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Good afternoon friends!
Have you asked yourself the question, where does the broker get the money for payments on option contracts? Of course, this is not an act of generosity, and there is nothing secret about the scheme itself. To understand it, it is enough to understand the principle of the binary options market . In addition, you will begin to better understand which trading strategy should be used in order to start making money in this market on your own.
What is Binary Option
At its core, a binary option is a derivative, that is, a derivative financial instrument (not of value in its own right). When you buy a binary contract, you are, in fact, betting on the price movement of the underlying asset. The contract describes the conditions under which the transaction is considered successful and the trader receives a certain percentage of payments from the value of the contract. If the conditions are not met, in most cases, the value of the contract is not refunded.
In fact, binary options brokers are not very different from bookmakers, since in fact they do not act as intermediaries in making transactions, working according to an internal clearing scheme. If a broker claims that all transactions take place between the traders themselves, or that all positions are hedged on the stock exchange, in the vast majority of cases this is a blatant lie.
I think it’s no secret that binary options trading is deliberately unprofitable. A coin-tossing strategy alone won’t get you very far, and the longer you trade in this way, the more you’ll lose.
The bottom line is that the mathematical expectation of each trade will be negative, since the payout on a binary option is always less than potential losses. For example, a typical option payout is 70%, while if you lose, you will lose 100% of your bet.
To start making money, the share of profitable trades according to the strategy should significantly prevail over the share of unprofitable ones. At the same time, the strategy should work stably, which means it should be based on a long-term pattern and, of course, should be well adapted specifically for trading on the binary options market.
Oddly enough, just like a trader, a broker develops his own trading strategy. The broker’s strategy is based on statistical patterns, and specifically on how many traders lose and earn in the trading process. By varying the percentage of payments on options, the company leaves the opportunity to earn a certain share of customers without violating its own statistical advantage.
As we found out earlier, by opening trades at random, you will lose money. So, if we take the average temperature in the hospital, traders in their total mass trade by chance, which means that the broker almost always remains in profit.
Sounds simple enough, but this strategy has some serious drawbacks. For example, there are market strategies that allow a trader to be almost guaranteed to outperform a broker. These include news trading . Actually, this is precisely why the broker is forced to introduce additional restrictions on the trading process in order to stay profitable.
In general, this is a struggle between two systems, where your task, as a trader, is to defeat the statistical advantage of the broker, using the market as a tool to achieve the goal. The main conditions for this are the presence of a well-thought-out trading strategy, with a high percentage of profitable trades at the testing stage.
As we found out, traders themselves bring money to the binary options market. The broker makes money by selling contracts to traders. Having a statistical advantage, he almost always remains in profit. However, having a proven strategy in hand, a trader is able to defeat the broker’s advantage and start earning on his own. Therefore, try not to make hasty conclusions, think over every step and take the time to test strategies.