Betting strategies for binary options

Binary Betting Strategies for Binary Options Trading.

First, before we get into betting strategies for binary options trading, let’s discuss what the odds are when you trade.

Let’s assume there is a 50/50 chance of being right or wrong on a trade. After all, no one has a crystal ball.

For example, let’s say you thought the EUR/USD was going to trade higher from it’s current price. So, you decide to buy a call option for $100, with a payout of 70%.

With that said, your best outcome is a profit of $70, and if you’re wrong you’ll lose $100.

If our expected return is 0.5 x $70 = $35 and .5 x $100 = -$50.

The expected investment value is (100) + (-15) = $85.

What does this all mean? Well, we have a negative expected return. That’s right, the odds are stacked against us. In order to figure out what we need to do to overcome this, pay attention to the following formula.

We take 1 and divide it by the (expected payout percentage + 1)

Again, what this means is that we have to be right on our strategy 59% of the time, in order to overcome the negative expected outcome. Of course, you should back-test strategies with this number in mine. Ideally, your strategy should have a higher probability of success than this, to be a profitable trader.

Now, will look at a couple of betting strategies used in binary options trading.

The Martingale Strategy.

Let’s assume that you bet $100 and the payout is 70%, the trader is making successive trades, check out the sequence of the size of the bets as they lose each one of them.

Bet Bet Size Total Losses Profit (if trade is right)

5) $2500 $1750 $130.

As you can see, the size of the bet increases as the trader loses each time. However, the first bet they get correctly, they’ll recover all of their losses. Of course, you’ll need deep pockets to absorb successive losses. In addition, your trading strategy needs to be better than the break-even point we presented earlier (59% in our example). But don’t get confused. If you’re going to follow this system, you have to be emotionally fit and disciplined enough to go through it.

Remember, the martingale strategy only works if your trading strategy does. Not only that, but you must keep your emotions in check and have a large enough bankroll to absorb losses.

Flat Betting.

A simple strategy, where the trader makes an equal sized bet based on a percentage of their trading account. For example, if a trader has $500 in their trading account, they might bet anywhere from 1% to 5%.

For example: $500 account, 2% of account value of on each trade, at 70% payout.

If wrong each time :

Bet Bet Size Total Losses Account Value.

A couple of things to point out, by using this method, the likelihood of blowing out your trading account decreases significantly. No single loss should be crippling. Of course, your trading strategy needs to be a profitable one (positive expectancy). If you’re trading strategy has an edge, you’ll be profitable using this betting strategy. In fact, this system is widely used by portfolio managers and professional gamblers.

The Parlay.

Now, this is a progressive strategy based on increasing your bet size as you win. They add their profit to their initial bet size.

For example: $500 account, 70% payout:

Bet Bet Size Total Won Account Value.

2) $17 $11.90 $518.90.

3) $21.90 $15.33 $534.23.

4) $25.33 $17.73 $551.96.

5) $27.73 $19.41 $571.37.

As you can see, the trader increases the size of their bets based on the profits that they receive. Even though the size of the bets increase, they are only risking $10, the rest at risk are profits. If the trader loses, they’d go back to their initial $10 bet size.

Another variation of this strategy would be to simply bet half of your profits.

For example: $500 account, 70% payout:

Bet Bet Size Total Won Account Value.

2) $13.50 $9.45 $516.45.

3) $14.73 $10.31 $526.76.

4) $15.16 $10.61 $537.37.

5) $15.31 $10.72 $548.09.

As you can see, these betting strategies are fairly conservative, they add risk when the trader is doing well and reduce risk when they are not. Intuitively, this makes sense, trade more size when you’re confident and smaller when you’re not.

Anti-Martingale.

Now, unlike the martingale, where the trader increases their bet size when they lose, the anti-martingale increases the bet size as the trader wins and decreases them when they lose.

For example: Account size $500, payout 70% , Trader will start off with $20, double their profits if they are right on the next trade… and go half of the size of their previous bet when they lose.

Bet Bet Size Win or Loss Profit/Loss Account Value.

1) $20 Win $14 $514.

2) $28 Loss -$28 $486.

3) $14 Win $9.80 $495.80.

4) $19.60 Win $13.72 $509.52.

5) $27.44 Win $19.21 $528.73.

6) $38.42 Lose -$38.42 $490.31.

As you can see, you’re strategy needs to have a positive expectancy. Another variation would be to increase the bet size with a portion of the profits, say 50-75% of profits, that way if the trader loses, they would have not given up all their gains.

In conclusion, the key to any betting strategy is to know if the trading strategy can produce a positive outcome. At the top half of the article, we went over a formula that shows how successful a trading strategy needs to be in order for the trader to break-even. It’s important to back-test strategies and keep a trading log. In order to improve, you must know what’s working and what isn’t. For the most part, the flat betting and variations of the parlay strategy appear to be the most attractive. However, each betting strategy has its own pros and cons.

Martingale.

Martingale is a popular form of betting strategy and often used in binary options; read on to find out why you should not be using it.

The Martingale Method.

A martingale is one of many in a class of betting strategies that originated from, and were popular in, 18th century France. The simplest of these strategies, all intended for gambling and gaming, was designed for a zero-sum game, that is, a game in which each side bets the same amount and wins and losses are absolute. If I win, I win all, if you win you win all.

The basic strategy has the gambler double his bet after every loss so that the first win would recover all previous losses plus win a profit equal to the original stake. In today’s world the martingale strategy is most often applied to roulette as the probability of hitting either red or black is close to 50%.

The idea behind the martingale is a simple one: Double your previous loss until you eventually win, resulting in profit no matter what, as long as you are capable of going the distance. The only limiting factor is the size of your account, so long as you can make the next trade you have a 50/50 chance of making all your money back.

What Martingale really does is remove the need to understand the market, technical analysis and trading because the only thing that matters is the outcome of the next trade. All you have to do be able to make a trade, and then double it if you lose.

Martingale is nearly a sure thing as your chances of producing a win grow with each consecutive trade, assuming of course you have an unlimited amount of time and a bank roll big enough to make whatever the next trade needs to be without going bankrupt. The danger lies within those assumptions.

To some, the martingale system seems pretty fail-safe, especially for newbies, but that is a popular misconception. If used incorrectly it can quickly compound ones losses to the point of catastrophic failure. The best thing to do is to use a sound money management technique like the Percent Rule to ensure that no single trade is so big it wipes you out. Save Martingale for having fun at the casino.

Why Martingale is not a good idea for Binary Options.

Now with digital options there are some things you have to take into consideration. Number 1, you must be aware of the payout percentages because binary trading is a minus-sum game. You never win as much as you bet. Because they are less than 100% you must increase your stake with that in mind so you cover your previous loss and gain a profit equal to the initial trade, otherwise you will end up losing no matter what happens.

If you place a trade for $100 and lose it, then make a trade for $200 and win 85% you only get back $370, covering your cost($100 +$200) but only winning 70% of your first trade. If you went to a third trade, a $400 trade, you would return $740 but only profit $40 or 40% of the initial trade. If you took it to a 4th trade, only doubling the trade size, the profit shrinks again and will turn into a net loss on the 5th trade.

The real risk here is that with each trade, to ensure that you do not end up losing, you have to increase you stake by more than 100%. This means that your potential losses grow exponentially with each trade. The first trade is 100%, then the second is 100% +115%, then the third is 215% + 250%, then the fourth is 465% + 500% so that your first trade is X amount of dollars, and your fourth is nearly 10X dollars and growing with each trade until your account cant handle it any more and you are wiped out of the market. In the end, Martingale is not trading to win, its trading not to lose.

Binary Betting Strategies.

by Polly Fergusson,

Binary betting is gaining in popularity around the UK - punters like the fact that it's simple to understand and, crucially, that you can only lose a certain sum. Polly Fergusson explains some of the strategies behind binary betting and how you can maximise your winnings.

A binary bet is nothing more than a fixed odds bet but quoted in a binary format, ie in 0-100, instead of the odds offered by a high street bookie. Say, for example, you want to bet on Arsenal winning the FA Cup and your bookie is quoting odds of 2-1, which equates to a binary market of 66.7. If you were to buy the binary bet at 66.7, your maximum profit would be 33.3, multiplied by your stake per point, and the maximum loss would be 66.7 multiplied by your stake. All a binary bet does is settle at 100 if the event is true or settle at zero if not true.

This sort of betting is gradually spreading through different markets and sectors, but you are still most likely to come across it on financial indices such as the FTSE 100 or Dow Jones. 'It's the thinking man's game of trading,' explains Tom Hougaard, chief market strategist at City Index. 'It is in fact very close to options trading as the same elements are taken into account, ie time to maturity, volatility and the direction of the markets.'

Another key attraction of binary betting is that you can choose whether to be the bookie or the punter. If you're the bookie you can lay bets, if the punter you can take the bet. With the Arsenal example above, where the binary market was 66.7, then to lay it you would buy the bet, giving you a maximum loss of 66.7 and a maximum profit of 33.3 (multiplied by your stake per point). If you were the punter you'd sell the bet short, giving you a maximum profit of 66.7 with a maximum loss of 33.3.

'Binary betting is attractive to the novice and to the experienced trader. People new to financial markets enjoy the simplicity, trades are resolved into a simple "will it/won't it" outcome, the bet sizes are small and there is limited risk nature,' says Dan Moczulski, director of new business at IG Index. 'Binary bettors can never lose more than their agreed deposit. Experienced traders enjoy the volatility - flat markets can enjoy 90-point turnarounds in seconds.'

Stock indices are well matched for this because they have a habit of over-reacting; buying dries up, with selling pressure creates more pressure and before long it's a route to get out. This is the basic approach, but you can be more sophisticated and try various betting strategies, depending on which markets you are betting and the level of risk you can afford to take.

'We say that you can play binary bets two ways,' explains Hougaard. 'Trade up depending on where you think the market is going, or work as a professional. In the latter case there is more in-depth research and you tend to trade on numerous statistics in the market, such as where the FTSE or Dow are heading, or economic news that is coming out.

Moczulski has a more basic approach to the right strategy. 'Quite simply, the right strategy is the one that makes money overall. Even if nine out of 10 trades lose, as long as the winner outweighs the losers, it's a great strategy.

'A slightly longer-term strategy seems to be the most effective, where a genuine view on the market is taken, as opposed to scalping a point here or there. Admittedly, a long-term view in binary betting is probably anything above five minutes!'.

Non-directional - the Range Bet or No-Touch Bet.

The range bet or no-touch bet offers a way to make money from lack of movement or volatility in a market. You need to find a market with a high statistical probability of going nowhere or trading within a very tight range between two set time points.

A number of market situations could lead a market to move within a narrow range. A very large move in an equity market will often then lead to anything from a few hours to a few days of sideways movement.

Equity and currency markets will frequently stagnate in front of or around holidays in other markets or even at certain times of day. For example, US markets frequently have a Monday holiday on days when European equity markets are still open, and often traders will sit on the sidelines marking time during such periods. On an intra-day basis, indices and currencies often stagnate before key figures or announcements come out. A regular event, such as the US Federal Open Markets Committee (FOMC) meeting, often means hours of waiting as markets come to a near-standstill prior to an announcement.

An advantage of Binary Bets is that they are always quoted.

A big advantage of binary bets is that they are always quoted. The problem with a traditional bookie is that once your bet is placed there's nothing much that can be done until the event is over - you either win or lose. This creates a problem: say you had the foresight to bet on Ray Quinn winning X Factor at the beginning of the latest series. At the time, there were more than 40 contestants, so you might have got 40-1. He did in fact get to the final but lost. Perhaps on the day of the singing final, his odds were around 3-1 to win.

With the bookies, there's no way to take a profit before an event happens - even if you think the outcome is changing. But binary bets are always trading, so you can change your mind and take a profit before you've reached your target.

Let's say you bet on the FTSE 100 to move 30 points lower on the day but change your mind when it moves just 10 lower. With binaries, you can take a small profit on the back of this 10-point move rather than the bigger profit on the still potential 30-point move lower.

Reversal strategy - a common Binary Betting Strategy.

This is a very common binary betting strategy. Wait for a big move in the market one way or the other and then buy a cheap binary bet (less than 15 points) on the assumption that the market has a good chance of reversing. If the trade goes wrong then the maximum loss is 15 points (or whatever the binary bet was trading at when you bought it). But if the trade goes right, then the maximum profit is anything up to 85 points multiplied by your stake.

The trading strategy is simple. Look for sudden sharp moves on the back of news and then bet that the move will reverse. For example, some economic news is announced, which moves the FTSE 100 sharply higher, bet the move will not last and the market will head back down.

Trade the economic figures.

You can put on a trade before significant economic figures in anticipation of a big market reaction once the figures are released. The US non-farm payrolls (employment report) is always released at 1.30pm London time on the first Friday of every month. This figure has the potential to move the Dow at least 50 points, if not 100 points, in a flash. Obviously this is not always the case but if the figure is widely different from the general market prediction sparks can fly.

You can trade hourly Dow Jones binary bets before the figure is released on the assumption that the market forecast will be wrong and the figures will come in far better or worse than expected. Although a binary bet is a tradable market, you don't have to keep the bet open until expiry. If, for example, you buy the bet at 15 you can sell all or part of it at 35 should the market move partly in your favour.

Have you got what it takes?

You are more likely to be successful if you possess certain psycholological traits. This doesn't guarantee success, but it can help. For example, are you patient? Most binary betters never force a trade. You should be prepared to wait for days or even weeks for the market to set up correctly. Trades don't set up that often, so wait for the right opportunity to present itself to you.

Binary bets are also quoted on hourly markets so often you will be playing a very short-term strategy. You've got to be quick and nimble here. 'This is a market where very small movements can make or lose you money quickly,' adds Moczulski. 'You are not going to be right all the time and it's all about minimising these losses. I think this acceptance is borne out in that the most successful binary betters tend to also trade in options - perhaps due to the inherent similarities in the products.'

However you use trading strategies, start trading with very small position size because binary bets can and do move very fast. Experience is more important than you might have first thought. 'If you treat binary betting as a punt, it will always be a punt and you won't really get anywhere with your trading,' says Hougaard. 'It's important to do lots of research on the markets. This will put your binary bet into its true place.'

Setting up a trade -:

The FTSE 100 will close either up or down from where it started. After the market closes at 4.30pm, IBM (a US company and not quoted in London, but still a global and therefore influential stock) announces a surprise profits warning. This sends the Dow Jones down over 150 points. The FTSE 100 opens the following day perhaps between 40-80 lower due to IBM. Stage 1 of the trade setup is now complete - a sudden and quick move in the FTSE 100 the next morning. You buy the binary up-bet for the day. This will settle at 100 if the stockmarket closes in the green (ie UP), or it will settle at 0 if the FTSE 100 closes in the red (ie DOWN). The likelihood of the FTSE actually closing higher may seem remote with all the bearish news and views around but the market has a habit of reversing. The binary bet may have been bought at only 12 points, meaning a potential payout of 88 (x stake) but more importantly a potential loss of only 12 (x stake). If you work out the standard fixed odds on this bet they're 15-2, risking £1 to make £7.50.

Want to Day Trade? Try Binary Options Or Spread Betting.

Spread betting and binary options are two types of derivative products growing in popularity due to their profit potential, small trading capital required and flexibility for high leverage. Both have similar and unique characteristics that help traders approach different strategies to profit from the market.

Binary options are a type of exotic options and are called binary because there are only two possible outcomes at expiration: nothing or a fixed amount of money. Binary options are usually classified in two types: Cash-or-nothing options and asset-or-nothing options. (Find out how to start trading binary options with A Guide To Trading Binary Options In The U. S .)

Cash-or-nothing options pay off a predetermined fixed amount of cash, or nothing, depending on the price of the underlying asset relative to the exercise (strike) price. In a European cash-or-nothing call option, the holder receives cash at expiration if the underlying price is higher than the strike price at expiration of the option, but receives nothing if it's lower. In an American cash-or-nothing call option, the holder receives a certain amount of cash if the underlying asset price ever reaches or exceeds the exercise price during the life of the option. In a European cash-or-nothing put option, the holder receives a certain amount of cash at expiration if the underlying price is lower than the strike price at expiration, while in an American cash-or-nothing put option, the holder receives certain amount of cash at expiration if the underlying price ever reaches or drops below the strike price during the life of the option. European asset-or-nothing call and put options and American asset-or-nothing call and put options work exactly the same as their cash-or-nothing equivalents, except that the pay-off of this type of option is not a predetermined fixed amount of cash, but the price of the underlying asset.

Binary Options Scenarios.

Assume that a trader buys a 3-month European cash-or-nothing call option on Nokia (NOK) common stock with a pay-off of £100 and exercise price of £9. If at the expiration date, Nokia shares are priced any higher than £9 (for example £9.5) then the trader receives £100, otherwise the trader receives nothing, because the option expires worthless. Now, assume that a trader buys a 6-month European asset-or-nothing put option on Microsoft (MSFT) common stock with a strike price of £45. At the expiration date, if Microsoft shares drop below the strike price, the trader receives £45, otherwise he receives nothing, as the option would expire worthless.

Binary Options Pay off Summary.

S T - is the price of the underlying asset at time T (Note: T - is the expire date for European options and any date during the life of options for American options)

X - is the exercise price of the option.

Q - is the amount of cash paid to the cash-or-nothing option holder in case the option is exercised.

Financial Spread Betting.

Spread betting is a derivative product that allows traders to bet a certain stake on each point of movement of the underlying asset price. While the strategy is called spread betting, don't let the name confuse you, since you are actually not betting on the spread but actually on the price direction of the underlying asset. Brokerage firms usually offer two quotes: a bid and ask quote. A trader betting that the price of the underlying asset will increase would bet the ask price for each point of increase. As a result, if the underlying price moves in the investor's favor, she can close the position by selling at the bid price. The opposite is also true for a trader taking a short position at the bid price. (To learn more about Financial Spread Betting read Understanding Financial Spread Betting .)

Say Apple (AAPL) stock is trading at £101.5 and a brokerage firm offering spread betting has a bid-ask spread of £100 – £103. If we predict that the price of Apple will increase over the following days and want to bet £10 per point (cent), we go long (buy) at £103. If, for example, after 2 days the stock price is £105.5 and the spread betting company quotes new spreads at £104 -£107 for bid-ask price, respectively we can close our position at £104 (new bid price). The return of the bet placed is the difference between the buying price (previous ask) and selling price (new bid) multiplied by the stake amount, £10. Note that the initial bet was £10 per each point (cent) of the price increase, thus profit will be (104-103) x10 = £1,000 (100 cents * 10). The strategy would be the opposite if we would have bet that Apple's price would fall.

Both are derivative strategies that allow traders to take advantage of price movements of an underlying security without actually owning the asset. Traders are usually able to speculate against different securities like stocks, currencies, commodities and even indexes. Both are leveraged products that allow traders to take long or short positions with small amounts of capital. One of the reasons these types of derivatives are growing in popularity is because of the opportunity they offer to obtain high profits with lower capital invested (remember with higher returns comes higher risk). They are both based on the change in price of the underlying asset. Regardless of the strategy, if the trader went long, he or she would profit from an increase in price of the underlying, and vice versa for a trader taking a short position.

Unlike binary options, the risk of spread betting is very high. With binary options, the most a trader can lose is the cost of the option, and as with all options, if the price moves against the trader, she would just let the option expire worthless. For spread betting, if we go back to the previous example, in the extreme case that Apple's stock would have gone to 0, the maximum loss of the long position would have been 10300*10=£103,000. Despite the growing number of spread betting companies, spread betting is not as widely available as binary options. Spread betting is prohibited in some countries like the U. S and Japan and is considered more of a betting strategy than a speculative strategy by many traders. Binary options on the contrary, are widely used derivative products, despite being a type of exotic options. Some binary options are now traded at the CBOE and companies offering binary options are allowed in the U. S and Japan. Spread betting does come with some advantages to traders. First, it’s easy to understand and there is no need to be a sophisticated trader in order to calculate initial investment needed and profit potential. Also, because spread betting is not considered a form of investing but a form of betting, gains on spread betting are not taxed in the UK (where spread betting is most popular). Finally, most spread betting companies require no commission fee; the only cost that traders incur is the bid-ask spread. While both strategies are gaining popularity, spread betting is not available in countries like Australia, Japan and the United States.

Traders who are sensitive to capital gains taxes and cost of trading can choose betting. In return they must accept high downside risk in case of adverse price movement. If they want to mitigate risks given by spread betting, they are better off using binary options at costs of higher upfront fees and less profit potential.