Is It Possible To Make Money Trading Binary Options?
Trading binary options online has become possible in 2008. It was a new way to make fast profits online for financial speculators. Trading binary option is open and available to anybody over 18 (one should check local government regulation before trading BO).
Binary options allows the user to speculate and place trades, which are essentially bets, on the direction of financial assets from a basket of currencies, stocks, commodities and indices. In binary options your losses can never exceed your deposits and your return is clearly defined at entry.
It is no secret that trading on the world’s financial markets by buying and selling positions has made many millionaires. It is also a fact that the markets bankrupted many more. The line between winning and losing can be very subtle. While trading may not be for everyone, the unprecedented ease of access to financial trading online has certainly made a lot of people happy about new possibilities.
Is it really possible to make money? If so, how much?
The big question is can you really make money trading binary options? Short answer is yes, but it’s not that simple. Whether you make money or lose money really depends on a number of factors including your risk management, trading strategy, the options that you choose when you enter the trades, your broker fees, your trading psychology, etc. There are simply too many factors to consider but of course it is possible to win and make money, but it’s not as easy as binary options advertising has us believe.
Brokers will often entice people with all types of bonuses and ads that suggest making money trading binary options is very easy. Although the actual act of trading binary options is easier than Forex it is not easier to win and make money consistently in binary options.
Here is a mathematical formula to calculate break even ratio in binary options:
B = Ot% / (I% + Ot%)
- B – Break even ratio – (shows how many times you need to win to break even)
- I – In the money ratio – (shows broker payout for winning trades)
- Ot – Out of the money ratio – (shows your losses for losing trades)
Using the above formula you can calculate the break even ratio assuming a set of fixed parameters. Assume your broker pays you 90% for wins and takes 100% for losses.
B = 100% / 90% (in the money) + 100% (out of money)
B = 100 / 190
B = 0.5263
B = 52,63%
What this means is that in the case of a payout rate of 90% and 0% rebates on losses you will have to accurately predict 52.63% of your investments in order not to break even. This break even calculation can change quite significantly with different options. A 90% payout is very generous and rarely seen in binary options. Anyoption offer above 90% of profit on wins and they are also a regulated broker. Most brokers offer between 70-85%.
Let’s look at the numbers and for the purpose of further illustration let’s assume that we are dealing with a trader who has a trading strategy with 75% of wins. (There are numerous signal providers that achieve those levels.) 75% of wins is quite high for most standards. He also uses a binary options broker who offers only 70% of profit on each winning trade.
In one month he takes 52 trades and on each trade he puts $100. His total investment will be $5200. It averages out to about 2 trades per trading day. Let’s also assume that each trade has a payout of 70% and a return of 0%, as is the case with many binary brokers.
When we divide the total sum of his investment of $5200 between the 75% of winning and 25% of losing trades we split the working capital between $3900 which was spent on the winning trades and $1300 spent on the losing trades. Now let’s take the $3900, the 75% of his total trading capital, and add 70% of return payout on the winning trades which will produce $2730 of profit. His losing trades, the 25% of total trading capital, cost him $1300.
So now that we know how much profit was made, let’s take those numbers and put them into the mentioned breakeven ratio formula to see how many times he actually needed to win in order not to lose any money at all.
B = 100% / 70% + 100%
B = 100 / 170
B = 0.5882
B = 58,82%
This financial calculation is quite modest because it assumes a return of only 70% on wins where many brokers offer payouts over 80% and some brokers like Anyoption also offer returns on losses, only about 5-10%, but this will change the numbers significantly. In addition, there are a few binary options signal providers who consistently achieve higher percentage of wins than 75%, which would also drastically improve profits as well.
So, only for the purpose of further illustration of what would happen if the overall wins were 80% and the return payout also 80% we’ll continue with our calculation. In this case $4160 is our winning capital, namely the 80%, and the remaining $1040, the 20%, is the losing capital. The winning capital of $4160 generates $3328 of profit (80% of payout for wining trades) and the losing capital of $1040 is simply lost, we’ll also use 0 return for losses in this calculation. So, out of 52 trades for $100 each the profit is $3328 and loss of $1040. Remember, that’s only in one month of trading.
As you can see the difference in earnings is huge between the first and the second example. A 24 percent per month as opposed to 2.5 percent per month is a world of difference. This is why it is so important to understand your risk exposure in binary options. Let’s see how many times he needed to win to break even:
B = 100% / 80% + 100%
B = 100 / 180
B = 0.5555
B = 55,55%
Professional traders understand that and seek options and ways to keep the odds in their favor. For example trading with brokers that offer 85%-95% on wins and some return on losses. In addition there are ways to trade binary options to receive even higher payouts, as high as 200%.
Of course were profits can be made in a such a quick way there is inevitably going to be more risks involved. You can make money trading binary options online, there is no doubt about that, but you can also lose money. Following a good and reliable signal service or a professional trader can really help you succeed in trading binary options online. It could be the difference between winning and losing.
Conclusion: Trade binary options like Don Johnson
Before you start conjuring up images of speedboats, palm trees and Miami, let me inform you that I don’t mean the Don Johnson from Miami Vice. I mean the Don Johnson, professional Blackjack player who beat the casinos for millions on numerous occasions and he now works as a consultant to casinos all over the world. If you haven’t heard of Don Johnson I recommend you view this video where he explains how he was able to beat the biggest casinos in Las Vegas.
How is this relevant to binary options and trading, you may ask. The reason Don Johnson was able to win was because he was able to exploit and sometimes, being a high roller, change the conditions of the game.
As you could see in above calculations there is a huge difference when the profit percentage is 70% and when it is 80%. Likewise, there is a big difference in numbers and profits when you win 75% of the time and when you win 80% of the time. It’s all about understanding your risk exposure and profit potential and optimizing the conditions of your trades to achieve a better break even ratio.
Just like Don would carefully study the casinos and the options offered by them, a binary options trader should study the brokers to see which broker will offer the best odds. Likewise, a binary options trader should look at trading strategies that minimize losses. Depending on your broker set up, on average you need to have a trading strategy that gives you at least 60% of wins in order to make money in binary options. If you don’t have a successful trading strategy you can always subscribe to a professional signal service and copy their trades.Published in Education