Binary Betting - Terms
Now, in case you are feeling a little confused by all the talk of odds, please don't worry - when I first started binary betting it took me a little while to become comfortable with the way the odds are presented, but please keep reading - it does become easier with a little bit of practice. I've tried to include as many examples as possible on the site which I hope explain things better than I can in words!
Binary Betting - Floating and Fixed
Let's start looking at some of the key points which I've listed out for you below in bullet point format for clarity:
- Floating binary bet - this is the most common type of binary bet or trade. With this type of trade, the strike price ( the price at which you entered the bet ) stays the same, and the binary odds move as the chances of the event occurring change with market conditions. So if we have opened the trade " GBP/USD will end down on the day" the event remains the same, (i.e. GBP/USD down on the day), but the binary odds will change as the likelihood of this event occurring increase and decrease during the day.
- Closing a floating binary bet - A floating binary bet can be closed, or even partially closed, out at any time during the life of the trade, so profits can be taken early and losses cut short.
- Fixed binary bet - this is the opposite of a floating binary bet. In this case the buy and sell prices remain fixed and the strike price moves. For example, if the bet is that "the £/$ will end up 25 by the end of the hour" the buy and sell prices would remain the same for the entire lifetime of the bet but the event might change to "the £/$ ending up 21", or "up 19", or "up 13", or "up 7", for example.
- Closing a fixed binary bet - A fixed binary bet can never be closed out during the life of the bet.
Binary Betting - Buy or Sell
As I mentioned above, the most common bet for binary betting is the floating version, so from now on all examples are based on this type of bet which is the one you will use for most, if not all of your trading, as it allows the bet to be closed at any time during the contract. Now all binary bets are quoted with two prices, one of which is the buy price, and the other the sell price, so when we look at a binary bet for a particular outcome it will be presented in the following way :
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Binary bet format - 69 - 71. If you think the bet will happen you buy at the higher price of 71. If you think the event will NOT happen you sell at the lower price of 69. Now it is important to realise in this example that there is a 70% chance ( at the moment ) of the event happening ( i.e. the mid point of the binary) and conversely a 30% chance of it NOT happening. Now in order to help you understand how this relates back to fractional odds which may be more familiar to you, I have produced a little table below which converts between binary and fixed odds which I hope will help clarify this for you.
If you sell a binary bet at the following: Fractional odds If you buy a binary bet at the following: 80 4/1 20 75 3/1 25 66.6 2/1 33.3 60 6/4 40 55.6 5/4 44.4 50 evens 50 44.4 4/5 55.6 40 4/6 60
So, if we take our fractional odds of 4/1 and we decide to buy this bet ( as in the horse race we think the horse will win and the event WILL happen) then there is a 20% chance that we will be right. If we decide to sell the bet ( we don't think the horse will win and the event WILL NOT happen) then the chances of us being right are 80%. In simple terms the higher the binary value, then the more chance there is the event will occur.
Binary Betting - Stake, Profit & Loss
OK- we are nearly there I promise, and then I'll run through some examples on the next page which will put all the last few pages into context. Finally, let's see how we calculate profit and loss for each trade, for both a sell order and a buy order, as they are slightly different.
Now with binary betting ( as with spread betting ) we have a stake which in effect is the amount we are prepared to bet for each 1% ( or 1 point if you like ) of movement in the binary bet. For all these examples I am going to use 10p and if you are new to this form of trading, then I strongly suggest you start with this while you build up your experience.
Let's assume an event is quoting 43-48 and you have decided to bet at 10p per point.
- Buy Bet Win - when buying, your profit is the closing price minus the opening price times your bet size ( per point) . Assume the bet wins and settles at a 100 ( the bet will either settle at 100 or 0) then your profit is 100-48 x 10p = £5.20
- Buy Bet Lose - if we take the same example, but this time the bet loses then your loss is the closing price, minus the opening price times your bet size ( per point) which in this case would be 0 - 48 x 10p= -£4.80
Now, lets look at a sell bet and how we calculate the profit and loss for this bet which is slightly different.
- Sell Bet Win - Here you think the event will not happen so you sell the bet and you are correct. The bet settles at 0, as the event did not occur. When selling the profit is the opening price minus the closing price times the stake, so in this case would be 43 - 0 x 10p = £4.30
- Sell Bet Lose - In this case the bet would settle at 100 ( the event occurs) so your loss would be 43-100 x 10p = -£5.70
OK - now we have covered all the basics on binary betting, let's look at some examples applied to the financial markets and see how we can use this technique in our trading.
