Of the many people who take to trading financial markets, almost all will have expectations of making their fortune. Traders dream of finding the secret to making high profits so that they can retire early having built up significant wealth.
For this reason making a million dollars from trading is often talked about. For many traders this is the ultimate goal that they strive for. But is it really possible to make a million from trading Binary Options? If so, could you be the next trader to achieve this?
To understand if this million target is something that can be achieved from binary options, we first need to have a good understanding of how this trading method works. We can then work out whether achieving this target is a reality, or simply a dream that is propagated by financial marketers.
Binary Options are one of the most simple forms of financial product. They have grown rapidly in popularity in recent years because they are easy to understand. Their key attraction is comes from the high payouts which can be earned over short periods of time. Gains of 70, 80, 90 or even 100%+ are possible in the space of just minutes.
These are not a ‘buy’ and hold investment in the traditional sense. Instead they pay-out a set profit at a predefined time of expiry. While normally this duration is less than one hour, in some instances it can be just a few seconds. You win if the contract ends in your favour at the expiry time.
To understand the quickest route to making gains with these contracts, you will need a basic understanding of how mathematical compounding works. This is not as complicated as it may at first sound.
Any financial strategy can make use of compounding. It works by incrementally building your returns. Here we use our original stake, plus any subsequent returns made on the trade to wager on the next contract.
Let us look at an example using a $2000 account. We are going to trade a $100 dollar trade (5% of our balance) on a contract with a typical 70% return.
Assuming that we win our trade, we now have $170. This is made up from the $100 placed on the first trade + the profit made from the win ($70). We wager this entire amount on the next contract.
If we get another win we then wager $289 on the next trade. This is made up from the original stake, + trade 1 winnings + trade 2 winnings. Get the idea?
This ‘compounding’ continues on each subsequent trade until you decide to bank your profits or you hit a loss.
The principle of financial compounding is a widely acknowledged practice for accelerating financial returns. While there are risks, unlike betting strategies such as Martingale for Binary Options, you are only ever risking your original stake and your winnings. Therefore although several trades down the sequence the amount of money you are staking will have increased exponentially, your risk is still limited to your original stake.
The compounding effect means that the biggest gains come several trades down the sequence.
The following table shows the returns built from a starting stake of just $100 assuming a 100% return per trade. In just 14 trades the magical $1,000,000 figure is exceeded!
The Random Factor
Of course reaching a one million dollar profit with binary options requires more than simply compounding alone. While this technique will help you to build returns fast, you will still need a strategy to get you there. We next need to look at the probability of winning.
As a starting point we have to consider that the market moves randomly over time. Using this assumption the statistical probability of winning any trade is 50:50. Therefore we can conclude that there is an even chance of predicting the correct direction that a price will move. For the moment we are assuming that your strategy and analysis does not increase the statistical chance of success beyond an even wager.
Using this information as a starting point we can use mathematical counting to work out the probability of success. We are looking to achieve 14 wins in a row to hit our million dollar target as is used in our example table above.
If we continue to assume a 50:50 chance of winning (1/2), then our chance of success can be calculated as follows:
0.5 x 0.5 x 0.5 x 0.5 … (fourteen times) = 0.000019 or 0.0019%
So what happens if we adjust the figures to assume a 70% win rate. This figure is typically quoted by trading signals providers as it offers a level to aim for where a good profit can be made.
In this example our calculation becomes:-
0.7 x 0.7 x 0.7 x 0.7 … (fourteen times) = 0.0047 or 0.47%
That’s a huge increase in probability but it still requires a huge chunk of chance! Basically we have less than a 0.5% chance of turning 14 winning trades in a row in our account. A slim chance, but possible!
With the statistical probability of making a long run of consecutive winning trades so low, it’s fairly safe to say that it is pretty damn hard to make your million from binary options in this way!
So what’s the alternative? Of course there is no reason why you shouldn’t make a million bucks by trading binary options. However if you want to achieve this then you need to reset your expectations.
Stop thinking that you can ‘bet’ your way to high returns. Instead develop a structured agenda for your trading and get to grips with a sound money management plan. You can still use compounding to boost your returns. However do so with the understanding that a steady and controlled approach will ultimately yield you the best long term rewards.