Posted 23rd February 2017
In today’s Profit Watch:
• Betting on events
• It’s a case of YES or NO
• PLUS: Using binary options to bet on gold
Places are being snapped up for our new trading service launched earlier. Get the details here.
Let me tell you a little more about what it involves…
You know how sometimes you might want to bet on something happening, some event – and how it might affect the price of an asset?
Like on Trump winning the presidency. Or the UK population voting on whether or not to leave the EU.
Ahead of those, we all knew they were likely to be market-moving events.
Another one is betting on the direction of the stock market or the US dollar ahead of the Non-Farm Payroll report.
You know it has the potential to move the market in a meaningful way. And it can be tempting to try and guess it.
Well personally, a directional trade that will win or lose depending on the unknown, is too risky for my money.
That’s why I always avoid trading around these major events – unless I have a very strong conviction in which way the result will go.
I far prefer to study the charts and let them give me clues about where the market’s heading.
But lots of people do like to have a punt on this kind of binary event. And there is a way you can do it with strictly limited risk.
It’s called binary betting.
As the description suggests, this kind of bet can only have two outcomes…
It’s a case of YES or NO
In binary betting, you can still bet on a direction and the size of a move, as you do with a spread bet. Only you will have strictly known maximum risk and maximum upside potential.
You bet on an event either happening or not. Yes or no.
Let’s use an example. Let’s say you think there’s a chance that the Fed will aggressively hike interest rates next month by, say, 100 basis points (1%) (highly unlikely, by the way).
But you imagine that if the Fed was to do this, the dollar would shoot higher and gold would slump.
With spread betting, you might bet that the price of gold would fall from $1,240 to $1,050. You might bet £10 per point and have a stop loss at $1,280. In other words, you have a 40-point stop loss and a 190-point target.
And if you’re right and gold dives to $1,050 (before you get stopped out!) then you win 1240 – 1050 = 190 points x £10 = £1,900.
Nice trade if it comes off. But you may have to go through a lot of volatility before you get there (if you get there). And that stop loss might well get hit before you reach your target. Or if you’re wrong, and gold shoots higher, you might get stopped out well above your stop loss (slippage).
That kind of uncertainty can cause sleepless nights.
Think about this…
Have you ever been convinced that a trade was right? And then something happens – some comment hits the newswires – and the market takes you out of the trade for a loss… only for it to reverse and go in your favour after it’s too late!
A frustrating, but very common, event for spread betters.
And this is why some people like to use binary options.
A way to strictly limit your risk
See with binary options, you only have two possible event outcomes:
YES something happens within a fixed timeframe; or
NO it doesn’t happen within that timeframe.
So you might bet on gold touching a certain exact level within a time period you choose (from minutes or hours to days or weeks). Or you might bet on it NOT touching a certain level within the period.
The binary options are priced based on several factors, mainly the time to expiry, volatility and the underlying market price of whatever it is you are trading (e.g. gold, the FTSE or the pound versus US dollar).
If the outcome described by the binary option occurs, at expiry, you win the profit agreed when you placed the trade. If it does not occur, you lose what you staked.
The thing is, that you know EXACTLY what your possible return is AND what your maximum risk is when you place the trade. You don’t have the uncertainty you can get with spread betting.
That’s why people like to use binary options. It’s the peace of mind you get with strictly limited and known risk.
Take leading binary options platform, Binary.com.
They offer something called a Touch/No Touch. You choose a level and a time frame and bet on whether you think the market will or won’t touch that level within that time frame.
So for example if you buy the binary option that pays out if such and such touches X level within 5 days – and it does so – you win. If it doesn’t, you lose your full stake.
Since we were talking about gold, let’s look at an example of how you might do this.
Now this is NOT a trade recommendation, more of an exercise to show you about binary options and how they work.
NOTE: The reason I’m doing this exercise is that earlier on I introduced you to a guy who specialises in this kind of trading. Did you get my email? It’s about what he calls his ‘pickpocket’ trading method. It’s a way he aims to help you turn a £40 stake into a £960 profit.
There’s been a lot of interest in this since I sent my email. But also a few questions about exactly how this form of trading works.
So I figured an illustration wouldn’t go amiss.
Let’s look at gold then. Here’s a screenshot from the Binary.com website:
Like I said, this isn’t a trade recommendation. And the print was taken a little earlier (gold’s trading around $1,249 as I write).
But let’s go back to the hypothesis I mentioned earlier – about the Fed jacking up rates by 1% in March. Let’s say I wanted to bet on gold crashing on that outcome.
With gold trading at $1,249 today, let’s say I reckon it could drop as low as $1,180 by the end of March if the Fed lights a fire under the dollar with a chunky rate hike.
Right now, I can buy “Touch” binary option that pays out if gold touches $1,180 at any time up to the close on 30th March. I can choose my stake. And as you can see, in this example, from the left hand side of the image, I’ve chosen to bet £10.
That is all I can lose.
Now as you can see from the top right of the screenshot, my payout on this trade would be £49.15.
If I placed this trade, and gold was to touch $1,180 before the binary option expired on 30th March, I would get a payout of £49.15 from my initial £10 stake. So that is a profit of £39.15 which is a return of 391.5% on my stake.
And I repeat: if the trade did not go my way – in other words if the price of gold did NOT touch $1,180 by 30th March – I would lose my entire £10.
But the important part: I could not lose any more than that. The risk is 100% known from when I place my bet. No slippage. No surprises.
And of course, £10 is just an example. You can set your stake at whatever you like (assuming you have the funds in your account!) And you can play around with the “Barrier” level – that’s the level you are betting the market will (or won’t) touch – based on the chart analysis you do.
What do you reckon? Is that the kind of trading you’d consider doing? Have you any experience if binary options? Let me know at firstname.lastname@example.org
The skill in this kind of betting comes in your analysis of not only the direction the market could go and the level it will reach – but the time in which it will do so. That takes some experience.
That’s why we decided to work with one of the most experienced traders we know on a new project that uses this kind of trading. I sent it over earlier.
If you missed it, here are the details.
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