How Much Money Can you Really Make in Binary Options?
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Binary options trading is already a mainstream accepted activity on the internet. As explained and pointed out on multiple websites, trading binary options can indeed generate substantial revenues for attentive and dedicated traders. But how much money can you actually make?
The biggest mistake many traders make is not to calculate their winning margins and profit margins. Calculating these margins is absolutely necessary in order to become successful in binary options trading.
In the article below we’ll teach you how to calculate profit and winning margins in binary options trading. Understating these is absolutely necessary in becoming a winning binary options trader since otherwise you won’t be able to know if you are winning or losing until it’s too late.
However, before we talk about winning margins we should first briefly explain how binary options trading works.
How it Works?
In binary trading you will be required to predict the movement of certain assets such as currencies, commodities, stocks and more. If you accurately predict your bet, then you will be rewarded with a large sum of money. If you fail to make an accurate prediction, you will lose your investment.
How Winning Ratios are Calculated
In binary options you will also have to be able to calculate your winning ratio. In this form of trading you will be paid a commission in case you accurately predict a bet. This commission is proportional with the investment you made.
Each binary bet has a so-called payout percentage. This percentage is your profit percentage. In case you accurately predict your bet, your initial investment will be multiplied by this percentage. Your final prize will be your initial investment + this percentage of your initial investment.
Consider the following example:
- You invest $100
- The payout percentage is 80%
If you accurately predict your bet, then you will be rewarded with a sum of $180.
Winning percentages over 100% are extremely rare because in this case the broker will generally not make any money at all. If a payout percentage is of 100%, then the broker will only make money if more than 50% of all traders lose all the time, which is extremely unlikely.
But since payout percentages are below 100% most of the time, this means that you will have to win more than 50% of your investments in order to make money. There has to be a way to calculate this percentage in order to make sure that you are actually winning money and not losing money.
This is where calculating the breakeven ratio comes in.
Calculating the Breakeven Ratio
The breakeven ratio is the ratio of successful trades that you will have to achieve in order not to lose any money at all. Since payout rates are rarely above 100%, your breakeven ratio will always be above 50%. – In other words, you will have to win much more than just 50% of your trades in order not to lose money.
The breakeven ratio is calculated the following way:
B = Ot% / (I% + Ot%)
- B – Breakeven ratio
- Ot – Out of the money percentage
- I – In the money percentage
Lets explain what these mean:
Ot – The out of the money percentage is the percentage of your investment the broker will take away in case you don’t manage to accurately predict your bet. Most of the time this is 100%.
However, in some cases some brokers offer so-called rebates. Rebates are cash back bonuses on unsuccessful trades. Most commonly this is around 10%. So, if a broker offers a rebate of 10%, then your Out of the Money ratio is 90%.
I – This is the amount the broker will pay you out in form of profits if you accurately predict your bet. Basically, this is the payout percentage.
So, based on these, lets give you a concrete example. Imagine the following:
- The broker offers a payout rate of 80%
- The broker offers a rebate of 10%
This means that I = 80% and Ot = 90%.
Your breakeven ratio is calculated like this:
B = 90% / (80% + 90%)
B = 52,94%
So, in the above example you will have to win 52,94% of all your trades in order not to lose any money at all. If you achieve a ratio less than this, then instead of winning you will be losing money.
But the breakeven ratio is what its name suggests. It’s just the ratio that you will have to achieve in order not to lose any money. If you want to win, then you will have to achieve a ratio higher than this.
Profit Margin
If you want to know exactly what your profits are you will have to calculate your profit margin. This calculation is also extremely easy. All you need to know is calculating your breakeven ratio and your ratio of successful trades.
You can calculate your ratio of successful trades the following way:
- Imagine you invested a total of 100 times
- You had 75 successful trades
So, your successful trade percentage is 75%.
And finally, you can calculate the profit margin the following way:
P = Successful Trades – Breakeven Ratio
Let’s take the above two examples:
P = 75% – 52.94%
P = 22.06%
This means that overall you will be generating 22.06% profits on the trades in the above examples.
And it’s really this simple to calculate your profit margins in binary options trading. However, many people are unaware of these things and as such end up losing money. If you are interested in trading binary options then it’s an absolute must to use these calculation methods.
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Category: Binary Options
