Hi everyone. Today I’m going to try to explain Binary Trading. I think it’s a bit like Spread Betting where you are basically gambling on the future value of a financial market, but it is a lot simpler. It’s more….Binary.
With Binary Trading you decide whether you think a market will rise or fall in the future, much like Spread Betting. With Binary Trading, however, you also set the timeframe into the future. So, you say whether a market will be higher or lower than it is now, over a given timeframe: 1 minute; 5 minutes; 15 minutes; 1 hour; 1 day; 1 month; etc. It does not matter whether the market goes up or down in the time in between. It only matters what the market rate is at the time in the future you specify. This might not be true. You may be limited to particular future timeframes, as opposed to saying ” I would like to bet on the market being higher than it is now in 7 hours, 13 minutes, and 53 seconds”.
This means, that unlike Spread Betting, you do not have to risk losing more money than you’ve wagered, so there is no need to worry about stop-losses to limit your liability. It’s a simple bet where if you are right you win, and if you are wrong you lose your initial wager.
Of course, like with most gambling, you have to be aware of the “house edge”. Different Binary Trading companies that offer this game need to make money to keep offering this game, otherwise, what is the point. They do this by not making it an even money game, a bit like adding a zero to a roulette wheel so you don’t get true 50/50 odds on black or red. FYI the odds of winning red or black roulette is 18/37 or 48.64%. And this is just European Roulette with one zero. American Roulette is worse. Anyway, keeping European for a minute, the house has 51.36% chance of taking your money. The difference 2.72% is the house edge.
With Binary Trading companies, from what I have seen, payouts for winning vary from 80% to 95%. I have to stress though, payouts vary depending on the markets, so look at this closely. Ok, so I’m going to quantify this with examples:
- With an 80% payout, if you wager £10, you either win £18, which is your initial stake back plus £8 winning, or you lose £10. In this scenario, for every 10 wagers, £100 paid if you win 5, lose 5, you gain £40, lose £50, so will be £10 down. If you win 6, lose 4, you gain £48, lose £40, so will be £8 up. Win 7, lose 3, you gain £56, lose £30, so will be up £26. Hopefully you can see here, that you need to be right 60% of the time to make an 8% return, but if you can be right 70% of the time you will make a 26% return.
- With a 95% payout, if you wager £10 you either win £19.50, or you lose £10. In this scenario, if you win 5, lose 5, you gain £47.50, lose £50, will be £2.50 down. If you win 6, lose 4, you gain £57, lose £40. Win 7, lose 3, you gain £66.50, lose £30. Here, being right 60% of the time will give you a 17% return, and being right 70% of the time a 36.5% return.
Hopefully, this simple illustration has shown you the importance of hunting out the best returns. Now lets look at the “house edge” for these different returns. with an 80% payout the house edge is 10%, with a 95% payout the house edge is 2.5%. This makes it favourable to a European Roulette table, even if you treated it as a purely random game.
The financial markets, however, have another advantage, in theory. The theory is that they are not purely random. They are, in theory dependent on, and therefore react to different world events. This is why people pay financial analysts. If you can follow a particular market, and understand what affects its price, you should in theory be able to determine which direction a market is due to move in. Now, according to the finance industry, there are two different schools of trading analysis: Technical and Fundamental analysis. These are definitely things you want to look into if you hope to give yourself an edge over the house. Remember, even with a 95% payout, you need to win at least 6 out of ten times to make a 17% return.
The other advantage of Binary Trading over Roulette, if you can give yourself an edge over the house, is that I don’t think there is as much of a house limit. I’m not sure on this however, and will have to research further. What I’m getting at here is, in theory, if you could consistently make 17%, compounding could increase your wealth considerably, much like in investing. Imagine you start with a pot of £200. Every time you bet on the Binary Trading markets, you wager £10. After ten bets your pot would be £217. After 100 bets your pot would be £370. Now lets say you can wager £15 a bet, sticking to an imaginary 5% staking plan. After the next 100 bets you in theory would have won £255 making your pot £625. Now for the next 100 bets you could wager £30 a bet, and could have made £510, making your total pot £1135. Lets assume you only make one bet a day. In just under a year you have turned £200 into £1135, giving you an annual return of 567%, all with only a consistent 17% return. And that is just year one. Of course these numbers are all well and good in theory, and rely on consistent returns, but hopefully you can see the idea behind compounding. Just to prove the point, the returns by the end of the second year would be a pot of £6405. From the initial £200 that is a 3202% return. Got your interest yet?
Now, lets balance this out with the potential downsides of Binary Trading. A word of warning. This information is UK centric to aid my understanding. Please check the guidelines that apply to your own country of residence. Currently in the UK, the FCA (Financial Conduct Authority) does not regulate Binary Trading. They call them Binary Options. They say that Firms dealing in Binary Options with remote gambling equipment located in Great Britain need to be regulated by the Gambling Commission (note the Gambling Commission’s remit is Great Britain rather than the UK). The FCA’s advice if you are going to deal in the Binary Options market are as follows:
- A firm based in Great Britain with a current licence to offer bets on binary options from the Gambling Commission. Such firms may or may not be authorised by the FCA for other financial services business but please note that, even if you deal in binary options through a FCA authorised firm, you will not be protected by the UK’s financial services complaints and compensation scheme. This is because binary options are not currently an FCA regulated financial instrument
- An EEA firm based in a Member State outside the UK which is authorised to deal in binary options and supervised by its home Member State’s financial services regulator, and which is passporting its services into the UK
- A non-EEA firm that is appropriately authorised or licensed and supervised in its home country
- You can link to the article here.
In practice it looks like most European regulated Binary Options brokers are regulated in Cyprus by CySec, the Cyprus Securities and Exchange Commission. I guess in practice it looks better to be regulated by a financial body instead of a gambling one, but I have seen logos for the MGA, Malta Gaming Authority, and the Isle of Man GSC, Gambling Supervision Commission.
From the FCA site there was also an interesting link to a warning issued by the city of London police, about social media enabled Binary options and Forex Trading fraud. It comes from the National Fraud Intelligence Bureau. You can read it here.
All interesting stuff. I guess the bottom line here is, like with all industries where a lot of money is involved, regulated or not, there are plenty of sharks in the water, and you have to be careful. Things that I would look out for are:
- Look for regulation as advised by the FCA. It’s no guarantee, but it is safer than going with someone unregulated. I believe the FCA is still consulting as to whether to bring Binary Options under their jurisdiction instead of the Gambling Commission.
- Check payout rates for best returns. Also check minimum deposits and minimum stake amounts. These can vary widely.
- Check the rules, carefully, before deciding whether or not to accept the free bonuses some sites offer. I would say these are best avoided, as they usually mean that you have to stake much more than your initial deposit before you are able to withdraw any funds. Basically, the bonuses act as a way of enticing you into increasing your volume of staking. As I’ve said before, remember the “house edge” every time to place a bet. More volume, more company profits.
- Be wary of company telesales people, claiming to be account managers, phoning you up, offering you financial advice to increase the profitability of your trading. They again are drumming up trade, trying to increase your deposit, get you to sign up to bonuses. Their advice is worth nothing. You will have no recourse if you listen to their advice and lose your money.
- Be wary of sites offering you foolproof automated Binary Options robots. There are plenty of people out there offering these services, and claim to have reviewed these systems with fantastic results, 80%+ success rates and all that. Unless you can demo a system and prove it works, or can devise a system you know works, don’t believe the hype. Most of these people have Affiliate links with Binary Options companies. They are just marketing tools to help drive traffic, and will get paid to do so. It is no coincidence that most of the sites they drive you to require a minimum deposit of £250.
- As with Spread Betting, find a demo Binary Trading account and test your ideas and theories before committing real cash. Otherwise, it’s just a roulette wheel gamble where ultimately, the house will win.
More on strategies and details of the best sites I’ve found to follow.
For those of you that are interested, I’ve added a couple of links to Times articles on the subject. They kindly offered me a reduced rate to reproduce them here, but being the cheap skate that I am, I decided only to add the links. Of course this does mean that you’ll only be able to view them if you are a Times subscriber, but that means I’ve got £100 to spend on other things.
The first article is a story of a man who has a reported amazing life of riches, based on his success in Binary Trading. People follow him on Instagram and Twitter. Turns out he is just a really good salesman. Most of his money is made by getting people to sign up to his trading advice at over £100 a month. He has also managed to personally recruit over 7000 people to trading sites, for which I’d guess he is handsomely rewarded.
The second is a story of a lady who lost over £600,000 Binary Trading, encouraged to riches by a pushy “account manager” at a Binary Trading company.
Wishing you health, wealth, and happiness as always.