Binary Trading

Binary Trading

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:

  1. 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.
  2. 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.
http://www.thetimes.co.uk/article/7273cf52-7d0b-11e6-bfdb-4199e9559171

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.
http://www.thetimes.co.uk/article/b8cdedfa-87f8-11e6-8242-d338f8b15268
Wishing you health, wealth, and happiness as always.

 

Spread Betting

Spread Betting

Spread Betting or Spread Trading, as I understand it, is trying to predict the future value of a financial market, and profiting from a correct prediction. This sounds similar to Trading at first sight. However, there are some advantages of Spread Betting over Trading, especially for those of us with less disposable income, and I shall try to cover these points as best I can.

  • You don’t need as much money to play the market: With traditional Trading you buy stocks, and shares, and currencies, and all that stuff, because you predict that its value will rise and you will be able to sell that stuff at a later date to realise a profit. With Spread Betting you never actually own any stocks, or currencies, or stuff. This means that you can wager as little or as much as you have, much like on a horse race where you can wager £1 to win or £1000 to win, for example.
  • You can win with Spread Betting if a market goes down as well as up: With buying stuff, you have to see that stuff increase in value to realise profit. With Spread Betting you are placing a wager in whether you think the market will increase or decrease in value. If you are right you still win, so in theory this doubles the opportunities to be right. Of course, you could argue that this also doubles the opportunities to be wrong.
  • There are much lower costs involved in Spread Betting: There are no commission fees to pay brokers in Spread Betting because you are not buying or selling anything physical. There is a slight commission built into the difference between whether you decide a price will increase or decrease. In Spread Betting speak this is known as the bid-offer spread. This of course in practice means that the more you trade the more costs are involved. Spread Betting is, however, free from capital gains, income, and stamp duty taxes. This is why it is popular.
  • Immediate Dealing: All wagers are between the Spread Betting company and you so they almost always get approved immediately. There is no broker to go through, no exchange to trade through, no having to wait to find someone willing to buy or sell at the other end at the price you want.
  • Extended hours: In most cases Spread Betting companies are open outside the traditional opening hours of the markets. This means in practice being able to Spread Bet 24 hours a day, at least 5 days a week.

That’s a brief list to start. There must be downsides though too, right? Well the main one I can see is you can lose more money than you started with if you are not careful. Let me explain. With a trade you buy, for example, shares. Lets say you buy ten shares at £1 each, total investment £10. If those shares go up in value to £1.20 per share and you sell them you get back £12, £2 profit. Lets ignore broker fees and taxes for now. If those shares go down to £0.80 and you sell them, you are left with £8, a £2 loss. With Spread Betting you wager a specific value per point of movement. Lets say you think the GBP will rise against the USD. You wager £1 per point, and the GBP goes up 50 points. You have potentially made £50 from £1. However, if like on 24th June 2016 the GBP/USD market opened at 14881 and closed at 13679, the value of your GBP would have dropped 1202 points, losing you potentially £1202. This is why in the Spread Betting game, stop losses are important. This basically means if the market goes in the wrong direction from my wager, how much am I willing to risk losing before I cut my losses and close the trade, instead of waiting to see if the market changes and moves in my favour. It is for this reason I also think it sensible to decide how much you want to win before closing the trade. Markets can look like they are moving in the right direction, and then suddenly change their minds and move the opposite way.

Of course the next question is, what’s a sensible exit point on wagers, both in terms of winning and losing. I guess that to some extend that depends on the volatility of the market. The GBP/USD market moves on average about 120 points a day, whereas the AUD/HKD market could move over 500 points a day. You have to remember that whatever timescale you are checking market charts in, to attempt to predict future market directions, the actual price of the market changes every second. It’s all a bit complicated really, and certainly not for the faint hearted. It’s not just a simple black or red roulette bet. You definitely need your wits about you and a proper staking plan.

Ok, so i’ll try and explain this in practical terms. What is a staking plan? You have £200 spare that you want to use to try your hand at this Spread Betting thingy. Every time you place a bet on a market you will potentially lose a portion of your £200. Lets say, sensibly that you can wager £10, or in other words 5% of your pot. This will give you 20 attempts to try to win the markets. Now, if you are wagering £1 a point, which is the minimum on most Spread Betting platforms, that only allows you a move of 10 points in the wrong direction before your stop-loss kicks in and the trade is closed. £10 loss. At 13.10 today in a 5 minute window the GBP/USD market moved 17 points from a high of 12516 to a low of 12499. That’s a move of 17 points. It would appear that the stop loss is not big enough here to cope with the volatility of this market. It’s true that there are the occasional companies out there that will offer 50p per point or even 10p per point spreads, but these are not the norm, and I would check closely the conditions attached. Is it for a limited period of time for example.

So, back to my original £1500. Well feeling like a potential lamb to the slaughter here, I would not want to risk more than 10% of my pot to experiment with this market, and it seems like that would not be large enough to cope with the vagaries of the market in this instance. If you do have a larger pot to play with than me, and think that this is something that could interest you going forward, these would be my words of advice:

  • Research different methods of predicting trends in the markets. There are loads of books, and sites out there on the subject.
  • Most importantly, test out these theories, because that’s what they are, by opening up a demo Spread Betting account.
  • Only once you have successfully implemented a strategy with a demo account should you attempt to spread bet live.
  • Be prepared for it to still go wrong when you go live.

I’m still interested in the idea that I can make money from the markets. I don’t however, want to have to spend my whole day, such as it is, staring at price movements to see if my theories will prove practical. If I haven’t got the cash to warrant playing the spread betting game, no matter it’s appeal, I need to leave time to explore other income avenues.

I haven’t completely given up hope here yet. There is one more area to look at here, and that is the little brother of Spread Betting, Binary Trading. More on that next time.

Health, wealth and happiness to all.

 

Thoughts on Trading

Thoughts on Trading

What do I mean by trading? I’m talking about looking into the profitability of trading the financial markets: forex; stocks; commodities; etc. On first glance, it seems like there’s a lot of money to be made here. You could be forgiven for thinking that places like London and New York have built their wealth from them. If you’ve ever travelled to London, you can’t help be impressed by the view of Canary Wharf on the skyline, and you’ve seen the film Wall Street haven’t you? Watch it if you haven’t. Classic.

So how do you make money from the financial markets? Well, a lot of people trade, which as far as I can see, means buying stocks, shares, etc., at one price, and hoping to sell them at a profit. It’s a multi billion pound, dollar, whatever other currency you can imagine, industry, so like with all places where large sums of money are at stake, I imagine that it’s also probably a bit of a bear pit.

I can see the attraction of trading. The opportunity to make vast sums of money, just you and your pot of cash, pitting your wits against the ebb and flow of the marketplace. No customers to please, products to make, staff or premises to pay for. All you need is a phone, computer, and a fairly decent internet connection.

However, trading is a potentially expensive occupation. I would say that you need a fairly large pot to start with if you hope to make any decent money. You need the cash to buy the stocks, commodities, currencies, and every time you buy something in the hope that it will rise in value there is a stock broker commission to pay for that trade. This means that either the value of the trade will need to have been large enough, or the trade will need to have increased in value a large enough amount, to offset the commission for placing the trade in the first place. With a small pot of cash like mine, I can probably rule this out as a viable option. It’s a big boys game.

So are there any options out there in the financial market for the little guy? Well, yes there are in theory. Spread Trading is one. More commonly referred to as Spread Betting. Interesting. So why do you think it is referred to as betting? I guess the main concept here, whether you’re actually buying stocks and shares, or so called Spread Betting, is that you are trying to predict the FUTURE value of something, and this is very similar to the more traditional vision of betting where you try and predict the FUTURE result, of say a football match or horse race. The financial markets may have more of an air of respectability, or maybe not if you think of fairly recent news of “Banker Bailouts” and “Financial Scandals”. In fact, the more you look into dodgy practices, to make a fast buck in the financial markets, the more dirt you find, so perhaps the markets just have the financial capital to invest to make themselves seem respectable. Just a thought. Anyway, regardless, it is a huge market, which attracts a huge amount of investors, and traders, with the potential promise of making vast sums of money, or should I call them customers? I think it’s probably the market makers of the financial markets that make the most profit from the commissions they charge on every trade. Much like the casinos who have an inherent “house edge” with all the games of chance they offer, or the online poker sites who have a “table rake” for every hand dealt. You can probably see the game here. Imagine charging one pence a game, but a thousand games where played a minute. That’s £10 a minute, or £600 an hour, 24 hours a day, 365 days a year, somewhere in the world. These are just made up numbers to prove a point. I’m sure the actual numbers are much larger. Basically, trading something in the financial markets is just the equivalent of cleverly packaged game.

Having said all that, people love games. They especially love games if there’s a chance of winning vast sums of money. So what are the chances of winning at trading? Well if you belief the numerous statistics on the internet, it would appear that the less than 5% of people become successful traders. Interestingly, the success rate is higher for women, but in reality, probably only marginally. Trading, unlike investing, is a zero-sum game. Well, actually, a negative sum game if you take into account broker costs. It would seem like as long as the game exists, the only people that consistently win are the brokers. However, the size of the market is vast. The forex market, for example, which seems to be the largest by far, where 90% of the volume is generated by currency speculators, is worth roughly $5.3 trillion a day, or $220 billion an hour!! You can understand why the market is so popular, and with less than 5% of traders making the money, you can imagine the profits for the few. Is this any different from say the chances of becoming a well paid football player? The chances there are reported as less than 1%, and it no doubt has less longevity.

So you’ve seen the odds of winning the game, and don’t have much money to start, but you still like the idea of winning in one of the biggest games in town. I would say under these circumstances treat it like a hobby. What I mean is look after your expenses first: rent; food; clothing; bills; living expenses. If you have spare cash and time after that, why not try and win the trading game. It is just like any other hobby where you spend money on the enjoyment of the pursuit without any immediate returns. You might pay for golf club membership, and invest time and effort in lowering your handicap, but there is no guarantee of joining The Tour. You might enjoy painting, and spend money on materials and canvases, and time perfecting your craft, but you may never sell a single painting, let alone be shown in a gallery. All I’m saying here is, do it if you enjoy it, but only do it with money and time that you are prepared to lose. After all, in all walks of life, no matter the odds, some people win. You’ve got to be in it to win it, and all that.

I’ll take a closer look at Spread Betting next time. For now, as always, wishing you all health, wealth and happiness.

Whilst I remember, for all of you out there with some Chinese heritage, happy new year for tomorrow, or maybe that should be xin nian hao and gong xi fa cai.