Trading binary options has inherent risks so a good understanding of money and risk management will help your long term profitability when placing trades with OptionFire.
OptionFire is one of a growing number of companies offering binary options. They currently offer hourly option trades in which each option expires at the start of the hour.
You, the trader, merely needs to place either a Call or a Put bet, depending on his view of where the market will be when the option expires at the next top of the hour.
So trading with OptionFire is remarkably easy as our review has pointed out, but that doesn’t mean that the risk of losing your money is reduced, although you merely stand to lose your stake and no more, as this is not a leveraged trade as with spread betting or other futures trading.
In this article we will explain why risk and money management may help reward you with long term profitability, though of course nothing is certain when trading any instrument, particularly binary options.
The Nature Of The Binary Option Trade
Trading binary options give you a chance to either win, or lose with nothing in between. There are no degrees of being right as there in other forms of trading.
Consider futures trading, for example. If you are correct in predicting the direction of the market, then you will benefit by how many ticks the market moves in your direction. The more ticks the market moves, the greater your profit.
Binary Options trading differs in that you are only right or wrong so if the market is only one tick higher than your strike price at expiration, if you have placed a Call option, then you win. There is no additional reward for the fact that the market has moved 50 ticks in your direction.
Of course if you predict market direction wrongly, then you lose your stake, although OptionFire do return up to ten per cent of your stake in this case.
Pay out Percentages Vary
There is another important point to consider when trading binary options with OptionFire.
The Payout percentage varies as OptionFire automatically adjust their own risk profiles according to market conditions. The lowest payout we have seen so far is 69 per cent and the highest is 91 per cent.
This means that if you win, then you receive your initial stake back plus 65% of your stake (or whatever the advertised payout percentage is).
For example if I place a $50 initial stake and the payout percentage is currently 80% then I will have $50 + ( $50 x 80% ) = $90 returned back to my account.
If I lose, then I will have $50 – 90% = $45 deducted from my account.
So I stand to win $40, but also stand to lose $45 which is less than a 1:1 reward risk ratio (0.88), which is why money management is important for your long term profitability.
In the image below you can see how the payout percentage for Crude Oil (72%) is different than for Gold (69%):
The Importance Of Win Rate
We have already ascertained that we cannot achieve a risk reward ratio that is greater than 1 so over time we will lose more than we win, which is one way in which OptionFire make their profits.
So if we only have a 50% win rate, we will be net losers over time. Statistics are against us.
The only way that we can overcome these odds against us is to make sure that we win more times than we lose.
If we win 75% of the time (two out of every three trades) then we will beat OptionFire and make money over time. Nice.
So if we are to be long term profitable when trading binary option with OptionFire we must pay close attention to our risk reward ratios and to our win rate.
Only Take Good Odds
There is one final important point to consider and that is the payout percentage again.
At the time of writing the payout percentage for Crude oil is 69% so lets look at our risk reward ratios again.
If I win I will gain $50 * 69% = $34.5. If I lose I will be down $50 * 90% = $45
So my reward/risk ratio has become more adverse. The reward to risk ratio is now 0.78.
This means that you have to win more trades than before to overcome the adverse odds. You have to be very confident on your win rate to be sure of profits over time.
Risk and Money Management Are Key For Long Term Profitability
You can see that you have to take risk and money management into consideration when trading binary options.
In general, consider these rules, however they are dependent on the effectiveness of your trading methodology:
- Recognise that the long term odds are against you as the reward/risk ratio is less than 1.0
- Do not trade when the payout percentage falls to low levels such as 69%. Remember that the payout percentage varies according to market conditions.
- Ensure that you have a system that has a win rate of at least 60% to overcome the adverse reward/risk ratio