You may be approaching binary options as an actual investment or you may be doing it to gamble for fun. Regardless of your reasons for trading binary options, it’s part of responsible money management to understand why your broker has the house edge over you, and a pretty substantial one at that. Since the “odds” on every trade you make are different, you can’t calculate this in the traditional fashion, but what you can look at are the payout percentages and out-of-money rewards and how they impact your trading experience. The reason that brokers don’t pay out 100% on winning trades is that paying out a smaller percentage does give them an edge.
Read more on Why Binary Options Trading is Simple, Not Easy
Example For Reference
Let’s look at an example so you can understand how this works. Let’s say you’re going to invest $100 on a binary options trade. If you win, the trade will pay out 75%. If you lose, it will pay you back 15%. If you win this trade, you will win $75.00. If you lose, you will receive $15.00 back as a refund. While some binary options trades will pay out a higher win percentage than this, 75% is fairly typical. Notice how there is a gap between the percentages? 75% + 15% doesn’t add up to 100%. It adds up to 90%. That additional 10% always goes to the house (or stays with the house)—you don’t get it back if you lose a trade, and you don’t win it if you win a trade.
If you were to make 100% on each of the trades you won (this isn’t going to happen with any binary options broker), and received no refund on lost trades (for the sake of simplicity), it should be intuitive to you to realize you’d need to win half of your trades in order to break even over time. You’d need to win more than half of your trades to be profitable. Now consider that you’re not going to make 100% on any of your trades, and again, your refund when you lose is pretty marginal. Let’s say you started out with $1000 and placed 10 trades of $100 each, and that you won 60% of them.
Here’s how things could play out if you got 75% for each win and 15% back for each loss:
Trade 1: Win: +$75.00.
Trade 2: Loss: -$85.00. (because you’re only getting $15.00 back as a refund)
Trade 3: Win: +$75.00.
Trade 4: Win: +$75.00.
Trade 5: Loss: -$85.00.
Trade 6: Win: +$75.00.
Trade 7: Loss: -$85.00.
Trade 8: Win: +$75.00.
Trade 9: Win: +$75.00.
Trade 10: Loss: -$85.00.
Wins total to $450, and losses total to $340. Subtract the losses from the wins and …
Wow, 10 trades later you’d win a whopping $110!
In this situation, had you won five trades and lost five trades, you wouldn’t have broken even; you’d have lost $50.00. And now think if you didn’t even have $1000 in your trading account. A lot of people start out with just a couple hundred dollars. If you weren’t smart enough to only trade a small percentage (and 10% as in the above example is still rather high), you could blow your account in just a couple of trades. Imagine if you had $200 deposited and you invested $100 on each trade. If you lost your first three trades, you’d lose all the money in your account. Losing three trades in a row, even with a great system, isn’t an amazingly long losing streak by any stretch of the imagination.
So that means that if you do have an account with a mere $200 deposited, in order to trade intelligently, you’re going to want to trade maybe $20 each time around. Now that you have that in mind, can you see why it’s ridiculous to believe that you can turn $200 into $200,000 overnight?
Does that mean there’s no point to binary options trading? Not necessarily. It just means that you should appreciate the house edge and take that into account when you manage your money. If you’re gambling for entertainment, there’s no reason you can’t have as much fun with binary options as you can with a casino game. Just as you’d learn about the house edge before you spent your money playing poker or roulette or a slot machine, it’s important to know how to manage your bankroll when you trade binary options.
And if you’re a serious trader, it’s important that you realize just how high a win percentage you need in order to do well with binary options. If you’re starting with a small account, you should have a realistic view of how long it’s going to take you to establish yourself and become a successful, profitable trader. There’s nothing wrong with this. All professions take a long time to get started in if you’re building from the ground up, and patience is an important quality in any trader.