How Binaries Work - Binary Betting Explained
Binary betting can at first seem like an alien concept, particularly for traders unfamiliar with spread betting and the concept of fixed odds. In actuality, it serves as an easier trading style than many others, insofar as understanding the ins and outs of the system are concerned. While the individual markets for binary bets vary depending on the broker you chose, the basic underlying principles remain the same.
Binary bets are quoted similarly to spread betting, which defines both the buy price, the sell price and the commission component taken by the broker. The outcome is then settled as either a win or a loss – numerically, that’s 100 or 0 respectively. If you buy a position and the market moves up, you win, whereas if the market falls, you lose.
Note that binary betting is not concerned with the volumes of movement in a market – it’s simply a bet on whether the market will move up or down. This makes it (theoretically) easier for the trader to call the outcome, and in essence, you can only ever be right or wrong – there’s no margin for a small gain or a massive loss.
A broker quotes spreads for binary bets on oil prices at 63-68. This represents a reasonable likelihood that the market will rise over the period, because the broker has effectively shortened the odds offered. The trader can buy at 68, and if the market rises, his profit portion is stake x (100-68). If the market falls, his loss is stake x 68.
This means there is a cap on the potential profits and losses that can be taken from a transaction. Unlike spread betting, where the extent of market swings represent greater returns (or losses), it is only the direction of movement that factors in to the equation when dealing in binary bets.
Regardless of the market the binary bets are offered on, the fundamental concept works the same – bets are settled at either 100 or 0, and are quoted on spreads that sit somewhere within that range, allowing the trader to capitalize on forecast market movements.