Profit and Risk

In order to be profitable in binary options, you need to at least understand the mathematics behind it.

You need to understand the following formula:

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

Where:
Profit is the calculated profit in the last month
Trades is how many trades were realised in the last month
Amount is how much money you use for each trade
Success is how many trades were positive
Payback is how much the broker  paid for a positive trade

Example:
In a certain month there were 200 trades taken, with a success rate of 60%.
The broker payback is 80% and you have used $10 per trade.

Let us input our numbers into our formula:

Profit = Trades x $ Amount x { ( Success x Payback) – (1 – Success ) }
Profit = 200 x $10 x {(60% x 80%) – (100% – 60%)}
Profit = 200 x $10 x {(0,60 x 0,80) – (1,00 – 0,60)} work it out in decimals
Profit = 2000 x { ( 0.48) – (0.4) }
Profit = 2000 x 0.08

Profit = $ 160

What if we only had 100 trades taken for the month?

100 trades per month averages out to 5 trades per day, which is 25 trades per week and 100 trades per 4 weeks.

This is what the traders in our copy trading aim for and average.

Let us do our calculation with 100 trades taken per month.

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

Profit = 100 x $10 x {(60% x 80%) – (100% – 60%)}
Profit = 100 x $10 x {(0,60 x 0,80) – (1,00 – 0,60)} work it out in decimals
Profit = 1000 x { ( 0.48) – (0.4) }
Profit = 1000 x 0.08

Profit = $80

That assumes that you were trading $10 per trade.

What would the results have been with different trade amounts per trade?

$1 = $8

$2= $16

$3=$24

$4=$32

$5=$40

$6=$48

$7=$56

$8=$64

$9=$72

$10=$80

$20=$160

$30=$240

$40=$320

$50=$400

$100=$800

Hopefully that gives you a better understanding of how binary options works.

As you can see, with 100 trades per month and a success rate of 60% and an average payout of 80% you can generate a profit.

However if you want to make it a worthwhile endeavour, you will need to increase your trade amount to an amount that will generate a decent return..

Trading with just $1 per trade in our example, would generate $8 for the month and if you were following our copy trading service, the copy trading cost per month is $12.50, therefore you would not have even generated enough profit to pay for the subscription.

So you are going to need a decent amount per trade to make it worthwhile.

Now the next part to understand is:

Account Funding

We suggest to have your account funded correctly and to trade with only 1-3% of your account balance .

3% is the sweet spot.

For example if you wanted to be trading $3 per trade, then ideally you want to have your account funded with at least $100 and that would be 3% of your account balance.

If you wanted to be trading $6 per trade, then ideally you would need an account funded with at least $200

Trading with $9 per trade and hoping to target a $56 return would require an account funded with at least $300

I am sure that you get the point.

By the way, don’t scoff at a $56 return per month on a $300 account.

That is an 18.6% return per month and a 224% return per annum.

Now the reason why we only want to be trading with a maximum of 3% of our account balance is because most losing trades seem to come in clusters.

Taking our above example where we took 100 trades for the month and had a 60% success rate; that means that we won 60 trades and lost 40 trades.

However, those 40 losing trades do not come nicely spaced out during the course of the month, but usually they come in clusters or groups.

It is not uncommon to see 5 or more losing trades in a row and on a really bad run, you could easily have up to 10 losing trades in a row.

Now losing 10 trades in a row is not that common, but it sure does happen from time to time.

Now let us say that we did have a losing sequence of 10 trades in a row.

If we are trading 3% of our account balance, that would be a total loss of 30% of our account balance. Not great, but we still alive to fight another day.

Now if we were trading 5% of our account balance, that means we would have lost 50% of our account balance with those 10 losing trades in a row.

Now, all is not lost, but losing 10 trades in a row can be psychologically hard to handle, never mind the fact that you have just lost half of your account balance.

Then finally let us say that we were trading 10% of our account balance per trade.

Well obviously 10 losing trades in a row will result in that account being blown.

So stick to 3% maximum of your account balance per trade or less.

Managing Risk

If you stick to trading just 3% of your account balance maximum, you can look forward to being able to survive the  inevitable draw-down periods and still be in the game for the winning trades.

With just a 3% trade amount per trade you can easily be looking at a 20% return per month.

That means that you could potentially double an account in 6 months and triple an account in a year.

4% and 5% could be much more profitable, but the reward does not really match the risk at this level and we do not recommend anything above 3%.

Make sure that your account is funded correctly.

Seriously, this is the single most contributing factor that leads to people blowing up their accounts.

Trading more than 3% of account balance inevitably leads to losses.

You have to manage risk and 3% of your account balance per trade is acceptable risk management.

Having said all that, you still want to be making money at the end of the day and so you will need to be able to cover your subscription costs before banking any profit.

Therefore you should aim to have your account funded to the maximum that you can afford and trade the 3% of the account balance and build it up slowly but surely, month after month.

Why most traders fail at trading binary options:

Trading too large a percentage of their account balance per trade.

Success rate of below 59% continuously on a monthly basis. It is inevitable to have a losing month here and there, but you need to be getting 60% and above over the majority of your trading months.

Not getting in enough volume of trades on a monthly basis. (hint: you are going need at least 100 trades per month, and the more the better)

Giving up too quickly after a sequence of losing trades.

It is very easy to have a losing sequence of 8 or even 10 trades in a row, but as long as you are not trading more than 3% of your account, you can survive it and still be in the game for when the winning sequence comes along. You need to stick with it.

Best course of action

We actually recommend that you rather spend the time and effort to actually learn how to trade spot forex correctly.

Surprised by that recommendation?

Honestly, it is a much more sustainable course of action than trading binary options.

With binary options, you are trying to predict the direction of an asset in a certain time period as opposed to spot forex trading, where you only need to predict the direction.

Trying to predict the direction of an asset is challenging enough, but to also have to predict the time in which it will happen is very difficult.

With binary options the risk to reward is always negative, meaning that you risk 100% for a reward of generally always less than 100% like possibly 80%.

With spot forex trading you can risk 100% for a return of 120%, 150%, 200%, 300% it is up to you and your appetite for risk to reward and your strategy.

Thing is with binary options you will need to be winning roughly two trades for every losing trade that you have and with spot forex trading you can quite easily turn this on it’s head and show a profit by winning just one trade and losing two just by using the correct risk to reward ratio.

Plus with just about every spot forex broker you will have the option to use leverage, which means that the broker is actually giving you credit to trade a larger position size than actual money you have.

Binary options trading could quite possibly be the most difficult type of trading there is, once you really understand the fundamentals of it.

Visit our page on Forex Signals where you can learn proven forex strategies that work in the real world and all about risk to reward ratios, by a team of professional traders and at the same time, get spot forex trading signals that you can use to generate some profits.

This is quite honestly the better long term solution .

If you still want to trade binary options, then we suggest that you do it more as a speculation and throw as many trades at it as you can by using copy trading, your own trading and making use of robots.

=>=> Visit ForexSignals website