Understand the Basics of Binary Options Trading
The biggest problem with up/down binary options has always been the risk:reward nearly always being lower than 1:1 on each trade. There is only one broker offering up to 100% returns and even they do not offer these returns all the time. If you decide to approach a trading style with a lower than 1:1 risk:reward then you need to understand the numbers, it’s important to know what will be required from you to be profitable. I do not mean to insult your intelligence here but even these basics must be written down to guarantee awareness.
A very conservative approach for the examples here will be to assume a 70% return on your up/down trades, this is a very low return these days and you can usually find better. Check our Regulated Binary Options Brokers page for our recommendations. This next table just below will also assume some common trade sizes so that you can see at what win ratio you start to become profitable and at what amounts.
|70% Return||$10 Risk||$25 Risk||$50 Risk|
If you were to use the same trade size on every trade then you will need to win 60% of your trades to be profitable, but the amounts you will be making are very small and hardly worth the effort. In reality you will need to maintain an 80% or higher win rate to even consider trading this way. If you were playing big money you may be able to make do with 70% but the average person will not start off playing big money. The 70% returns that are used here are very low these days and you should be able to find 80% or higher. This will not change the fact that you need a higher than 70% win rate in order to make any decent money though.
So what you need to do first is to demo test your ability to execute your trading strategy and make sure that you can maintain your desired win ratio consistently for a period of time. Only then will it be safe for you to trade with real money because only then you will have the required confidence in your abilities. Let’s take a look at a few more common trade sizes and check the numbers.
|70% Return||$20 Risk||$30 Risk||$40 Risk|
Trading Psychology and Some Advice
After you have proven to yourself on a demo account that you are able to execute your trading strategy effectively, you will be ready to go live. If you stick with the above basics of just trading the same trade size each time, you know how the numbers work, the only thing left to overcome will be the psychology behind executing your plan with real money on the line. This will effect each person slightly differently but it will be a hurdle, even if it is the last hurdle. Most people rush the demo account / building confidence part of the plan and lose their money before they even get started, so please take this all seriously and don’t underestimate the weight of trading psychology at first.
In the next two lessons we will take a look at how you can use a little math to combat the bad risk:reward that the up/down binary options trades have. Both of these lessons are highly recommended but only providing you have a good deal of experience under your belt first. You will need your own trading history results to study before you can safely implement either.