Binary options’ trading is no different from other types of trading. You can generate some profits but there is also a high probability that you will suffer some losses. No trader is able to be right on all his trades but a good trader manages his risk with money management skills. Everything will depend if your market scenario is validated and if your trade was opened on the right direction (a call on a bullish trend or a put on a bearish trend).
The break even ratio is based ion the asymmetry of binary options payouts
When traders buy High binary options (also called calls) and their speculation proves to be correct, the transaction generates a positive payout. With traditional binary options, these payouts (or returns) will most likely range from 70% to 90% of your invested amount. On the opposite, when you buy a call but the price of the underlying asset depreciates during the lifetime of the binary option, the transaction generates a loss. Most of the time, this loss will be equivalent to your entire invested amount. Nevertheless, some brokers are proposing features like return on loss or refunds that will repay you up to 15% of your invested amount in case of a losing trade. This is a really useful feature for beginners
Let’s now imagine that the broker is not offering any refund and hat it proposes a return of 80% on winning trades. As you can see, there is an asymmetry here, on one side you only make 80% but on the other side you risk losing 100%. This 20% asymmetry is the compensation for the availability of the option and to cover all the expense linked to your position (the broker expenses). For more information on the topic, feel free to read our article How binary option brokers make money. If you invest let’s say $100 on a binary option, there are only two possible alternatives: either you win and end up with $180 either you lose it all. This can be seen as an advantage as well as a drawback. The advantage is that you cannot lose more than what you invested with binary options. The drawback is this all-or-nothing characteristic. With more traditional forms of trading, your investment would generally appreciate or depreciate with the price of the asset over a long period of time.
What is the break even ratio?
In order to minimize the risk of losing it all, it is necessary to determine a break even ratio. What is this ? The break even ratio is the amount of winning trades you need to generate in order for your account balance to stay the same. How is this break even ratio calculated ? You have to take your potential loss, which is your invested amount, and divide that by your potential payout plus the potential loss, and times by 100.
So if your potential loss is 100% of what you invest and your potential return is 80%, you would take 100, the potential loss, divide that by the potential return plus the potential loss, which is 180, and times by 100, which is 55.55%. It means that if you are right 55.55% of the time when trading binary options, you would break even and you need to be right more than 55.55% of the time to generate a profit on your trading account deposit.
The break even ratio can help you choose between different binary option brokers. For instance, some brokers advertise high potential return but do not propose any refund. With a broker that offers a lower return but higher return on loss (or refund) you might be able to achieve a lower break even ratio. That corresponds to increase your chances of profit. A broker that proposes a return of only 75% but a return on loss of 10% will lower your break even ration to 54.54%.
In the end, the smaller the potential loss and the higher the potential profit, the lower the break even percentage should be, meaning we have to be right in our trading less frequently to achieve a profit.
Feel free to have a look at the detailed reviews of our recommended brokers OptionTime, 24option, AnyOption and TopOption to find more information about their different available binary option types as well as return and refund levels.