When it comes to trading binary options, most people don’t think in terms of straight mathematics, at least, not in the way that they should. Sure, when you look at charts at other technical indicators, you need to rely on numbers, and this is math. When you make your decisions based upon what these numbers are telling you as far as price direction goes, you’re even applying that math in a way that makes sense. But, if you are not looking at what the odds are of making money on your payouts rates, then you are doing all of the hard work, but not applying it correctly in the final stage. This is an easy way to miss out on making more money, and in some cases, it makes even a great trader a losing one.
First, look at the payout rate that the broker is offering you. Let’s start with a 75% return. Next, look at what your likelihood of being correct in your prediction is. Now, we want to pit those two together in order to find out whether or not your odds of success over the long term are good or not. For example, if you look at a 75% return, but you are only finding that your trades will be successful 55% of the time, if you have 100 trades at $100 each, you will find that you lose $4,500, but gain only $4,125. That’s a loss of $375. You’re correct most of the time, but you’re still losing money because you are not thinking about the long term.
You could have the same rate of success and be profitable, though. If you were getting an 82% return instead of 75%, you are now turning a very small profit. You are still losing the $4,500, but you gain $4,510—a profit of $10. It’s a very small profit for hours of work; hardly worth the time and effort that you’ve put into it.
As you can see, balance is needed. It’s tough to find that, though, if you don’t know that you should look for it in the first place. There are so many traders out there that have a great knowledge of the stock market, Forex market, commodities market, or whatever else they might trade. They might even know how to manage their money and alleviate risk by diversification and so on. However, when you don’t know how to manage probabilities of success and how to ensure that you are going to maintain success over the long haul, losing long term becomes the most logical outcome.
Don’t be Fooled
The problem that many binary options traders find themselves encountering is that it’s impossible to see what will happen over the course of 100 trades. If you have 50 trades, and all of them are winners, it’s really easy to think that you are very talented. However, the more accurate conclusion is that you are very lucky. Even the best traders in the world are not able to replicate 50 perfect accurate trades in a row, so it’s silly to base your talent level as a trader off of so small of a sample.
It’s also silly to base your skill level off of your record at the beginning of your trading career. You need to practice, and no matter whether you are using demo trading, or if you just paper trade, you need real life experience to improve as a trader. Once you’ve traded for a few months, you will be able to more accurately appraise your correct trade rate. This will help you find great rates of return more easily and more realistically evaluate risk.