Binary options are an exciting new trading product that provide new opportunities to profit from the market. They also have a low bar for entry which makes it easy for anyone to get started trading them. Recently, I opened an account and was able to turn $5,000 into $10,362.50 in just 10 trading days using a martingale betting strategy – a strategy that has been around for hundreds of years. In this discussion, you will learn what martingale betting is, how it works, and how to apply it to binary options trading to produce profits of your own. First, let’s take a look at binary options.
What are binary options?
Binary options are a type of derivative that are similar to regular options except that they have a fixed payout percentage. With binary options, you decide if the price of the underlying product will be above or below the current price at some point in the future. If you are correct, you will receive a percentage of your original investment, usually 70-80%, and if you are wrong, you lose your entire investment. This simple risk profile makes binary options easy to analyze.
Suppose you thought the price of oil was going to rise in the next five minutes. You bet $25 that the price of oil will be higher than it’s current price, $60.00 (the strike price), five minutes from now (expiration). The payout for being correct is 75%. If oil is above $60.00 after five minutes (in the money), you will receive $43.75 – your original $25 investment plus $18.75 (75% of your original investment). If oil is below $60.00 after five minutes (out of the money), you lose your $25 bet. If the price of oil is exactly $60.00 at expiration (at the money), most brokers will return your original investment to you.
The amount of money you place on each trade is up to you. Brokers will place a minimum and maximum dollar value, the lowest being as low as $1 and the highest being as high as $50,000. The time until expiration is also variable. Sixty second binary options are very popular, but generally have a lower payout percentage than five minute binary options. This is important when considering the long term profit potential of your strategy.
What is martingale?
Martingale is a betting strategy that has been around since the 1700s. In it’s most basic form, the strategy involves a gambler playing a game in which they win their bet if a coin lands on heads, and lose their bet if a coin lands on tails. When the coin lands on tails, the gambler will double their next bet, and continue doing so, until the coin lands on heads. This allows the gambler to win back all of their previous losses and profit by the original bet size. Here is an example of this strategy in use:
|Bet #||Bet Size||Bet Result||Bet P&L||Net P&L|
At this point, you might be wondering what happens if the coin lands on tails 10 times, 50 times, or 100 times? This is a valid concern. While a long string of consecutive tails is unlikely, it can, and will, eventually happen.
The danger in this lies in the amount of money you would be required to bet after so many tails. Let’s say the coin lands on tails 10 times in a row. Because you have to double your bet after each loss, on the 11th bet, you would be required to put down $1 * 2^10 = $1,024. That’s a lot of money compared to your initial bet size of a mere $1. Not only would you need $1,024 to make the next bet, but you’re already at a loss of $1,023 from the first 10 losses. If you had started this game with anything less than that, you would be bankrupt by now. Make sure you start with a large enough bankroll to absorb a string of losses.
Another concern is if your binary option broker will even allow you to place such large trades. Most brokers have a large enough maximum trade size that you can use martingale effectively, but you should confirm this before depositing any money. The larger the gap between the minimum and maximum trade size, the better.
My binary options trading strategy
My strategy uses five minute binary options since they have higher payout percentages (75-80%). The percentage will vary depending on the liquidity and trading volume of the underlying product. Currency pairs and commodities during the day will generally have these high percentages. My strategy begins the same way each trading session:
- Make an initial bet of $25
- Bet that the underlying will be higher than it’s current price
The bet size and direction will change depending on the outcome of the previous trade.
If the previous trade was a win, the bet size of the next trade will be $25. If the previous trade was a loss, the bet size of the next trade will be the sum of all previous consecutive losses divided by the payout percentage. In simple terms, this allows you to win back all your previous losses in one trade.
This is a slight deviation of martingale. Instead of doubling my bet after each loss, I’m betting just enough to win back my losses and break even. Doing this causes my bet size to grow at a slightly slower rate than standard martingale.
If the previous trade was a win, bet the same direction for the next trade. If the previous trade was a loss, bet the opposite direction for the next trade.
This takes advantage of any trend that develops in the underlying product and can increase your win rate above the 50% average.
Putting it all together
Let’s assume you are trading oil binary options that are currently paying out 75%.
- You bet $25 that the price of oil will be higher in the next five minutes. At expiration, this trade wins.
- Since the last trade was a win, you again bet $25 that the price of oil will be higher in the next five minutes. At expiration, this trade loses.
- Since the last trade was a loss, you bet $33.34 ($25 / .75) that oil will be lower in the next five minutes. At expiration, this trade loses.
- Since the last trade was a loss, you bet $77.79 (($25 + $33.34) / .75) that oil will be higher in the next five minutes. At expiration, this trade loses.
- Since the last trade was a loss, you bet $181.51 (($25 + $33.34 + $77.79) / .75) that oil will be lower in the next five minutes. At expiration, this trade wins.
- Since the last trade was a win, you bet $25 that the price of oil will be lower in the next five minutes. At expiration, this trade wins.
At the end of these six trades, you end up with a net profit of $37.50. The following table illustrates the results.
|Trade #||Bet Size||Direction||Result||Trade P&L||Net P&L|
Take a close look at trades two through five. Trade two produces a loss of $25. The bet size for trade three is calculated in such a way that a win would cover the loss of trade two ($33.34 * .75 = $25). If trade three were a winner, then the combined P&L of trades two and three would have been a wash.
The same goes for trades four and five. If trade four were a winner, then it would cover the losses of trades two and three. In trade five, we finally get another winner which covers the losses of the three previous trades ($181.51 * .75 = $136.13). The combined loss of trades two through four was $136.13, therefore the win with trade five washes out the loss.
My binary options trading results
Using this strategy, I was able to make a $5,362.50 profit in just ten days. I focused on trading five minute options on the EUR/USD currency pair during the day which usually has a payout percentage of 78%. I traded over eight hours each of those days for a total of 1000 trades. As an hourly rate, I was making $64.35 per hour. On an annual scale, that comes out to be $128,700 per year.
What about risk?
Without a doubt, this is a high risk strategy that may not be suitable for every trader. There is a real potential for losing your entire account if you do not begin with sufficient capital. There are, however, other strategies for profiting with binary options.
Binary signal systems use algorithms that crunch market data in real time and produce signals that tell the trader what product to trade and what direction to trade. These algorithms look for profitable market conditions where there is a high chance of winning. Services that provide signals will send each signal to traders through email and/or text message so that they can be acted on in real time.
Many such binary signal services exist which makes it daunting to decide which one to use. The best way to decide is to read binary signal reviews from real users to find out which systems are really profitable. These systems will provide a steadier source of income and will expose you to less risk than the strategy I’ve just outlined.
There are many opportunities to make money in the binary options market. Whether you use the strategy described here or one of the many binary signal services out there, you will make money as well. Good luck!