It is important to understand what the risk/reward ratio of binary options is. This will give you, as a trader, better insight into what your odds actually are. In turn, this will help you determine whether or not you are making any progress with your current trading plan.
The risk/reward ratio can be defined as the possible profit that can be made contrasted with how much the trader stands to lose. With binary options, this ratio is technically fixed. This is because even before the commencing of a trade, you know precisely how much you stand to gain or lose. This is because of the all or nothing nature of binary options trading. Let’s take a closer look at what the actual risk/reward ratio of binary options is:
1) Risk/Reward Ratio Changes According to Broker
While the risk/reward ratio may be easily calculated with binary options, it does change from broker to broker. This is due to the payout rate. The payout percentage that is quoted by your broker will youdetermine just what the overall risk/reward ratio will be.
- Brokers may offer payout percentages that can range anywhere from 60 percent to upwards of 90 percent.
- For the most part, they tend to hover between 70 percent and 90 percent. This means that the ratio that you will have to consider could be anything from 1:0.70 to 1:0.90.
In layman’s terms, this translates to between 70 cents and 90 cents for every dollar that you invest in a trade.
2) The Issues
From the above calculations, it is easy to see that breaking even, let alone making a profit may be a little difficult with binary options. This is because your trade wins can be offset with just a couple of losses. This is due to the heavy loss that is incurred with out of the money trades.
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This means that you are not always able to cover the loss with your wins. This leaves the question, can you actually make a profit with binary options with the odds stacked against you? Well fortunately, you can improve your risk to reward ratio.
3) Increasing Your Risk/Reward Ratio
There are two ways to improve your risk/reward ratio and they both include your binary options broker. Therefore, as long as you choose your broker carefully, you should be able to improve your odds. The first thing that you should look for is a higher than average payout rate.
The greater the payout percentage, the more chance that you have of offsetting any losses. As mentioned, there are brokers that offer payouts of above 90 percent. It is important to ensure that there are no terms and conditions that may interfere with this high payout rate. The next thing you will need to look for is brokers who allow you to exit trades if it looks as though you will lose. By doing so, you are able to conserve some money from the trade. This too, will come in handy as you are trying to amass your profits.
This is what the risk/reward ratio of binary options means for you. There is also details on how you can increase this ratio, in your favor.