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.

Money Management

Using different money management techniques can help.

We incorporate a few with our binary bots.

The most popular one is definitely the Martingale.

The Martingale being the one where you double up after each loss until you have a winner and that winner will recoup all your losses and show a small profit.

If the payout was 100% we would just double up, but with binary options we usually multiply by 2.2 to cover the below 100% payout.

Actually, the Martingale is quite well suited to binary options trading, especially off the higher time frame charts and expiry times.

For example on our free copy trading we are trading on the 1 hour charts and we only initiate a trade after 4 consecutive 1 hour candles of the same colour have formed and some other criteria, then we enter a trade in the reverse direction.

If that trade fails we immediately reenter with a Martingale again and if that losses, another Martingale trade and so on for 7 reentries.

If you take a look at any 1 hour chart , it is super rare to find 12 consecutive 1 hour candles of the same colour, if at all.

So, that is the premise of that.

Of course the brokers are aware of these things.

In the case of binary.com they have a period between 9pm – midnight where you can not place a 1 hour trade and the minimum trade duration is 5 hours.

This would break your progression.

Aside from that, the Martingale does do rather well with binary options on the higher charts and expiry times as long as you stick with it.

That is why we suggest using a binary bot for that.

You can check out our copy trading on this page.