How to Avoid Getting Scammed When Trading Binary Options
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Binary options are often utilized by scammers posing as serious brokers, and finding reputable brokers that still offer binary options has become increasingly difficult.
Below, we will share a few points that are good to keep in mind when looking for a binary options broker and trying to avoid being scammed. Still, there are no guarantees and many experts recommend that traders – especially non-professional traders – stay away from binary options altogether.
If you are a retail trader interested in derivatives trading, you can for instance take a look at Contracts for Difference (CFDs) instead of binary options, since it is much easier to find large, reputable and well-established brokers that offer CFDs to retail traders, operating with a license from a reputable authority.
If you suspect that a binary options scam has targeted you, you can report the issue to the relevant regulatory authorities, such as the FCA, CFTC, or the local regulator in your country. Additionally, if you’ve lost money to a scam, you can report the fraud to the police. Consumer protection organizations or financial ombudsman services can also be helpful.
Difficulties Finding A Binary Options Broker Regulated By a Strict Authority
In the past, the recommendation have been to find a binary options broker regulated by a serious authority known for having strong trader protections in place. This has become increasingly difficult, however, as more and more of these authorities have either banned binary options or prohibited brokers from offering them to non-professional traders (retail traders).
Well-known and trusted regulatory bodies like the Financial Conduct Authority (FCA) in the UK, the Cyprus Securities and Exchange Commission (CySEC) in the European Union, and ASIC in Australia are all examples of entities that bann brokers from offering binary options to non-professional traders.
Now, retail clients will largely have to be content with binary options brokers regulated by an authority that is not considered top-tier when it comes to trader protection. There are also plenty of binary options brokers out there that claim to have a license but do not, or that are deliberately vague about where they are based and how they are regulated.
If a binary options broker claim to be regulated and licensed by a certain authority, always check with that authority. You can usually do that on the authority´s official site.
When a strict authority does not regulate a broker, it is less likely to behave properly when it comes to issues such as transparency, security, and fairness. Unregulated brokers, and those regulated by very lenient authorities, are difficult to hold accountable if something goes wrong.
Are binary options legal in the United States?
Yes, binary options are legal in the United States, but the rules stipulate that they must be traded on a regulated U.S. exchange, and these exchanges are Designated Contract Markets (DCMs). At the time of writing, there are only three DCMs in the United States offering binary options: Cantor Exchange, LP; Chicago Mercantile Exchange, Inc. (CME); and the North American Derivatives Exchange, Inc. (NADEX).
Some binary option scammers like to highlight the fact that binary options are legal in the United States, while conveniently forgetting to mention that they must be traded on a regulated U.S. exchange. There are offshore companies out there that promote binary options to traders in the United States without being a Designated Contract Market (DCM) and without having the necessary approval of the Commodity Futures Trading Commission (CFTC).
The CFTC publishes The Registration Deficient List (the RED List) which is comprised of names of entities that are not registered with the CFTC even though they appear to be acting in a capacity that requires registration with the CFTC. The list is not limited to binary options brokers.
A few examples of entities that are included in the list at the time of writing are Binary Mate, Binarytradeplus, Binarycent, Binary Trade Option, and CryptoBinaryTrade.
https://www.cftc.gov/LearnAndProtect/Resources/Check/redlist.htm
2. Be Wary of Unrealistic Promises
One common tactic used by binary options brokers is promising guaranteed profits or risk-free trades. This is a strong warning sign. Any broker or trading platform that claims you can make a high profit with little to no risk is almost certainly a scam. The nature of trading, especially binary options, is inherently risky. You can lose money just as quickly as you can earn it, and no legitimate broker would guarantee returns or downplay the risks.
Be wary of brokers or websites that showcase testimonials or success stories with highly unlikely returns (like doubling your money in a week without taking enormous risks).
Also be wary of “guarantees”. What happens if you lose your money – will the broker really honor their guarantee?
3. Check Reviews
Before selecting a broker or platform, do your own research. Look for credible reviews from trusted financial websites, trader forums, or consumer protection agencies. Reviews from actual traders can give you insight into whether the broker is reliable, offers good customer service, or has questionable withdrawal practices. Look for red flags like recurring complaints about withdrawal issues or poor transparency, which are common with scam brokers.
Be mindful of fake reviews, including glowing testimonials.
4. Test with Small Deposits and Withdrawals
Even if a binary options broker seems legitimate, it’s still wise to test the platform with small deposits, and not keep big amounts in the account.
Start by depositing a small amount of money and then attempt to withdraw some of your profits. This will allow you to see how the platform’s withdrawal process works.
If the broker makes it difficult for you to withdraw money or continuously offers incentives to keep your money invested, this could be a warning sign of fraudulent activity.
Note: Some scammers posing as brokers do not care much about trying to pinch your first $10 deposit from you, because what they are really after is your private information to use for identity theft. They will happily keep up the act while you give them all your information, a copy of your passport/ID, copies of utility bills in your name, and more. Since this is all a part of the necessary Know-Your-Customer check carried out by all reputable brokers too, it is difficult to protect oneself from.
5. Bonuses and Leverage Offers
Many scam brokers offer bonuses or high levels of leverage to attract traders, but these offers often come with complex conditions in the fine print. For example, some brokers tie bonuses to complicated requirements that make it difficult for traders to withdraw their funds. Be cautious of any “free money” offers, and always read the terms and conditions before accepting bonuses or leverage.
6. Deposit Methods
When funding your trading account, ideally use trusted payment methods like major credit cards, PayPal, or bank transfers. Some methods offer dispute resolution options and may be able to help you recover your money in case of fraud.
A binary options broker requiring deposits through cryptocurrency or wire transfers can be a warning signal, as these methods are harder to trace and provide less protection in case of fraud.
7. Automated Trading Systems and Signal Services
Many binary options scams use automated trading software or signal services to lure traders with promises of low-risk and hassle-free profits. It can be done by the broker, in cooperation with the broker, or independently.
These programs promises to make trades on your behalf based on market signals or algorithms, but many are unregulated and provide inaccurate information that leads to losses. Some of these services are just a front for scams that siphon off traders’ money.
If you decide to use any type of automated trading system, research the software or service thoroughly and ensure it is associated with a properly regulated entity.
8. Understand the Inherently Risky Nature of Binary Options Trading
Binary options are high-risk, short-term financial products. It’s essential to fully understand the risks before trading. In many cases, traders lose more than they gain due to the nature of binary options, which offer “all-or-nothing” returns. The speed and simplicity of binary options tend to attract novice traders, and their lack of knowledge and experience can lead to significant financial losses in a very short time.
9. Be Cautious of “Cold Calls”
Scammers often use cold calls, unsolicited emails, or social media messages to lure unsuspecting traders into fraudulent schemes. If you receive a call or any other type of message encouraging you to get into binary options trading, it’s best to ignore it. Reputable brokers don’t operate this way.
It is also best to simply ignore pressure sales tactics, e.g. repeated messages that urge you to “invest now before it’s too late.”
Note: Lately, we have seen how classic romance scams have merged with trading scams. Potential victims are contacted through dating apps or through cold approaches, and the scam will start in a romantic/sexy way before turning into a trading scam.
If you want to get into trading, do your own research, develop your own strategy, and pick your own broker and trading platform. Do not follow the advice of strangers sliding into your DMs with a “great opportunity to make money”.