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September 28, 2016

Understanding Win Rate as a Binary Options Trader

While a lot of things may have attracted you to trading binary options, there’s no shame in admitting that a major influence over your decision was simply how much money you could make from doing it in such a short period of time. However, you’re also probably curious about just how much new binary options traders can expect to make. How often you score a profitable trade is known as your win rate in this industry and it is, indeed, a very important element to remain focused on.

Having the Right Goals in Mind

It’s easy to get caught up in the hype of trading binary options. We’re going to address that a bit more below, but new binary options traders need to make sure they’re focused on the right goal before addressing their win rate.

In short, your goal as a binary options trader is to protect yourself from losses and develop an earning strategy that has a long-term timeline. If you just focus on one trade at a time, you’ll definitely be in for a lot of fun, adrenaline-fueled days, but the profits will be short lived.

Hitting a 60% Win Rate

Binary options get their name because, for the most part, you have two options: call or put. You can string these together for more complicated trades, but those are the basics.

As such, when it comes to a straightforward trade, you have a 50% chance of turning a profit. This is enough to attract a lot of traders who are basically just here to gamble on the flip of a coin.  If you’re serious about trading binary options though, this won’t be good enough. Usually, you’ll have to aim for a 60% win rate before you’re doing better than random chance (more on this in a moment).

Why Many Win Rates Just Aren’t Possible

After grasping the above concept, a lot of new binary options traders then rush to a software platform the vendor claims has an 80% win rate. These aren’t remotely hard to find.

Now, let’s take them at their word for a moment and look at what this would mean for you, the trader. As long as you follow the platform’s signals, you’ll have a win rate of 80%.

Let’s say you start with a $500 budget and only make five trades a day, never risking more than 2% of your total. That’s a pretty conservative approach and most new binary options traders would have no problem putting $500 together, so this is a fairly realistic scenario.

It might surprise you, then, that over the course of a single year, by following this simple strategy and doing what your software tells you, you’d go from having $500 to over a million. Whatever you paid for the platform was definitely worth it because you’re now a millionaire.

A Realistic Win Rate

Alright, that’s obviously too good to be true. If it worked, everyone would be doing it and this sheds some much-needed light on win rates and why 80% claims by vendors isn’t possible.

Every time you buy a contract on an option, someone has to take the other side. This is why you can’t simply write contracts that give you insane odds and huge payouts. Who would take the other side of that proposition?

To be more realistic, you’ll probably trade with a broker who offers you a 75% payout. In that case, you’re going to need to hit a 57% win rate to turn a profit.

The question is then how to get from 50% to 57% and then 60% and then 70%, etc. Quality software will absolutely help and so will finding a strategy that fits your risk tolerance and overall trading preferences.

The biggest thing, though, is to document your progression so you can go back and look at what really moves the needle for you and then find ways to use those moments to really improve your win rate. 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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