1. Introduction

As trading in the financial markets becomes more popular, it is part of the natural progression for products and offerings to evolve. New virtual markets are created. When new financial markets evolve too quickly, sometimes it's hard to keep track of the sustainability and reliability of those products. Binary options is just such a market. The emergence of binary options is a phenomenon in the same way as Forex was- a true market explosion that is nowhere near maturity. Believe it or not, binary options have only been around since 2008 when the Securities and Exchange Commission (SEC) approved this form of online trading.

It goes without saying, that with the emergence of new markets come handfuls of new brokers offering the trading product. Often unregulated these binary options brokers are an unknown quantity. If you value your money then you would be right to be wary of the unknown. If you are new to trading in the financial markets, this can especially lead to confusion. Binary options trading can be extremely rewarding for professional traders and newcomers, however, how do you know which broker to deal with and who can you trust with your money? What trading platform should you be using?

These are some of the basic questions that you will need to confront before you take the plunge in the exciting world of binary options trading. Adding to this confusion is the amount of information or misinformation that can be found on the internet posted by disgruntled traders or even competing brokers! So how does one distinguish a reliable broker from hundreds of other firms that are out there on the web?

In this guide for selecting the right broker for your trading activities, we've identified various factors that a trader should consider before contemplating which broker to trade with. Some of these factors are:

> Regulations

> Company Capitalization

> Trading Platforms

> Broker Types

> Customer Services

2. Regulation

In the Forex Market, for a lot of traders, trading with a regulated broker is often the most important factor when opening a trading account. By the way, some markets or regions are unregulated meaning you may be better off with an unregulated broker if you are based in those markets. Sometimes, like in the US with their strict NFA regulation, trading can be no fun at all. Leverage offered is very low and highly regulated brokers can offer very low spreads. Also, just like in the case of MF Global who recently were all over the news, being regulated does not necessarily guarantee the safety of your funds. Nevertheless, how a broker is regulated depends on where it is registered and where its base of

Guide to Choosing a Binary Options Broker

operation is. This can be a complex issue especially when you are dealing with a global market. The financial market is largely an Over The Counter (OTC) market and this makes it difficult to subject a particular company to a specific set of regulatory framework.

Although this is a complex issue, one mustn't ignore the importance of having a financial regulatory framework governing the operation of a broker. This is because most retail traders or investors are unlikely to conduct their own research into the feasibility of investing in a particular investment vehicle. With the fees or commissions that are paid to the brokers by the investors, many investors actually feel that this is part of the broker's obligations. In short, the broker is supposed to act in the best interest of their clients. However when the broker is also the Market Maker, ie. taking the other side of the trade, this isn't always the case.

In the United States (U.S.), brokers are self-regulated by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization of the brokerage industry and the Securities and Exchange Commission (SEC). For those brokers that are based in the United Kingdom (UK), the task of regulating brokers falls under the ambit of the Financial Services Authority (FSA), a quasi-judicial body. Individual member states of the EU have their own respective regulatory bodies that follow the recommended legal framework standards established by the European Union. These are the main regulatory bodies that monitors and ensure that brokers are held accountable to a fiduciary standard.

In a perfect world, the above scenario is supposed to be the case. Unfortunately, the global financial crisis that resulted from the collapse of the U.S. subprime mortgage market in 2007/2008 is a stark reminder that financial regulations are not everything for the protection of investors.

Binary options is different. Every week there are ten new brokers popping up. 95% of all binary options brokers are unregulated. The regulated ones are usually based in Cyprus and so regulated by Cysec with registered offices in the BVI. So far I have only come across a handful of regulated binary options brokers in the whole market and those are not necessarily the best companies I've found to trade with by far. So it seems that in this market, regulation is not one of the governing factors to choosing your broker. So what is?

3. Company's Capitalization

Another factor in the selection of a broker is to look at their market capitalization. It is always prudent to ensure that the broker shortlisted by you is well capitalized to minimize the risk of losing all funds if the broker does go bankrupt or if you have placed a big winning trade. Well when a company is regulated you know that they are well capitalized, they have to have millions of dollars in their accounts to even apply for regulation. Previously, firms with as little as $100,000 operating in the U.S led to many of them having issues with their clients' money when the market tanked. However, recent regulations have been tightened in the U.S. that requires brokerage firms to have at least $20 million dollars in capitalization in order for them to operate. This requirement is monitored by the National Futures Association (NFA) in conjunction with the Commodity Futures Trading Commission (CFTC). To check whether a firm is sufficiently capitalized, you can refer to the CFTC website. They have a list which shows the capitalization of their members that is updated on a monthly basis. However, it should be noted that many Forex and binary option firms have difficulty in meeting this requirement and are forced to relocate their operations outside of the U.S to Europe.

Nevertheless, as retail trading in the financial market is becoming more popular and legitimized many countries in the EU are also following the footsteps of the U.S in terms of capitalization. In this respect, capitalization is becoming less and less of an issue which a trader has to worry about. The reason for this is that many binary options brokers are hedging their risk or underwriting their risks with third parties. This means that even if they lose out on an elephant trade they can afford to return your profits. Some brokers also take the other side of a very large trade by trading it at another brokerage house. This guards the company from losing too much in one trade.

It's a good idea to ask the brokerage you are trading with about their capitalization and also whether they hedge themselves or are underwritten by third parties.

Ensuring the capitalization of the firm is one very important factor to consider when doing your broker research and selection.

4. Trading Platforms

There are many typesof trading platforms on the market. With binary options most of them seem to be web-based. A lot of them are white labels of other companies platforms where they have taken their own branding such as logos and placed it on the platform ie. SpotOption and Tradologic platforms. That's ok it just means they don't have their own proprietary platform.

So let's break it down.

Binary brokers offer different types of vehicles on their platforms. The classic option is UP/DOWN or PUT/CALL. This is the platform you'll see offered by all the companies. Very simply you choose the market movement at a set expiry and whether the asset will have traveled up or down at that expiry. What to look out for here? Ideally you will have a chart available to look at before you choose the asset type. This will make your task easier and quicker.

The next platform offering is One-Touch. Your trade depends on whether you think the asset will touch a certain point by a set expiry time or not. Payouts offered on this trading type stretch up to 550% of your initial trade amount. It's a massive return, but it's also a long shot. The line is often far away from the charts trend.

Boundary trading or Range trading is assuming whether the asset will stay within a set range or outside of that range by the pre-set expiry time. Some brokers even offer 60-Second options. This is a very desirable new trading type with a quick turnaround.

With all of these option types, look for companies that offer charts with a good history time frame, ranging back at least a week. Look for a company that has very little down time on their server or slippage. Slippage is the time between placing the trade and execution of the trade. Seconds can make all the difference, especially when trading the 60-Second options.

Web Based or Non Web Based Platform

So what is the main difference between a Web Based Platform and a Non Web Based Platform? A web based platform is totally independent of the computer which a trader is using to trade with. Non Web Based Platform normally requires users to download a piece of software before they can start trading. What this mean is that a trader will need to trade from that specific computer. If the computer that a trader is using is a desktop, this would mean that the trader cannot trade from anywhere in the world. In other words, he is not mobile.

Mobile trading

Some of the better brokers are even offering mobile trading types where you can open their platform from your iPhone or Smartphone using a downloadable app. Your account opens so you can keep an eye on your open positions, execute a trade and even deposit funds.

5. Payouts Offered

Below is a list of features that you should look for before making your selection.

Sufficient Returns on Money Invested

With binary Options trading, traders have to predict which way the underlying asset's price is going to go at the expiry time. If the trader makes the correct determination, he will be able to reap a percentage return based on the amount of money invested. However, this percentage return varies from broker to broker, the asset traded and the expiry time selected. Some brokers calculate this return based on the real time market price of the underlying asset while some broker uses their own proprietary algorithms to calculate this return. Whichever the broker that you selected is using, it is important to look at the final return and see if it touches at least 65% to 70% to make it worthwhile for you to invest in. The highest payout on the PUT/CALL options I have seen are 85%. The highest payout I have seen for the One-Touch trading is 550%.

Payout for out-of-the Money Trades

The main disadvantage with binary options is that when your trade is even out by one cent from the predetermined price, you will be out-of-the money. Hence, apart from looking at returns, traders should also look at the rate of payout when their trades are not successful. Again this figure varies from broker to broker. Some brokers' will pay out 15% of the original amount invested when your trade is out-of the money while some will not pay out anything at all.

6. Assets offered

If you are an experienced trader what do you like to trade? Perhaps it's commodities or currency pairs. Perhaps your expertise is one major currency such as the EUR/USD. If that's the case, stick with it with binary options. You'll already have a feel for the market movements for that asset and the charts general trend. You'll be used to reading relevant technical analysis and fundamental analysis and perhaps will know what's coming next, as history repeats.

Support Multiple Currencies Trading

Binary Optionstrading is very flexible and as such traders can benefit from the volatility of the Forex market while at the same time minimize their risk. Hence, to derive maximum benefits of being able to trade in the Forex market with binary options, traders should ensure that their trading platform can support as many pairs of currency combinations especially with regards to the major currencies. A trading platform which can support many currency pairs is often indication of a well thought out trading architecture. In this respect, you can indirectly tell whether a broker is serious about their business or not. A broker which provides a trading platform that can handle only just a few pairs of currencies is certainly not one that you want to deal with.

Populated Asset list

When the currencies get volatile and unpredictable perhaps it's time to move to the commodities or indices. Check that the broker you want to work with has a full and populated list of assets to choose from. The general rule is; the more populated the list, the more serious the broker.

7. Customer Service

Customer service is key! Check out the amount of languages offered by the trading platform. How can you contact the customer services representative? How quick are they to respond?

The level of the customer service is often a key indicator as to the quality of the company. I tend to test a broker before I deposit funds within, it's simple. Send them an email, and see how quickly they are to respond. Get on the live-chat and ask them a question about their trading accounts or welcome bonuses. From these interactions you can get an idea of how serious the broker is and how much they value their clients.

Most binary options brokers offer welcome bonuses and trading promotions. Be sure to ask your customer service representative what they are currently offering. Also find out the trading conditions which apply to that bonus. ie. The broker may give you 100% bonus but when can you withdraw it? What trading volume must you reach before you can take it?

Customer service staff are not here to suggest trends or to give market information, although they can train you on binary options trading and how to use their platform.

8. Secured Trading Environment

By secured tradingenvironment, we are talking about how safe is it for you to be conducting your trading on the internet. This security issue is not just specific to binary options trading but affects all forms of web based transactions. To be as secured as possible, you should make sure that your trading platform is encrypted with a 128 bit SSL encryption key. If your transactions are not encrypted, you will subject yourself to hackers can steal your financial data.

By the way you can do searches on forums to discover people's reactions to the security and safety of certain brokers, but overall you should take this with a pinch of salt. Often traders that lose their money can cry, scam to try to get their funds back. Other times competitor binary brokers can leave bad comments, or scam findings. It's not nice, but it does happen.

9. Questions to ask Before Opening an Account

Before choosing a broker, be sure to ask the following questions:

> How well capitalized are you?

> Who takes the back-end of your trades?

> Are my trading funds kept in a separate, secure client account?

> If so where?

> How can I deposit funds?

> What welcome bonus will I get?

> How long do withdrawals take?

> Do I have to pay for withdrawals of my funds?

> Is this something we can negotiate between us?

Conclusion

From time to time traders complain to me off scams they have dealt with when using specific brokerage firms, I have looked into most of these and found them to be, the trader that was unhappy at losing his funds too quickly. Of course scams happen within any market, so move slowly.

Don't be pushed into depositing your funds with any specific broker, take your time in deciding. Deposit small amounts to start. Test the withdrawal processes and then once you are sure of the legitimacy of the company involved deposit bigger over time.

Once you've started trading, don't be pushed into depositing more funds if you're not ready.

Ask all of the above questions and test out the customer services department.

Open a demo trading account to test the platforms on offer.

Just like with your trading strategies and your risk management strategy choosing a broker should form part of this process.

Binary options trading has many advantages over other trading types. You can know you initial payout or risk even before you place the trade. Payouts are high as compared to Forex and you don't have to be an expert trader to understand the mechanisms of binary options trading.

But remember, a careful trader is a happy trader.

FirstDepositInsurance Team

www.FirstDepositInsurance.com