Retail traders face an uphill battle. No matter what product they chose to trade the odds are stacked against them. The vast majority of active retail traders do not make money in the long run. A major reason for this is that in general traders are undercapitalized for the markets they are trading in. Any trader with a small account will typically be forced to take on more risk they should when trading stocks, options or futures. Regulations might also keep traders with smaller accounts from day trading actively. It can be very difficult for a trader with a small account to build that account up when they are forced to take on too much risk in the individual trades they take. Binary options offer a solution to this problem and are the perfect instrument for a trader to use if they are trying to build up a small trading account.
Nadex listed binary options and spreads allow a trader to take speculative positions in a wide variety of underlying markets. These contracts trade at a much lower value that futures or standard options and are also not subject to day trading regulations. The limited risk and reward dynamics of binary options are also ideal for a trader who is working to build their account. Let’s look at one example of a futures trade setup and a spread setup to see the differences more clearly.
Futures Trade: Trader buys 1 CME E-mini S&P 500 futures contract for 2098
Risk: $50 per point
Here a trader is risking $50 per one lot for every one point move in the futures. This makes it very difficult for a trader with a smaller account to scale up a position or to take multiple contracts. In using a Nadex spread the trader has much more freedom.
Spread Trade: Trader buys the US 500 2070-2110 Daily Spread for 2098
Risk: $280 per 1 lot
Reward: $120 per 1 lot
In this trade the trader is risking $10 per point rather than $50 meaning it is much easier to take multiple contracts. The floor and ceiling levels of the spread also limit a traders overall risk in the position. This certainty in risk management is an extremely valuable benefit for traders trying to build an account.
While there are some limitations to binary options and spreads they will generally provide traders with superior risk management capabilities and a much less capital intensive way to approach the markets they want to trade. Binary options and spreads are the ideal instrument for traders struggling to build their small accounts trading stocks options and futures. They are also a great way for traders who are just starting out to learn about trading in a much less capital intensive environment.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.
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