Your Guide to Binary Options and Binary Option Trading

Your Guide to Binary Options and Binary Option Trading
By Eugene Jameson

A binary option is a fixed return option because there are only 2 possible outcomes which are fully realized at the onset of the contract

A binary option is a contract which gives the buyer (known as the owner) the right, but not the obligation, to buy an underlying asset at a fixed price within a specified time frame.

The items being traded are known as underlying assets and they could be a range of products: currencies (e.g. USD/JPY), commodities (e.g. Oil, Gold), stocks (e.g. Microsoft, Coca Cola) or indices (e.g. Nasdaq, FTSE 100). The fixed price at which the owner buys or sells at, is known as the strike price.

When trading binary options, the buyer of the option chooses whether he thinks the underlying asset will hit the strike price by the selected expiry time - this could be at the end of the nearest hour or the end of the day, week or month.

The owner places a call option on his binary option trade if he thinks that at the expiry time the option will be higher than the current price. He places a put option if he thinks that at the expiry time the option will be lower than the current price.

In this respect binary option trading is extremely flexible. The asset, expiry time and predicted asset direction can be controlled by the owner of the investment who can select each one as he desires. The only unknown factor is if the asset will expire higher or lower that its existing price.

The returns from binary option trades are set from the onset of the contract. If an option expires in-the-money then a buyer will receive between 65-71% profit on the investment amount. If an option expires out-of-the-money then with anyoption(TM), the buyer will receive a 15% payback on his initial investment. The certainty of binary option trading makes it a preferred method of trading for many investors since not only is the potential gain known from the offset, but more importantly the potential loss is fixed and they will not be called upon for cover an investment which ended out-of-the-money.

This is how trading binary options would work: Investor A invests $100 on a call option on Oil, with a 70% return rate, with an end of the day expiry time. The current rate of Oil is 65.9001. If at the end of the day the price of oil closes at 65.9002 or above, then Investor A will receive $170. If it closes at 65.9000 or below, then he will receive a $15 payback. The simplicity of binary option trading makes it an attractive and desired way of investing for many investors.

The difference with trading binary options to traditional trading is that in binary option trading, a buyer is just trading on the performance of an asset - they will not actually own the asset itself. For example, in a stock option trade in Microsoft, an investor is not literally buying Microsoft shares, but rather opening a contract on whether the shares of Microsoft will increase or decrease within a specified time period.

Due their uniqueness, binary options have several advantages.

They are easier to trade because only a sense of which direction the asset will move in is needed

There is a controlled risk which is known from the onset of the contract - the 2 possible outcomes are pre-determined and set by the buyer depending on how much he invests in the option

For a binary option trade to be profitable, the option must only move in the predicted direction - the magnitude of the move is not relevant hence it is easier to receive a payout

Binary option trading is extremely flexible, due to multiple expiry dates and times, the range of underlying assets on offer and the ability to trade online without the need for a broker

So, whether you are a investor new to the world of trading options or a old-time trader used to the traditional trading market, it is recommended to try your hand at the phenomenon that is binary option trading and see how it could work for you.

Your guide to Binary Options and Binary Option Trading

http://binary-options.com

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Consistently Profitable Over X Timeframe

By Michael S. Singer

Consistent Trading Profitability Over X Timeframe

We could be a day trader which holds no trades overnight, or we could hold trades a week, a month or even a year. Some traders may only make 10 trades per year whilst others might have 1,000s of trades. Every individual must decide the timeframe they wish to be consistently profitable over.

So developing our system we have determined which timeframe we want to be consistently profitable over. Now to achieve this goal we need a level of confidence or expectation of consistent profitability. You must determine what confidence level you expect to be profitable on a monthly basis e.g. I prefer to have 95% confidence level that we expect to profitable at the end of the month. Therefore, at most we will expect only a few losing months over 7 plus years of trading.

Expectancy really is not a critical component of being consistently profitable nor is winning percentage of each trade. The most important metric in determining consistent profitability is expected profit factor. The higher the PF for any system then the more chance of achieving consistent profitability.

Expected profit factor = (Probability of Win * Average Win) / (Probability of loss * Average loss)

First a trader must choose a timeframe they are comfortable with and then they must focus on profit factor and number of trades. The higher the PF and higher the number of trades the higher the expectation of consistent profitability which is the main goal of any trader.

A table displaying relationship between trade frequency and profit factor required to be profitable within a timeframe at a confidence level of 95%.

Number of trades... profit factor required:

10... 4.00

20... 2.50

30... 2.00

40... 1.75

60... 1.50

At 95% confidence level if you wish to be profitable every week and your system produced a PF of only 1.75, then you need 40 trades out of it to achieve this goal. Therefore, for a daytrading system to achieve consistent profitability you will have to trade 40 trades per day at 1.75 PF. This will be extremely difficult for a single system to have this many opportunities per day (excluding high frequency trading) and will be rare.

From this you can see that it is very unrealistic to achieve profitability every single month for a single system. Most models or systems traders use rarely trade over 30 times per month and getting profit factors higher than 2.0 is extremely difficult.

I hope this article highlights the dangers of unrealistic expectations in daytrading and emphasises the most important metric required for a winning system.

At Quant Savvy our Serenity Bot achieves this goal at 95% confidence level of profitability each month and we do this by combining multiple winning systems which are completely uncorrelated. This is the only way to produce consistent profitability in a selected timeframe.

Check out: http://www.quantsavvy.com

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