Profit and Risk

There is a basic formula that you need to understand before trading binary options.

As the formula will show you exactly how changing just one part of the formula can dramatically change the outcome for you.

The formula is:

Profit = Trades x $ Amount x { ( Success x Payback) – (1 – Success ) }

Where:

Profit is exactly as it says, the profit you make. We will take it as profit after 1 month of trading.

Trades is the number of trades taken for that month.

$ Amount is the amount in dollars/Euros or GBPs invested per trade. We will use $20 per trade in our example.

Success is how many trades we won as a percentage of all trades taken.

Let’s give an example:

In one month of trading we took 334 trades at $20 per trade and we had 60% In The Money (ITM) or winning trades and the broker paid out 78% per winning trade.

So, we plug those details into our formula.

Profit = Trades x $ Amount x { ( Success x Payback) – (1 – Success ) }

Profit = 334 x $20 x {(60% x 78%) – (100% – 60%)}
Profit = 334 x $20 x {(0,60 x 0,78) – (1,00 – 0,60)} work it out in decimals
Profit = 6680 x { ( 0.468) – (0.4) }
Profit = 6680 x 0.068

Profit = $ 454.24

Okay, that looks good, but what if we only took 100 trades for the month with the same parameters?

Let’s work it out.

Profit = Trades x $ Amount x { ( Success x Payback) – (1 – Success ) }

Profit = 100 x $20 x {(60% x 78%) – (100% – 60%)}
Profit = 100 x $20 x {(0,60 x 0,78) – (1,00 – 0,60)} work it out in decimals
Profit = 2000 x { ( 0.468) – (0.4) }
Profit = 2000 x 0.068

Profit = $ 136

What if we were only trading $1 per trade?

Let’s work that out:

Profit = Trades x $ Amount x { ( Success x Payback) – (1 – Success ) }

Profit = 100 x $1 x {(60% x 78%) – (100% – 60%)}
Profit = 100 x $1 x {(0,60 x 0,78) – (1,00 – 0,60)} work it out in decimals
Profit = 100 x { ( 0.468) – (0.4) }
Profit = 100 x 0.068

Profit = $ 6.80

So, all that trading for $6.80 profit. See how dramatically your trade amount can affect the outcome?

Now that calculation assumes that the broker was paying out every trade at 78% which we know is very hard to find these days, especially on the lower expiry times.

We have seen the 5 minute payouts drop below 50% on binary.com a lot.

Let’s say that we had a 60% payout for the same 100 trades.

Profit = Trades x $ Amount x { ( Success x Payback) – (1 – Success ) }

Profit = 100 x $1 x {(60% x 60%) – (100% – 60%)}
Profit = 100 x $1 x {(0,6 x 0,6) – (1,00 – 0,60)} work it out in decimals
Profit = 100 x { ( 0.36) – (0.4) }
Profit = 100 x -0.04 ( yes, that is a negative 0.04)

Profit = -$ 4 Yes that is minus $4. means that you lost $4

Remember that all these calculations assume that your success rate is winning at 60% which means that you winning 60 out of 100 trades.

Fall below that strike rate and you will find it very difficult to show a profit.

Hopefully now you will understand why many people say that binary options trading is the hardest type of trading that there is, even though the concept is so easy to understand;

Predict whether an asset will go up or down in a fixed time period and do that over and over again.

Not so easy.

We hope that knowing the maths behind binary options will help you in your trading adventures and also know BS when you see things like “invest $100 and make $2000 in one week” and things like that.

Knowing the maths, you will know that is a straight out scam and impossible.

In summary, let us look at 100 trades with a 60% ITM and with different trade amounts and the outcomes that we experience with our copy trading and robots, where the minimum payout is set at a minimum of 70% to give you an idea of what you can expect.

Profit = Trades x $ Amount x { ( Success x Payback) – (1 – Success ) }

Profit = 100 x $1 x {(60% x 70%) – (100% – 60%)}
Profit = 100 x $1 x {(0,6 x 0,7) – (1,00 – 0,60)} work it out in decimals
Profit = 100 x { ( 0.42) – (0.4) }
Profit = 100 x 0.02
Profit = $2

So with 100 trades for the month and with a 60% ITM outcome and a 70% payout we would get the following returns with different trade amounts:

$1 trade amount =$2 profit after all that.
$2 trade amount = $4
$3= $6
$4=$8
$5=$10
$6=$12
$7=$14
$8=$16
$9=$18
$10=$20
$20=$40
$30=$60
$40=$80
$50=$100
$100=$200
$500 =$1000

How about with a 65% ITM which we get quite often and 100 trades with a minimum payout of 70%?

Back to our formula:

Profit = Trades x $ Amount x { ( Success x Payback) – (1 – Success ) }

Profit = 100 x $1 x {(65% x 70%) – (100% – 60%)}
Profit = 100 x $1 x {(0,65 x 0,7) – (1,00 – 0,60)} work it out in decimals
Profit = 100 x { ( 0.455) – (0.4) }
Profit = 100 x 0.055
Profit = $5.5

Now we look at what we would get with different trade amounts with 65% ITM and 100 trades with a minimum payout of 70%

$1=$5.5
$2=$11
$3=$16.50
$4=$22
$5=$27.50
$6=$33
$7=$38.50
$8=$44
$9=$49.50
$10=$55.00
$20=$110
$30=$165
$40=$220
$50=$275
$100=$550
$500=$2750

Of course there will be many trades in there that payout more than 70% and as high as +90%, but the minimum would be 70%.

I hope that you are starting to understand the reality of trading binary options and that it is a maths problem to be overcome as well as a trading one.

Of course the easiest way to affect the above outcome would be to increase the number of trades in a month.

Bearing in mind that 100 trades per month is basically 100 trades over 20 trading days in the month which is basically 5 trades per day.

To double the profitability of the above mentioned trade results we would need to double the number of trades in the month and that would be doubling the number of trades per day to at least 10.

Let us look at the above 2 examples and this time with 200 trades for the month and with 60% ITM and 65% ITM and a minimum payout of 70%:

Back to our formula for 60% ITM and 200 trades

Profit = Trades x $ Amount x { ( Success x Payback) – (1 – Success ) }

Profit = 200 x $1 x {(60% x 70%) – (100% – 60%)}
Profit = 200 x $1 x {(0,6 x 0,7) – (1,00 – 0,60)} work it out in decimals
Profit = 200 x { ( 0.42) – (0.4) }
Profit = 200 x 0.02
Profit = $4

$1 trade amount =$4 profit
$2 trade amount = $8
$3= $12
$4=$16
$5=$20
$6=$24
$7=$28
$8=$32
$9=$36
$10=$40
$20=$80
$30=$120
$40=$160
$50=$200
$100=$400
$500 =$2000

Back to our formula for 65% and 200 trades

Profit = Trades x $ Amount x { ( Success x Payback) – (1 – Success ) }

Profit = 200 x $1 x {(65% x 70%) – (100% – 60%)}
Profit = 200 x $1 x {(0,65 x 0,7) – (1,00 – 0,60)} work it out in decimals
Profit = 200 x { ( 0.455) – (0.4) }
Profit = 200 x 0.055
Profit = $11

$1=$11
$2=$22
$3=$33
$4=$44
$5=$55
$6=$66
$7=$77
$8=$88
$9=$99
$10=$110
$20=$220
$30=$330
$40=$440
$50=$550
$100=$1100
$500=$5500

Now that would be a lot of trades per day for any human trader and that is why we like trading the binary options with our robots so much, as that can be done by a robot more easily than a human.

We hope that has given you a better idea of what to expect from trading binary options.

Increase any of the values in your formula and your outcome improves.

The reality is that we looking to get between 60-65% ITM and with a minimum payout of 70% and the more trades the better.

Account Funding + Trade Amounts

The biggest mistake most binary options traders make is trading too large a percentage of their account balance.

The absolute maximum percentage of your account balance that you should be trading is 5%.

So if you wanted to be trading $5 per trade, then you should have your account funded with at least $100.

If you wanted to be trading $10 per trade, then you need your account funded with at least $200

How often do we see traders with $50 accounts and trading $5 per trade?

That is 10% per trade. Lose 5 trades in a row and now your account is down to $25 and your next trade of $5 is actually 20% of your account balance.

This is too much.

Don’t go over 5% of your account balance per trade and make sure that your account is funded correctly.

Also with regards to this 5% we make all our copy traders copy us with a 5% Custom Risk percentage which is compounding.

What this means is that as your account balance increases, so will your amount per trade, even though it is set at 5% and vice versa.

When you are on a losing run, your trade amount per trade will decrease.

So basically increasing your amount per trade when you winning and decreasing your trade amount per trade when losing.

Summary

Try and increase any of the numbers in your formula and it will increase your outcome.

The easiest one for you to increase would be trade amount per trade.

To do that you need confidence in your system or strategy, so be sure to demo test first and then when you are confident that you have an edge, throw as many trades at it as you can and as large a trade amount per trade as you can afford.