Table of contents:
- 1 The problem with variance
- 1.1 The possibilities for course analysis are limited
- 1.2 Many brokers offer free training or video courses where newcomers can learn how to analyze prices.
- 1.3 Without good risk management, binary options are gambling
- 1.4 Many brokers offer free training material
- 1.5 Even for good traders, a high risk remains
- 1.6 Conclusion: Binary options are financial bets whose probability of winning can be influenced
Binary Options are structured as simple financial bets: The trader has two possible events to choose from: The price for an underlying asset can either rise or fall after the specified time has expired. The trader bets a self-selected amount on one of these events. If this event actually occurs, i.e. if the price develops as the trader predicted it, he receives a profit. If, on the other hand, the event does not occur and the price does not behave as the trader originally assumed, the bet is lost.
This simple structure makes Binary Options very popular, especially with beginners, because trading is easy to learn. On the other hand, trading is often criticized because, by definition, it is actually a bet.
However, just because Binary Options are bets does not mean that it is not possible to trade them for profit. Most people know betting as a game of chance where it is not possible to make a profit in the long run. But that is not the definition of betting. Although Binary Options contain a high luck component, they are not a pure game of chance, because the probability of winning can be influenced by targeted analysis and a good understanding of the market. Whether a trader can be successful in the long run depends mainly on whether he manages to create Binary Options bets with a positive expected value. If the average expected profit per bet is higher than the stake, then it is a bet with a positive expected value. Those who make many such bets will make a profit in the long run.
Facts of Binary Options trading:
- Binary Options trading is like betting on rising or falling prices
- Sometimes you will need luck
- Binary Options are easy to understand
- Analysis can help you to win the trades
The problem with variance
As we have seen, Binary Options trading is all about making good decisions and placing trades so that they are won with the highest possible probability.
There are many different methods available for price analysis, from relatively simple to highly complex. However, even traders who are very good at price analysis and only make trades that should actually produce a positive result often suffer heavy losses and may even lose all their trading capital. How is this possible? If the traders have chosen the more likely outcome each time, they should actually make a profit. This is where the variance comes in.
The so-called expected value is an average value. If a trader places a trade that is won with an expectation value of 58%, it has a positive expected value. So, on average, the trader will make a profit if he chooses to make this trade.
However, there are still only two possible outcomes for the individual trade: It is won or lost. 58% only refers to the average. If a lot of trades are placed with this expected value, 58% of them will be won in the long run. On the other hand, this also means that 42% will be lost.
The more trades are placed, the more precisely the result corresponds to the expected value. This means that price analysis is always long-term. Everything is possible for the individual trade. Several trades of this type can be lost in a row, which can in certain circumstances endanger the trader’s entire investment. If, for example, 10 trades of this type are placed, it cannot be assumed that 5.8 of them will be won, as should be the case according to the expected value. On a small size, anything can happen. In the long run, however, if thousands of trades are placed, the result is quite close to the expected value. So if the trader has completed 100,000 trades at some point and had an average expected value of 58%, then it can be assumed that the number of trades won will be relatively close to 58,000.
The possibilities for course analysis are limited
Charts are available to analyze the price of the traded underlying accurately and thus be able to place good trades, users have many different methods and tools at their disposal. The price analysis can be learned quickly, but there are many complex subtleties that can be used to improve the result and new methods are developed regularly so that even experienced traders should always train themselves because they too can learn something new.
Trade Binary Options with a trusted broker:
Many brokers offer free training or video courses where newcomers can learn how to analyze prices.
Although price analysis is undoubtedly one of the most important tools in binary options trading and is essential for long-term success, it should not be overestimated. Some newcomers assume that with the newly learned analysis skills they can now win almost any trade, and some binary options advertisements suggest exactly that to their clients. However, since there are many unpredictable factors in the course of the prices and these can only be predicted very imprecisely, even with an optimally performed analysis, the probability of hits can only be increased slightly. A trader who is able to win about 55-56% of his trades with the help of technical analysis is already very good and can make a profit with most brokers, provided that he sticks to the necessary risk management. However, even this trader has to live with over 40% of lost trades.
Without good risk management, binary options are gambling
The variance in Binary Options is high because they are “all or nothing” bets that either yield a high profit or result in the loss of the entire stake. Since even a good price analysis can only very vaguely predict whether a trade will win or lose, there is still a very high luck factor for individual trades.
Due to the variance, almost anything can happen in the short term. With a lot of luck, significantly more trades are won than the probability calculation would allow and the trader makes a high profit. In this example, we speak of positive variance. On the other hand, a negative variance can also occur and the trader loses significantly more trades than the average expected value. Only if the number of trades is very high will the result be in line with the expected value and good traders will actually have a positive result.
The big problem with this is that many traders do not even come up with such a high number of trades because the negative variance strikes first and they lose everything. To avoid this, any trader who is serious about Binary Options trading and wants to avoid gambling should have good risk management in place. This means that only a very small part of the total capital is traded. This prevents traders from losing too much when trading with negative variance and thus not being able to continue trading. In the event of losses, the amount of the stake is reduced accordingly so that fluctuations do not have too great an effect on the total capital. Due to the significantly smaller stakes, profits naturally do not increase as quickly, which is why a high degree of discipline is necessary in order not to deviate from the planned risk management and still risk more. Many actually good traders block the way to success because sooner or later there is negative variance and the capital is lost due to the too high stakes.
Many brokers offer free training material
A well-executed, targeted course analysis is important for long-term success. Many aspects of price analysis can be learned by beginners directly from their binary options broker, as free training material is often provided. It is advisable to study this in-depth before starting to trade. Good knowledge of the subject will increase the chances of winning. Many brokers also offer a free demo account. Here, users can get to know the trading of Binary Options with play money and thus without risk and implement and deepen the newly learned strategies and analysis methods. Thus, no own investment is necessary to learn to understand binary options financial betting and to find out whether the trade corresponds to their own ideas.
Whoever has been able to gain initial experience through a free demo account and now wants to trade with real money should only ever deposit small amounts, which he can easily do without, because the danger of total loss is always present. Although this can be limited by appropriate risk management, it cannot be completely avoided even by the best traders.
Even for good traders, a high risk remains
Binary Options are considered a very modern trading product and are very popular. Critics, on the other hand, complain about the sometimes incomprehensible pricing by brokers and the high risk of loss. Despite all the analysis possibilities, Binary Options remain a highly speculative trading variant, in which luck plays a major role, at least in the short and medium-term. Even experienced traders who have extensive specialist knowledge cannot, therefore, make continuous profits, but often have to accept high losses. Although good risk management can reduce the risk of losing the entire deposit, there is no such thing as complete security. Therefore, before making the first deposit, all newcomers should be aware that although high profits are possible, the deposit may just as well be lost.
Conclusion: Binary options are financial bets whose probability of winning can be influenced
The accusation that Binary Options are pure gambling cannot be confirmed in this way, as there are ways to influence your chances, as the success of some trading professionals shows. However, it is true that Binary Options are financial bets where a wager is placed and, if the result is positive, a predetermined payout is made. The aim is to only make bets where there is a positive expected value. In this way, a profit can be made in the long term.
However, with Binary Options the risk should never be neglected because even professional traders expose their capital through the Binary Options to great danger. Since it is a highly speculative investment with extreme variance, it is possible and even probable that high losses will always occur. Total loss is also possible, which many traders have experienced first hand. Therefore, only money should always be used whose loss can be accepted without restrictions and never be deposited with a broker beyond one’s means, even if he encourages this by tempting promises.
Before registering and making a deposit with a Binary Options Broker, prospective clients should read the general terms and conditions carefully and check their seriousness. Only with a broker who trades fairly and according to the applicable regulations is successful trading with Binary Options possible at all.
Check out my other posts about Binary Options trading:
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