Due to binary options trading not allowing for a better, more acceptable risk vs. reward ratio, such as the popular Forex trading, the sweet spot between quality vs. quantity is highly debated among traders. This is a very interesting and debatable subject. When we have a look at the statistics baking up each side of the argument, we can come to a clear conclusion, yet to some this still not a sufficient conclusion.
I hope this article will clear things up and somewhat put the debate to rest, while reflecting the earning potentials when it comes to binary options trading. What made me decide to write this article you may ask. I am simply tired of the “You cannot make money trading binary options due to the low risk reward” theory!
What Is Risk To Reward
Risk Reward is a ratio used by many investors to compare the expected calculated return of their investment. This ratio is calculated mathematically by dividing the amount he or she stands to lose if the price moves in the unexpected direction (i.e. the risk) by the amount of profit the trader expects to have made when the position is closed (i.e. the reward).
Binary Options Risk Reward Ratio
Unlike Forex the risk:reward ratio is predetermined by the In-The-Money payout offered by the broker for the selected asset. It never even gets close to a 1:1 as the ITM payout ranges from as low as 60% – 86% respectively. In ratio terms we are looking at 0.6:1 – 0.86:1, not even close to a even risk to reward. So in theory, risking 1 will only return a potential reward of 0.86(+ your initial investment). Some brokers might try and make it seem higher than it really is by displaying a 186% return, while in theory it is only your initial 100% risked + 86% reward.
In Money Terms
Risking $100 will only provide an $86 profit or return on investment. You receive $186 back when the trade expires where $100 is your initial investment and the remaining $86 is your profit.
The Statistical Data
You might say: “Hey, 1 win and 1 loss = a loss”. Right indeed! A win and a loss does not break even. For every loss you need at least 2 wins to earn your money back including a small profit on the side. So logic tells us that it should be better to aim for quality potential trades vs. quantity. 2 Wins 0 Loss > 4 Wins 2 Loss. 2 Trades vs. 6 trades. 2 Wins vs. 4 Wins. So every loss sets you back 2 wins. This is why most people turn down binary options. The risk does not justify the return. In a sense that is true, but taking all the other factors into account it has its benefits over Forex where you can aim for a 2:1 risk vs. reward ratio.
- Trades can be as short as 60 seconds
- Custom/Flexible expiry times
- Can’t lose more than you risk
- Know your potential risk vs. reward in advance
- Lower equity required
- No margin calls
These are just a few benefits over other forms of trading, but the list goes on…
Coming To A Conclusion
Binary Options Trading does not deserve all the negativity it is getting regarding risk to reward ratio. There are plenty of possessive points and benefits that make it worth while. In some cases Forex traders see these opportunities and hedge Forex trades with binary trades. In no means should binary options be seen as an easy way to make money, as this will get the better of you. The same research and market education should be taken into consideration as with any other form of trading.