Unlike forex or stocks trading where you determine your take profit and stop loss levels, Binary Options trading simplifies this process for you by fixing the win percentage and loss amount. Your decision boils down to:
Trading Binary Options
1. Whether price will go up or down
Trading Binary Options
2. The duration you want to wait before the decision is made
Why does the payout percentage drop when the binary option duration increases?
This is because the shorter the duration, the less time you have to see your prediction fulfilled. Trading binary options can be compared to a farmer planting fruits. A farmer can be reasonably certain a week before harvest, that fruits will appear next week. However, if you ask the farmer if fruits will appear in 60 seconds, he will tell you its a gamble. With binary option trading now available on Metatrader 4, traders can now employ charts and technical analysis to predict market direction. As with all technical analysis logic, the larger the timeframe, the less “noise” from the market and theoretically the more accurate the trade patterns. For these reasons, longer duration binary options have a lower return.
What is the payout ratio for Binary Option Trading?
This differs from broker to broker depending on their risk appetite, and the range can be wide from 60% to 90%. When you trade binary options, you are basically betting against the broker. It is either you win as the trader, or the broker wins as the house. In this article we feature an MT4 broker called NoaFX, regulated in New Zealand. From their trading platform, you can see the various payout ratios:
60 Seconds: 85%
3 minutes: 80%
2 hours: 75%
1 day: 70%
5 days: 70%
The shortest duration is 60 seconds all the way up to 5 days. If you predict the market price to be up in 5 days from where it is today and you turn out correct, you win 70%. If you are wrong, you lose 100% of the amount invested. Because it is easier to predict a 5 day movement compared to a 60 second movement, the payout is lesser.
What is the Win Rate required to have a positive expectation?
The lower the payout ratio, the higher the win rate you need to make a profit over the long run. With a payout of 85%, you need to win 54% of the time. With a payout of 70%, you need to win 59% of the time. The formula to determine return = Win Rate * Win % – Loss Rate * Loss %.