases an option to predict if the price will stay within the price range/tunnel until expiration (In) or if the price will breakout of the price range in either direction (Out).

The best way to use the tunnel binaries is to use the pivot points of the asset. If you are familiar with pivot points in forex, then you should be able to trade this type.

Touch/No Touch

This type is predicated on the price action touching a price barrier or not. A “Touch” option is a type where the trader purchases a contract that will deliver profit if the market price of the asset purchased touches the set target price at least once before expiry. If the price action does not touch the price target (the strike price) before expiry, the trade will end up as a loss.

A “No Touch” is the exact opposite of the Touch. Here you are betting on the price action of the underlying asset not touching the strike price before the expiration.

There are variations of this type where we have the Double Touch and Double No Touch. Here the trader can set two price targets and purchase a contract that bets on the price touching both targets before expiration (Double Touch) or not touching both targets before expiration (Double No Touch). Normally you would only employ the Double Touch trade when there is intense market volatility and prices are expected to take out several price levels.

Some brokers offer all three types, while others offer two, and there are those that offer only one variety. In addition, some brokers also put restrictions on how expiration dates are set. In order to get the best of the different types, traders are advised to shop around for brokers who will give them maximum flexibility in terms of types and expiration times that can be set.

Mobile Apps

Trading via your mobile has been made very easy as all major brokers provide fully developed mobile trading apps. Most trading platforms have been designed with mobile device users in mind. So the mobile version will be very similar, if not the same, as the full web version on the traditional websites.

Brokers will cater for both iOS and Android devices, and produce versions for each. Downloads are quick, and traders can sign up via the mobile site as well. Our reviews contain more detail about each brokers mobile app, but most are fully aware that this is a growing area of trading. Traders want to react immediately to news events and market updates, so brokers provide the tools for clients to trade wherever they are.

Trading FAQ

What Does Binary Options Mean?

“Binary options” means, put very simply, a trade where the outcome is a ‘binary’ Yes/No answer. These options pay a fixed amount if they win (known as “in the money”), but the entire investment is lost, if the binary trade loses. So, in short, they are a form of fixed return financial options.

How Does a Stock Trade Work?

Steps to trade a stock via a binary option;

  1. Select the stock or equity.
  2. Identify the desired expiry time (The time the option will end).
  3. Enter the size of the trade or investment
  4. Decide if the value will rise or fall and place a put or call

The steps above will be the same at every single broker. More layers of complexity can be added, but when trading equities the simple Up/Down trade type remains the most popular.

Put and Call Options

Call and Put are simply the terms given to buying or selling an option. If a trader thinks the underlying price will go up in value, they can open a call. But where they expect the price to go down, they can place a put trade.

Different trading platforms label their trading buttons different, some even switch between Buy/Sell and Call/Put. Others drop the phrases put and call altogether. Almost every trading platform will make it absolutely clear which direction a trader is opening an option in.

Are Binary Options a Scam?

As a financial investment tool they in themselves not a scam, but there are brokers, trading robots and signal providers that are untrustworthy and dishonest.

The point is not to write off the concept of binary options, based solely on a handful of dishonest brokers. The image of these financial instruments has suffered as a result of these operators, but regulators are slowly starting to prosecute and fine the offenders and the industry is being cleaned up. Our forum is a great place to raise awareness of any wrongdoing.

These simple checks can help anyone avoid the scams:

  • Marketing promising huge returns. This is clear warning sign. Binaries are a high risk / high reward tool – they are not a “make money online” scheme and should not be sold as such. Operators making such claims are very likely to be untrustworthy.
  • Know the broker. Some operators will ‘funnel’ new customer to a broker they partner with, so the person has no idea who their account is with. A trader should know the broker they are going to trade with! These funnels often fall into the “get rich quick” marketing discussed earlier.
  • Cold Calls. Professional brokers will not make cold calls – they do not market themselves in that way. Cold calls will often be from unregulated brokers interested only in getting an initial deposit. Proceed extremely carefully if joining a company that got in contact this way. This would include email contact as well – any form of contact out of the blue.
  • Terms and Conditions. When taking a bonus or offer, read the full terms and conditions. Some will include locking in an initial deposit (in addition to the bonus funds) until a high volume of trades have been made. The first deposit is the trader’s cash – legitimate brokers would not claim it as theirs before any trading. Some brokers also offer the option of cancelling a bonus if it does not fit the needs of the trader.
  • Do not let anyone trade for you. Avoid allowing any “account manager” to trade for you. There is a clear conflict of interest, but these employees of the broker will encourage traders to make large deposits, and take greater risks . Traders should not let anyone trade on their behalf.

Which Are The Best Trading Strategies?

Binary trading strategies are unique to each trade. We have a strategy section, and there are ideas that traders can experiment with. Technical analysis is of use to some traders, combined with charts, indicators and price action research. Money management is essential to ensure risk management is applied to all trading. Different styles will suit different traders and strategies will also evolve and change.

There is no single “best” strategy. Traders need to ask questions of their investing aims and risk appetite and then learn what works for them.

Are Binary Options Gambling?

This will depend entirely on the habits of the trader. With no strategy or research, then any short term investment is going to win or lose based only on luck. Conversely, a trader making a well researched trade will ensure they have done all they can to avoid relying on good fortune.

Binary options can be used to gamble, but they can also be used to make trades based on value and expected profits. So the answer to the question will come down to the trader.

Advantages of Binary Trading

The main benefit of binaries is the clarity of risk and reward and the structure of the trade.

Minimal Financial Risk

If you have traded forex or its more volatile cousins, crude oil or spot metals such as gold or silver, you will have probably learnt one thing: these markets carry a lot of risk and it is very easy to be blown off the market. Things like leverage and margin, news events, slippages and price re-quotes, etc can all affect a trade negatively. The situation is different in binary options trading. There is no leverage to contend with, and phenomena such as slippage and price re-quotes have no effect on binary option trade outcomes. This reduces the risk in binary option trading to the barest minimum.

Flexibility

The binary options market allows traders to trade financial instruments spread across the currency and commodity markets as well as indices and bonds. This flexibility is unparalleled, and gives traders with the knowledge of how to trade these markets, a one-stop shop to trade all these instruments.

Simplicity

A binary trade outcome is based on just one parameter: direction. The trader is essentially betting on whether a financial asset will end up in a particular direction. In addition, the trader is at liberty to determine when the trade ends, by setting an expiry date. This gives a trade that initially started badly the opportunity to end well. This is not the case with other markets. For example, control of losses can only be achieved using a stop loss. Otherwise, a trader has to endure a drawdown if a trade takes an adverse turn in order to give it room to turn profitable. The simple point being made here is that in binary options, the trader has less to worry about than if he were to trade other markets.

Greater Control of Trades

Traders have better control of trades in binaries. For example, if a trader wants to buy a contract, he knows in advance, what he stands to gain and what he will lose if the trade is out-of-the-money. This is not the case with other markets. For example, when a trader sets a pending order in the forex market to trade a high-impact news event, there is no assurance that his trade will be filled at the entry price or that a losing trade will be closed out at the exit stop loss.

Higher Payouts

The payouts per trade are usually higher in binaries than with other forms of trading. Some brokers offer payouts of up to 80% on a trade. This is achievable without jeopardising the account. In other markets, such payouts can only occur if a trader disregards all rules of money management and exposes a large amount of trading capital to the market, hoping for one big payout (which never occurs in most cases).

Accessibility

In order to trade the highly volatile forex or commodities markets, a trader has to have a reasonable amount of money as trading capital. For instance, trading gold, a commodity with an intra-day volatility of up to 10,000 pips in times of high volatility, requires trading capital in tens of thousands of dollars. However, binary options has much lower entry requirements, as some brokers allow people to start trading with as low as $10.

Disadvantages of Binary Trading

Reduced Trading Odds for Sure-Banker Trades

The payouts for binary options trades are drastically reduced when the odds for that trade succeeding are very high. While it is true that some trades offer as much as 85% payouts per trade, such high payouts are possible only when a trade is made with the expiry date set at some distance away from the date of the trade. Of course in such situations, the trades are more unpredictable.

Lack of Good Trading Tools

Some brokers do not offer truly helpful trading tools such as charts and features for technical analysis to their clients. Experienced traders can get around this by sourcing for these tools elsewhere; inexperienced traders who are new to the market are not as fortunate. This is changing for the better though, as operators mature and become aware of the need for these tools to attract traders.

Limitations on Risk Management

Unlike in forex where traders can get accounts that allow them to trade mini- and micro-lots on small account sizes, many binary option brokers set a trading floor; minimum amounts which a trader can trade in the market. This makes it easier to lose too much capital when trading binaries. As an illustration, a forex broker may allow you to open an account with $200 and trade micro-lots, which allows a trader to expose only acceptable amounts of his capital to the market. However, you will be hard put finding many binary brokers that will allow you to trade below $50, even with a $200 account. In this situation, four losing trades will blow the account.

Cost of Losing Trades

Unlike in other markets where the risk/reward ratio can be controlled and set to give an edge to winning trades, the odds of binary options tilt the risk-reward ratio in favour of losing trades.

Trade Corrections

When trading a market like the forex or commodities market, it is possible to close a trade with minimal losses and open another profitable one, if a repeat analysis of the trade reveals the first trade to have been a mistake. Where binaries are traded on an exchange, this is mitigated however.

Spot Forex vs Binary Trading

These are two different alternatives, traded with two different psychologies, but both can make sense as investment tools. One is more TIME centric and the other is more PRICE centric. They both work in time/price but the focus you will find from one to the other is an interesting split. Spot forex traders might overlook time as a factor in their trading which is a very very big mistake. The successful binary trader has a more balanced view of time/price, which simply makes him a more well rounded trader. Binaries by their nature force one to exit a position within a given time frame win or lose which instills a greater focus on discipline and risk management. In forex trading this lack of discipline is the #1 cause for failure to most traders as they will simply hold losing positions for longer periods of time and cut winning positions in shorter periods of time. In binary options that is not possible as time expires your trade ends win or lose. Below are some examples of how this works.

Above is a trade made on the EUR/USD buying in an under 10 minute window of price and time. As a binary trader this focus will naturally make you better than the below example, where a spot forex trader who focuses on price while ignoring the time element ends up in trouble. This psychology of being able to focus on limits and the dual axis will aid you in becoming a better trader overall.

The very advantage of spot trading is its very same failure – the expansion of profits exponentially from 1 point in price. This is to say that if you enter a position that you believe will increase in value and the price does not increase yet accelerates to the downside, the normal tendency for most spot traders is to wait it out or worse add to the losing positions as they figure it will come back. The acceleration in time to the opposite desired direction causes most spot traders to be trapped in unfavourable positions, all because they do not plan time into their reasoning, and this leads to a complete lack of trading discipline.

The nature of binary options force one to have a more complete mindset of trading off both Y = Price Range and X = Time Range as limits are applied. They will simply make you a better overall trader from the start. Conversely on the flip side, they by their nature require a greater win rate as each bet means a 70-90% gain vs a 100% loss. So your win rate needs to be on average 54%-58% to break even. This imbalance causes many traders to overtrade or revenge trade which is just as bad as holding/adding to losing positions as a spot forex trader. To successfully trade you need to practice money management and emotional control.

In conclusion, when starting out as a trader, binaries might offer a better foundation to learn trading. The simple reasoning is that the focus on TIME/PRICE combined is like looking both ways when crossing the street. The average spot forex trader only looks at price, which means he is only looking in one direction before crossing the street. Learning to trade taking both time and price into consideration should aid in making one a much overall trader.

The Global Financial Crisis and The Role of Monetary Policy

Speech by Jürgen Stark, Member of the Executive Board of the ECB
at the 13th Annual Emerging Markets Conference 2020

Washington, 24 September 2020

Ladies and gentlemen, I am very pleased to address this distinguished audience.

Looking back over time, we see that the role and conduct of monetary policy has often changed in response to economic and financial crises. In fact, the international central banking community has always been eager to learn from past developments and experiences, also with respect to different experiences across countries. Of course, this does not imply that monetary policy in the past has always been the same everywhere. Certainly, differences exist in the way monetary policy is conducted across countries. But it is precisely because of the open-mindedness in discussing and the willingness to learn from each others’ experiences during the past century that monetary policy making went through an evolutionary process: an evolutionary process that improved the conduct of monetary policy over time and led to a great deal of convergence across countries.

Let me in my remarks briefly review this process. I will then discuss the specific lessons that we can learn from the recent episode of financial and economic turbulence, and conclude with the challenges ahead not only for monetary policy, but also for economic policies more generally.

It was in response to the major bank panics of the first half of the nineteenth century that the Bank of England adopted the “responsibility doctrine” proposed by Walter Bagehot. [1] This required the Bank to lend freely on the basis of any sound collateral, but at a penalty rate to prevent moral hazard. Half a century later, the Federal Reserve System was established in the United States in response to frequent banking crises, in particular the crisis of 1907, to serve as a lender of last resort similar to the Bank of England.

Under the gold standard gold convertibility served as the economy’s nominal anchor and was used as a way to ensure trust in a currency. Before the establishment of central banks, private banks and governments issuing banknotes had often overextended their gold reserves. In a sense, early central banks were strongly committed to price stability. However, from the 1920s onwards many central banks fell under public control. The Great Depression led to a major reaction against central banks, which were accused of exacerbating the crisis. In virtually every country, monetary policy was placed under the control of the Treasury and fiscal policy became dominant. In many countries, central banks followed a low interest rate policy to both stimulate the economy and to help the Treasury in marketing its debt.

In the 1950s independent monetary policy making by central banks was restored, and this was accompanied by a brief period of price stability until the mid 1960s. The belief that unemployment could be permanently reduced at the expense of higher inflation resulted in very accommodative monetary policy in the 1970s, which led to an increase in inflation as inflation expectations started to rise. Only a few countries, such as Germany, were an exception to this rule, as the Bundesbanks’s emphasis on monetary aggregates resulted in a much tighter monetary policy. By the end of the 1970s, central banks put renewed emphasis on credibility and started to tighten monetary policy so that inflation decreased significantly. In many countries central banks were granted independence and were given a mandate to keep inflation low. As a result, stable prices have become a fact of life for billions of people.

Today we are experiencing the worst economic and financial crisis of the post-war period. I am convinced that the knowledge gained as a result will again change and further sharpen the way we conduct monetary policy. So let me now share with you some thoughts on the direction in which I expect – and hope – monetary policy thinking to change in response to the current crisis.
The role of monetary policy and lessons from the financial crisis

I think it is fair to say that there was a widespread consensus over some key elements of the pre-crisis monetary policy paradigm. [2] In particular, against the background of the high inflation experience of the 1970s in many industrialised countries, the central bank consensus comprised three key elements:

Central bank independence as a corner stone for an effective monetary policy;

Price stability as the primary objective of central banks; and

Solidly anchored inflation expectations on the basis of transparent communication.

In addition, not least against the background of the “Great Moderation”, that is, the period of low inflation and macroeconomic stability in most industrialised countries which was observed during the 20 years before the crisis, the central bank consensus also emphasised three elements, to which the ECB has never subscribed. These are:

Monetary policy has a primary role in the management of aggregate demand in the short-run;

Money and credit indicators can be disregarded;

Monetary policy should react to asset price busts; not to asset price booms.

Let me discuss how I see these elements from today’s perspective, particularly in the context of the recent experience of the global financial and economic crisis, and draw conclusions with regard to the usefulness of these elements for the future conduct of monetary policy.

Let me start with my general conclusion: In my view, the first three elements have proven to be very valuable assets during the crisis and I view them as absolutely essential to the success of monetary policy. The latter three elements of this consensus should be seriously reconsidered. I think the crisis has made a convincing case for a more medium term orientation of monetary policy, which takes into account information in money and credit indicators, and which tries to lean against the wind as financial imbalances start to develop and pose risks to price stability in the medium term.

Let me now elaborate on the above elements and draw some conclusions:

Firstly, the crisis has – in my view – crucially underlined the importance of central bank independence as a corner stone of credible and effective monetary policy making. Of course, central bank independence is a precondition of effective monetary policy at all times. It is an important lesson which is not only evidenced by events in the history of central banking, but also by the academic literature, that any blurring of responsibilities can potentially lead to a loss of credibility for the central bank. Such a situation would ultimately undermine the effectiveness of monetary policy. [3] The effectiveness of monetary policy on the basis of institutional and operational independence was, however, fundamental during the crisis. During the turbulent market conditions that we experienced central banks had to implement extraordinary measures, both in terms of reducing policy rates to levels that are unprecedented, and in terms of unconventional liquidity measures. If these measures – untested as they are – are to be expected to exert any impact on economic decisions, they have to be seen by market participants as the result of an autonomous decision by the central bank. They have to be seen as consistent with its overall policy framework, rather than as the result of pressures from fiscal authorities. The reason is simple. If a central bank comes under pressure in times of crisis, and succumbs to that pressure, it is very unlikely to exit from such extraordinary measures in a timely manner. This may unanchor inflation expectations and thus undermine the effectiveness of the measures implemented during the crisis.

Secondly, regarding the objective of price stability and the anchoring of inflation expectations, the crisis taught us that well-anchored inflation expectations can act as an automatic stabiliser when uncertainty becomes destabilising. This is always true, in good times as well. In fact, well-anchored inflation expectations in the euro area were instrumental in avoiding large interest rate hikes before the crisis, when commodity prices rose sharply. At the height of the crisis, they became a policy instrument in their own right. Thanks to well-anchored inflation expectations we could avoid deflationary spirals and real interest rates could be reduced in tandem with nominal rates. It is noteworthy that if inflation expectations are well anchored, and are not affected by transient shocks to actual inflation, there is no need to manipulate monetary policy frameworks: there is no need to increase the inflation target as a means of resisting deflationary risks in times of macroeconomic distress. [4] Opportunistic manipulations of the monetary policy framework of course damage the foundations on which that framework rests. So, being able to rely on the stabilising effect of inflation expectations is clearly a preferable option.

Let me now turn to the elements of the consensus that are, from the perspective of the ECB, somewhat more controversial.

Firstly, the crisis has demonstrated that a monetary policy aimed at fine-tuning short-term objectives carries serious risks. Before the crisis, there was a widely-held conviction that monetary policy could focus more on short term demand management because inflation was firmly under control. Proponents of this view found support in the phenomenon of the “Great Moderation” observed in the twenty years before the crisis, a time of widespread macroeconomic stability and low inflation in most industrialised countries. Nonetheless, there were clear signs – and also warnings – that this short-term orientation could have negative side effects in the medium to long term. [5] As you know, these side effects manifested themselves in a spectacular build-up of monetary and financial imbalances. Although monetary policy frameworks oriented towards the medium term could probably not have completely prevented the current crisis, I am convinced that they would have helped to make it less disruptive.

Typically, policies of short-term demand management rely heavily on inflation forecasts and output gap measures. Experience, especially prior to the crisis, has revealed the risks of constructing policy on indicators and variables which are not sufficiently robust. Let me take the output gap as an example. As the literature has clearly shown, the empirical proxies used to capture the output gap are subject to constant revisions. [6] Policy-makers who base their decisions mainly on such assessments of the cyclical position can be led very much astray. For instance, The Great Inflation of the 1970s occurred, to a large extent, due to measurement errors in the real-time estimates of the output gap combined with an overreaction to output gap measures when assessing the state of the economy. [7] Arguably, the same can be said of the low interest rates implemented for a prolonged period in the middle of the previous decade. [8]

Monetary policies aimed at fine-tuning short-term objectives also run a serious risk of inducing too much policy forbearance for too long. Exiting an extraordinary accommodative mode too late can sow the seeds of future imbalances. As the economy recovers from an exceptionally deep recession, real time output gap estimates and estimates of structural unemployment or the non-accelerating inflation rate of unemployment (NAIRU) are particularly uncertain. Potential output is likely to have fallen for a variety of reasons. This could be due to a mismatch between the skills of workers that lose their jobs and the skills required in new vacancies. Another phenomenon is that economic growth after a financial crisis tends to be much slower due to the debt overhang. [9] While emphasis on measures of the output gap can give the impression that output could be increased by monetary means, it becomes an illusion if the problem is due to a mismatch of skills or a debt overhang. Only structural policies can address these problems.

Second, with respect to the claim that money and credit do not matter for successful monetary policy making, the experiences of the past three years have proven that this conventional wisdom is simply wrong. By including an analysis of money and credit developments in their monetary policy strategy, central banks can ensure that important information stemming from money and credit, typically neglected in conventional cyclical forecasting models of the economy, is considered in the formulation of monetary policy decisions. There is compelling empirical evidence showing that, at low frequencies – that is over medium to longer-term horizons – inflation shows a robust positive association with money growth. [10]

Monitoring credit growth can also be useful in identifying other sources of unsustainable credit developments, even if some of them cannot necessarily be eliminated by monetary policy tools, and would instead require action of a macro-prudential nature. After years of oblivion, macroeconomic theory seems to have caught up with reality and shifted its attention to credit and leverage as critical parameters that a central bank should consult regularly to measure the pulse of the economy. [11]

The ECB had consistently used these indicators even when they were derided as relics of a defunct monetary doctrine. They proved useful. They gave information about financing conditions and the financial structure, as well as about the condition and behaviour of banks, when these sources of information were critical to the assessment of the health of the transmission mechanism and, more broadly, the state of the business cycle. This dimension of monetary analysis has proven particularly valuable in shaping the ECB’s response to the financial crisis. There is indeed evidence in support of the fact that, without duly taking monetary analysis into account, inflation in the euro area would have been distinctly higher at times of financial exuberance and would have fallen deep into negative territory in the wake of the financial markets’ collapse, starting in the autumn of 2008. The economy as a whole would have been more volatile. [12]

And thirdly, with regard to the pre-crisis consensus on monetary policy not to act on asset price bubbles, the crisis has vividly demonstrated that bursting asset price bubbles can be extremely costly. The public policy response to the crisis has – even when being successful in attenuating the immediate impact of a financial crisis on the real economy – carried substantial fiscal costs and has led to significant output losses. To confine ourselves to “ex-post” policies is, therefore, not enough and calls for effective “ex-ante” policies. The main policy tools in this regard are, of course, appropriate regulatory and supervisory policies. Before the crisis, these preventive tools were insufficient to deal with the build up of asset price imbalances in the pre-crisis period. Lessons have been learned, and with the re-design of the supervisory architecture in many countries around the world, and the Basel III regulatory reforms, enhanced preventive tools are underway.

But also from a monetary policy perspective, greater emphasis on “ex-ante” prevention is warranted. To the extent that financial imbalances are accompanied by excessive monetary and credit growth with possible implications for the medium term outlook on inflation, central banks do indeed have an obligation to take appropriate action. With respect to the ECB, our focus on medium term definitions of price stability, as well as the use of money and credit in our monetary pillar, already provides some ‘leaning’ against the build up of asset price imbalances. Therefore, in my view, a cautious leaning against excessive money and credit growth and building up of financial imbalances as part of our general monetary policy framework cannot only contribute to financial stability, but most importantly to achieve our primary objective of maintaining price stability.

Let me now turn to the economic challenges lying ahead of us, and the role monetary policy should play in overcoming these challenges.
The challenges ahead and the role for monetary policy

The global financial crisis is far from over. By now the global financial crisis has gone through a number of different phases. Initially the crisis started in the sub-prime mortgage market during the summer of 2007, and became very intense in September 2008 with the default of Lehman Brothers. Subsequently, financial woes spilled over into the real economy, resulting in recessions in almost all industrialised countries. Monetary and fiscal policy countered this with unprecendented vigour. Monetary policy responded with very low interest rates and a wide range of non-standard measures. Fiscal policy allowed public deficits to widen and set up rescue packages for troubled financial institutions. To a large extent thanks to these measures, economic activity rebounded in 2020. But at the same time, countries that had entered the financial crisis with large public and private debt burdens started to have serious problems accessing sovereign debt markets. In 2020 the tensions in sovereign debt markets intensified further due to increasing concerns about long-term debt sustainability in various parts of the world. These developments have further threatened financial stability as financial institutions hold a significant share of troubled countries’ government bonds.

Here, the onus is clearly on governments to engage in the necessary fiscal corrections. However, this does not only mean exiting from the fiscal stimulus and support measures taken in response to the crisis. Even with these measures reversed, fiscal policy still faces at least three important challenges. First, excluding crisis-related stimulus measures, most advanced economies are still left with historically high deficit-to-GDP ratios, which, in the context of today, are largely structural in nature. To put it another way, given the lower actual and potential post-crisis output and correspondingly lower post-crisis tax revenues, pre-crisis spending levels are no longer affordable. Secondly, government debt-to-GDP ratios are now much higher than before the crisis, and the guarantees provided to the financial sector have added to the potential liabilities. Thirdly, over the next two to three decades, governments face rising costs related to ageing populations. Due to the combination of these factors, questions are – unsurprisingly – being asked about the ability of some governments to bring their public finances onto a sustainable path over the medium term.

In this regard, let me point out that the state of public finances in the euro area differs significantly across countries. According to the IMF the debt-to-GDP ratio ranges from 6 percent in Estonia to 152 percent in Greece in 2020, while the aggregate debt-to-GDP ratio for the euro area stands at 87 percent. But let me also emphasise that restoring sound public finances is not only a challenge for the euro area. As I mentioned before, government deficits and debt levels in many advanced economies outside the euro area have also risen to historically high levels, at least in a time of peace. For the largest industrialised countries such as the US, UK and Japan, according to the IMF the debt-to-GDP ratio in 2020 ranges from 83 percent in the UK, to 100 percent in the US and 229 percent in Japan.

The state of public finances clearly matters for central banks. At least from a theoretical point of view, one of the reasons is that monetary policy could in principle be used – or abused – to alleviate a government’s budgetary woes. The regime that has prevailed in advanced economies over the last three decades has been a regime of monetary dominance, under which central banks can pursue price stability-oriented policies without having to take into account the government’s budget constraints. Central banks have been given an explicit mandate to maintain price stability and have been protected by legal provisions guaranteeing their independence.

Credible, stability-oriented monetary policy frameworks are assets that have been difficult to acquire and must not be put at risk. As I have pointed out, monetary policy thinking went through a remarkable evolutionary process during the last century which resulted in price stability for billions of people. As serious questions have arisen about the medium term sustainability of public finances in a significant number of industrialised countries, we cannot but conclude that the same evolutionary process did not happen to fiscal policy making. Fiscal policy making has not managed to converge to a framework with clear principles and medium term objectives. [13] Growing doubts about governments’ ability to deliver sustainable public finances could at some point also cast doubt on the sustainability of the prevailing regime of monetary dominance. This would lead to an increase in inflation expectations or at least heightened uncertainty about the inflation outlook in the medium term.

It is a fallacy to think that loose monetary policy can solve the large structural problems we are facing. Central banks must not become the victims of their own success and should not become overburdened. Historically, whenever policy makers tried to broaden the role of monetary policy beyond its original role as a guardian of the value of a currency, it had to compromise on its objective of price stability. For monetary policy to remain effective, its responsibilities must remain within clear limits.

Instead, we need a growth model that is different from the one during the years before the financial crisis. We need economic growth that is based on a genuine increase in productivity, and not on low interest rates and the accumulation of debt. The unlimited accumulation of private and public debt before the financial crisis has now become a burden on economic growth and should be reduced progressively. [14] To achieve this we need far-reaching structural reforms that increase competition in labour and goods markets, more financial supervision, and a stronger fiscal policy framework.

We must reform financial supervision and strengthen economic governance so that economic policy becomes less pro-cyclical. Basel III is a very important step in the right direction, as it should provide for higher minimum capital requirements and better risk provisions by financial institutions. Still, regulation of the banking system and financial markets has not yet progressed sufficiently. Fiscal policy should be more grounded in a rules-based framework with clear medium term objectives, similar to monetary policy. The adoption of fiscal rules by some countries is clearly an improvement. In the euro area, a number of steps have been undertaken to strengthen economic governance so that concerns about competitiveness and fiscal policy can be addressed pre-emptively. But for the ECB these steps do not go far enough. For rules and sanctions to be fully credible they should be stricter and automatic – not subject to the political process – so that countries have the right incentives to address their problems.

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