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Binary Options - How not to get stopped out

  • #1
  • First Post: Jul 13, 2010 1:56pm Jul 13, 2010 1:56pm
Stop trading Spot Forex and start trading weekly Binary Options.

My weekly Binary Options would have gotten stopped out numerous times if they were spot Forex positions.

I wouldn't recommend Daily Binaries though...unless you are trading a big news announcement.

You can trade Weekly Binary Options either through Nadex or IG Markets (who own Nadex.)

Cheers!
Binary Options Trader
  • #2
  • Jul 15, 2010 12:42am Jul 15, 2010 12:42am
Could you explain what a binary option is and how it works? Can these be traded through a regular broker?
Gone to a better place
  • #3
  • Jul 15, 2010 3:55am Jul 15, 2010 3:55am
A Binary Option is a simple derivative contract that closes out at $100 per contract. For example, there maybe a binary contract with a statement that reads "USD/CHF >1.0475 3pm July 16." So if you believe this statement will be true then you would buy it, and if you believe it would be false then you sell it. Your profit is the difference that you paid to get into the contract - $100.00.

You can trade Binary Option contracts the way you would Spot Forex or you can use them as a hedge against your spot Forex positions.

The price of a contract is relevant to how close the statement currently is to the current Spot Forex price. A Binary Option that cost less will pay out more, and a Binary Option that cost more will pay out less (but have a greater chance of success.)
Binary Options Trader
  • #4
  • Jul 15, 2010 4:11am Jul 15, 2010 4:11am
Quoting Yoda_Glenn
The price of a contract is relevant to how close the statement currently is to the current Spot Forex price. A Binary Option that cost less will pay out more, and a Binary Option that cost more will pay out less (but have a greater chance of success.)
The problem I see here is that you'll never know it their pricing is fair.
You're somehow fighting their own pricing algorythm.
  • #5
  • Jul 15, 2010 4:18am Jul 15, 2010 4:18am
Quoting TJPLD
The problem I see here is that you'll never know it their pricing is fair.
You're somehow fighting their own pricing algorythm.
You mean for the pricing of the contracts? These are more or less set according to the current spot forex price....so I'm not too sure what you mean. Could you explain?
Binary Options Trader
  • #6
  • Jul 15, 2010 6:40am Jul 15, 2010 6:40am
On a $100 binary contract, according to one broker which offers it, you gain $70 if you win, and pay $90 if you lose. I didn't pursue it because of this skewed risk:reward, but maybe different brokers structure it differently.

Rob
  • #7
  • Jul 15, 2010 6:49am Jul 15, 2010 6:49am
Quoting Rob Mondave
On a $100 binary contract, according to one broker which offers it, you gain $70 if you win, and pay $90 if you lose. I didn't pursue it because of this skewed risk:reward, but maybe different brokers structure it differently.

Rob
If the contract is priced at 100 USD and you are stupid enough to buy it you lose 100 USD or gain 100-100 = 0 USD. If it's priced at 40 USD you buy it you'll loses 40 or gain 100-40 = 60 USD.

It can only be priced between 0 and 100 USD depending on how much "in the money" the contract is. But this pricing which factors in price and time (to expiry) is not really transparent so you'll never know if you get a fair price for your contract.
  • #8
  • Jul 15, 2010 6:57am Jul 15, 2010 6:57am
sounds like betting. why don't you bet on football matches instead? There are much more out there on daily basis and a greater chance to win. or you are just advertising?
  • #9
  • Jul 15, 2010 7:12am Jul 15, 2010 7:12am
Binary Options and the related derivatives are functions of time and volatility. Their are better than spot because the price can go against you as long as it wants and you don't lose more than the initial bet but they expire worthless if the market stays in a tight range too long.
You can't hedge them profitable against spot positions for the simple reason that it is easy and people with more money would be the first to take advantage of this arbitrage opportunity.
The contract's price is based on the volatility of the underlying pair plus spread.
  • #10
  • Jul 15, 2010 7:14am Jul 15, 2010 7:14am
Quoting TJPLD
If the contract is priced at 100 USD and you are stupid enough to buy it you lose 100 USD or gain 100-100 = 0 USD. If it's priced at 40 USD you buy it you'll loses 40 or gain 100-40 = 60 USD.

It can only be priced between 0 and 100 USD depending on how much "in the money" the contract is. But this pricing which factors in price and time (to expiry) is not really transparent so you'll never know if you get a fair price for your contract.
If you're looking to get in and out of a binary before it expires, then yes, the price is arbitrary. However, if the binary closes, then it is always going to be 100 or nothing.
Binary Options Trader
  • #11
  • Jul 15, 2010 7:18am Jul 15, 2010 7:18am
Quoting papaki
sounds like betting. why don't you bet on football matches instead? There are much more out there on daily basis and a greater chance to win. or you are just advertising?
It's no different than Spot Forex, which is high probability betting anyway. You're giving up stop losses in exchange for expiration time, that's all. With Binary Options, you still have to look at a chart and determine where the price is going to go, just like Spot Forex.
Binary Options Trader
  • #12
  • Jul 15, 2010 7:30am Jul 15, 2010 7:30am
Quoting Yoda_Glenn
If you're looking to get in and out of a binary before it expires, then yes, the price is arbitrary. However, if the binary closes, then it is always going to be 100 or nothing.
Yes but if it's priced at 60 this roughly means the probability of the event happening is 60%. Who tells you that this a fair price for your contract? The price is made up by the brokers pricing algo and is anything but transparent.
If you buy it over 50 you will never get a 1:1 RR ratio. And if buy at 50 and the probability of the event happeing is 50% (according to the pricing algo) you'll never make any money this is what I mean that you have to beat their pricing.
  • #13
  • Jul 15, 2010 8:07am Jul 15, 2010 8:07am
Quoting TJPLD
Yes but if it's priced at 60 this roughly means the probability of the event happening is 60%. Who tells you that this a fair price for your contract? The price is made up by the brokers pricing algo and is anything but transparent.
If you buy it over 50 you will never get a 1:1 RR ratio. And if buy at 50 and the probability of the event happeing is 50% (according to the pricing algo) you'll never make any money this is what I mean that you have to beat their pricing.
Ahhh, yes, I see. However, I find the pricing to be on par with the current spot price all the time. That is, it's always between $45 - $55 per contract if the contract is close to the current spot price.
Binary Options Trader
  • #14
  • Jul 15, 2010 8:27am Jul 15, 2010 8:27am
Quoting TJPLD
Yes but if it's priced at 60 this roughly means the probability of the event happening is 60%. Who tells you that this a fair price for your contract? The price is made up by the brokers pricing algo and is anything but transparent.
If you buy it over 50 you will never get a 1:1 RR ratio. And if buy at 50 and the probability of the event happeing is 50% (according to the pricing algo) you'll never make any money this is what I mean that you have to beat their pricing.

This would be preferable through an STP vs a Dealing Desk broker that offers this, after all Dealing Desks shade prices so this could be detrimental to your wallet unless you are with an STP
Know when to hold em, Know when to fold em!
  • #15
  • Jul 15, 2010 8:46am Jul 15, 2010 8:46am
Why not trade stocks instead??
  • #16
  • Jul 15, 2010 8:54am Jul 15, 2010 8:54am
Quoting Brb-Fraudin
Why not trade stocks instead??
why not trade commodities.
  • #17
  • Jul 15, 2010 9:38am Jul 15, 2010 9:38am
I just advise people try them on a demo account. My interest is only in making Binary Options more popular in the hopes of having other brokers offer them. If more brokers offer them then the lower they cost to trade.

After all, why be so skeptical and opposed to trying out something that might possibly make you more money? You have to be open minded and curious when it comes to making money.

I use to be like a lot of people on Forex Factory, losing on Spot Forex trades left and right from being stopped/spiked out. Then I found Binary Options through a friend, and trading has become much less stressful and a lot more profitable.
Binary Options Trader
  • #18
  • Jul 15, 2010 6:47pm Jul 15, 2010 6:47pm
Here’s an example of why I prefer Binary Options over Spot Forex.

Lets say you have two traders taking the same position on the same currency pair, trader A & trader B. Both trader A&B will be shorting the USD/CAD.

Trader A opens up a spot position @ 1.0325 with a stop loss of 60 pips.

Trader B sells a Binary Option contract @ 1.0325

Now, lets say the USD/CAD begins to go in the right direction for 20 pips, but suddenly, it spikes up some 80 pips from 1.0305, due to a sudden reversal.

Trader A’s spot position is immediately wiped out, and his funds are gone. His stop loss has been hit.

Trader B’s position is not wiped out, because there is no stop loss. Trader B then waits for USD/CAD to drop down some 50 pips from its overbought state, and then he buys out of his contracts. The result is that Trader B only loses a FRACTION of his total funds (probably about 1/3 of what he risked,) while Trader A loses 100% of what he risked.

Also, most successful spot Forex traders have a stop loss that is twice and even three times their take porfits. This means that their risk to reward ratio is 2:1 or 3:1. With a Binary Option you can buy or sell a strike price right at the current spot Forex price, and therefore you will have a 1:1 risk to reward ratio.
Binary Options Trader
  • #19
  • Jul 15, 2010 9:14pm Jul 15, 2010 9:14pm
Forex trading is already complex enough, I will give binary options a miss because it requires a fairly accurate sense of price direction movement in a specific period of time, in which, I could already use it to trade forex profitably.
  • #20
  • Edited 1:46am Jul 16, 2010 1:24am | Edited 1:46am
Quoting Yoda_Glenn
Trader B’s position is not wiped out, because there is no stop loss. Trader B then waits for USD/CAD to drop down some 50 pips from its overbought state, and then he buys out of his contracts.
Only in fairytales.

As I said, the price of a binary option is based on the average volatility. If your option expires next week then the seller of that option will calculate how much the underlying pair moves in 7 days and will add his comission.
If the pair's price moves a certain number of pips in the opposite direction, your chance of reaching a certain price is decreasing accordingly and that is of course factored in the current price of your option.

There's no free lunch, as you try to put it. If binary options would have the slightest advantage over spot some people would have already profited and the seller would have been bankrupt.

And I really have a lot of doubts that someone trades binary options profitable but is losing trading spot, or viceversa. You win only if you understand the market and the tool you use has no importance whatsoever, be it futures, options or spot. Show me a profitable strategy using binary options and I'll translate it to you for spot. Or even better, I'll give 10.000$ to anyone who can prove that in the long run binary options are better than spot.
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