What Win-Rate do you Need to Break-Even?

The following lesson will explain the different win rates required to break-even in binary options based on the size of the payout size and trade type.

Understanding Win Rates to Break-Even

Binary options offer investors an opportunity to increase their portfolio’s substantially, but to accomplish this feet, they need to understand the profit per trade associated with trading binary options as well as the payout profile for each type of binary options that is available.  The win rate a trader needs to have will be different depending on the type of binary options that is traded.

Win Rate for Above or Below Options

First lets evaluated the win rate that is needed for “above or below” options which are also known as call or put options.  Each broker could have a different name for this type of option but the underlying premise is that you are speculating on whether a security such as a currency will be above or below the market at the time of the transaction.

Most daily “above or below” options have a payout that is equal to 75-85% of the notional amount wagered on a binary options trade.  For example, if a trader transacted an “above” option on the EUR/USD currency pair and wagered $100, the return if the market is higher at expiration, the trader would receive approximately $180 in return.  If the market was lower the trader would lose the $100 speculated on the trade.

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With this type of option, a trader will need to win more than they lose to become profitable over the long term.  Obviously winning before losing is helpful as a trader could easily lose their all the capital they are willing to speculate on binary options if they lose initially.  Assume that the wins and loses come at random a trader would need to win 56% of the time with a payout of 80% to generate a winning strategy.

Example

Assume for this example that the amount that is traded is constant at $10 per trade.  Also for this example the trader will make 100 trades, 56 winners and 44 losers.  The payout would be as follows:  56 Winning trades (56 * $10 * 80% = $448) = 44 Losing trades (44 * $100 = $440).  In this scenario an investor would have a net profit of $8.

Any difference in the payout will require a change to the calculation.  For example, if a trade will pay an investor 78% return on his capital, the trader would need to win at a higher percentage rate than with 80%.  If a trade returns 85% as a payout, the trader could afford to win less than 56%.  In all cases, when the risk reward ratio is less than 1, (85% / 100% = 0.85 risk / reward), the investor will need to have a higher win rate than 50%.

Win Rate for One Touch Options

Many one touch options are referred to as high yield one touch options and they boast a payout profile that is as high at 400% on your capital.  The reason a broker can offer this type of option is that the probability of the currency or security reaching the barrier level that needs to be touched is very low.  With this in mind the win rate for an option that pays an investor 200% is 34%.

Touch Option

For example, less assume 100 trades where the investor risks $10 per trade.  Winning trades 34 (34 * 10 * 2 = $680) Losing trades 66 (66 * 10 = $660). In this scenario on 100 trades an investor would have a net gain of $20 dollars.

With a payout of 350% on one touch trades, would create an even lower win rate.  The key in understanding the different options is that the statistical likelihood of winning with a one touch trade is a lot lower than the chance of winning using an above or below option.

60 Second Options

Short term options such as the 60 second and 30 second options have the lowest payout profile and therefore require the largest win rate to generate a successful trading strategy.  Most 60 second options have a payout between 65% and 75%.

60s Binary Options

For example, if a trader placed 100 $10 trades with a payout of 65%, they would need to have a win rate that is 61% of the time.  Winning trades 61 (61 * $10 * 65% = $396) Losing trades 39 (39 * 10 = $390).  In this scenario the trader would have a net profit of $6 dollars.

Summary

One of the keys to being successful when trading binary options is to understand the win rate needed on each type of binary options which will allow you to generate a profit.  Creating a strategy that will take advantage of these constraints will be the key to successful binary options trading. For more information on binary options, go to our binary options lessons here.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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