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Saturday, 18 June 2016 | MYT 10:55 PM

Binary options are a scam


BY MARK REIJMAN

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A scam is a dishonest representation, meant to trick someone. What makes binary options a
scam is that it presents itself as an investment method, while it is nothing short of gambling
with bad odds.

The simplicity of binary options is part of its attraction.

Binary means two and refers to the fact that you only have to make a single decision about
one of two outcomes. You decide on whether you think a certain asset will rise or fall in the
future.

The size of the movement does not matter. If you are wrong, you lose the money you have
invested.

If you are right, you will get a pay out of between 65%-85% of the invested amount. Note this
is already unfair as you stand to lose 100%, but you can never win 100%.

Some brokers will give you a small percentage 5% to 15% back, in case you lose, but they
compensate this by giving you less when you win.

You can bet on almost any asset: stocks (for example Shell), indexes (for example the Dow
Jones), commodities (for example gold, oil), or currency pairs (for example Ringgit and Dollar).

Here is the tricky part: the duration of the binary option is extremely short. It typically ranges
from 60 seconds to 24 hours.

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For such short time periods, assets move in essentially random directions and cannot be
predicted. The short duration makes any investment technique worthless.

Binary option brokers will tell you the trend is your friend, but to call movements of a few
second or minutes trends is a grave misuse of the term. If you do spot a trend, it is only
because the human mind is trained to see patterns and trends, even if they arent really there.

Similar to how people see trends at the roulette table, while it is completely random what
happens: roulette balls have no memory and dont care what happened the previous roll.

This means you are not investing, but gambling. It is just that you have worse payout ratios
than if you were to go to the casino and gamble red or black on the roulette table.

Predicting what the stock is going to do in the next ten minutes is impossible, even for
companies about which an abundance of information is available, such as Apple or Facebook.

Random, unrelated events, such as interest announcements, large buyers / sellers, bad weather,
a terrorist attack or a ash-crash could temporarily in uence the stock price.

But more often, there is no attributable reason at all for short term stock movements. This
makes binary options gambling with unfair chances. The broker will always win at the end, just
like at the casino.

As short-term uctuations in stock prices are random and irrational, you have 50% chance of
being right. Lets say you invest RM100 and are wrong, you lose RM100. If you invest RM
100 and are right, you will get RM75 (a payout percentage of 75% is common).

This means on average you will lose RM12.5 per trade: (lose RM100 + win RM75) / 2 trades.
Betting red or black on the roulette table is a better deal (through you will still lose on average),
as the payout is 100% and the chance that you win is 18/38= 47% (due to the occurrence of the
0 and 00).

As you have to accept the 75% payout, it means you would need to be right in 57% of your
gambles, instead of 50%, in order to break even. In order to win money, you need to be right even
more often! This is because 57% x RM 75 (you win) 43% x RM 100 (you lose) equals zero
Ringgit.

But there is no knowledge that can help you to improve your win rate to 57%. After multiple
gambles, you will always gravitate toward the 50% average and lose money.

It is easy to see how all the human weaknesses greed, jealousy, overcon dence in your own
trading ability and knowledge plus the underestimation of risk come into play when you see
the unwanted ads for binary options pop up on your screen.

They scream at you: no knowledge required!, Make money from your own home, Start
earning thousands of ringgits in a few hours. Then, the fake testimonies from paid actors start
to play. Its the latest get rich quick scheme. Its too good to be true, literally.

You dont need to be Einstein to realise this is a scam. If it would work as advertised, everybody
would do it. Regrettably, it is always the nancially illiterate people that end up being the victim
and become even poorer as a result, while the brokers are the only ones who pro t.
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No serious investor, such as Warren Buffet, would ever consider binary options. No nancial
investor worth his or her salt would advise it.

Short term stock movements are noise that can only be ltered out by holding a stock for an
extended period of time not even months, but years.

As Warren Buffet said in his Chairman letter of 1988: Our favorite holding period is forever.

Mark Reijman is co-founder and managing director of http://www.comparehero.my/, dedicated


to increasing nancial literacy and to help you save time and money by comparing all credit
cards, loans and broadband plans in Malaysia.

TAGS / KEYWORDS:
Markets , binary options

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