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Binary bets

So, let’s start with the basics of binary betting, why it is so called, and what binary actually means in the context of trading. Once we understand the basics then we can have a look at some examples and see how this method of financial betting compares with spread betting, and fixed odds betting.

For those of you with an IT background, the word binary is no doubt second nature – to us mere mortals, it is perhaps not so immediate, but it does describe the type of bet precisely. Binary arithmetic is based around the numbers 1 and 0, and the entire pc world is based on computer chip technology which has been designed using a combination of 1 and 0, yes and no, if you like. Binary betting is so called, as the outcome of a binary bet or trade has only two results, either 1 or 0. In other words you either win or lose the bet if the event either happens, or does not happen. As I mentioned earlier, binary betting takes the best of spread betting and the best of fixed odds betting, and combines the two into a new strategy. The concept of a fixed outcome, either win or lose, is based on the fact that binary betting has a fixed odds heritage at it’s core. For us as traders this means that when we open a binary option ( or binary bet, we can call it either), we always know what out risk is on the trade, whatever happens during the life of the contract. We do not have to sit in front of our screens nervously watching, nor do we have to manage stop losses or calculate lot sizes.

As with fixed odds trading, before we hit the enter button, we know exactly how much we are risking and that this will not change. Just like a horse race, if you bet a certain amount to win, say £10, then you know that this is your maximum risk if you lose – the bookmaker is not going to ask you for any more after the race is over, are they – NO!!  Now whilst you know what your downside risk is beforehand of course, you cannot sell your bet back, if you horse is trailing along in last place midway through the race – this is where binary betting differs dramatically, as we shall see in a minute.

For those of you familiar with sports betting, there are essentially three different ways to express a bet, and depending on where you live in the world, the odds will be presented in different ways. I have explained these in full on the fixed odds trading site, so if you would like a complete explanation, please just follow the link. Briefly the three main types of odds are fractional, decimal and money line. Fractional odds will be most familiar to those in the UK, Ireland and Australia, decimal odds are popular in Europe and Canada, and money line mostly used by American bookmakers. Now binary bets are presented differently ( sorry folks) but as you will see in a minute they are very easy to understand. So let’s look at a simple example.

All binary bets are quoted with values between 100 and 0. If the event occurs the binary bet settles at 100, if it loses it settles at 0 ( I did tell you it was easy ). In effect what this means is that binary bets are quoted as a % chance of the event happening or not – so a binary bet of 30 means it has a 30% chance of happening, ( i.e. it is less likely )  and a binary bet of 80 means it has an 80% chance of the event happening ( i.e. it is more likely to happen). If the binary bet were 50, then it has an equal chance of either happening or not happening just like the probability of a coin landing on a head or a tail – 50/50. This is one of the beauties of binary betting in that you can instantly the probability of an event occurring or not which is being quoted by the binary betting company, and therefore gives you view on the company’s view of the event. If the binary bet being quoted is higher than 80, then the probability is very high that the bet will win, and if the binary bet is below 20 for example, then the probability is that the bet will lose. Remember, binary bets are simply a numerical representation of the event probability, and just as in a horse race, the rank outsider does win occasionally. All the odds tell us is that if a horse has odds of 100/1, then if the race were run 100 times under the same conditions, then we would expect the horse to win once. It does not tell us where in the 100 runnings this will happen, nor indeed if it will happen at all ( it may never win) but the probability is that it will win once at some point in the 100 cycle.

Now as we have seen, binary bets are presented as a % of the event happening, or not happening. So how do binary bets compare to fractional odds and decimal odds, and please don’t worry – it will all fall in to place once you start to see some examples. The following three bets represent all the same probabilities of the event occurring :

  • Binary odds 33.33 – As we have just seen above binary odds are a % of the chance that the event will happen, so this event has a 33.33% chance of occurring.
  • Fractional odds 2/1 – To convert this to a probability of occurring, we turn the fraction upside down, add 1 to the bottom and multiply by 100 to convert to a %. So in this case this becomes 1/2+1 * 100, which becomes 33.33%
  • Decimal odds 3 – To convert decimal odds to probability we simply divide 100 by the odds themselves, so in this case it would be 100/3 which is 33.33%

So now we understand some of the theory behind binary betting, let’s look at the types of binary bets most commonly available and the main features of each type of bet.