Binary Trading - John Piper

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fact there is no bet for a market to reverse but this is how I classify the Up/Down bets. For example, if I bet on FTSE to close up or FTSE to close down I generally buy them when they are less than 50. So I will buy the FTSE to close down when FTSE is up and the FTSE to close up when FTSE is down. If I am to win, FTSE must reverse.

      I must stress that this is just the way I trade and it does not mean you should do the same thing. You will have more successful trades if you buy FTSE to close up when FTSE is up. But you will pay more for the bet and your profits will be less – it is your decision as to which is the best way to trade these instruments.

      To repeat a basic point: the bet will go to 100 if the event occurs, i.e. if FTSE does close up/down, and go to zero if the event does not occur.

      Here are three ways in which to profit from this form of bet:

      1. Small moves

      A small move by the underlying market can have a substantial effect on the binary price – especially if that small move takes the underlying from up to down, or vice versa. Another way of saying this is that the small move takes the underlying market through parity.

      For example, if FTSE is 5 points up and it is 2pm then the FTSE to end up bet may be priced at around 55/60 reflecting the fact that the market has two and a half hours before it closes.

      At the same time the FTSE to end down bet would be priced at 40/45 – remember that the bets are a mirror image of each other, both sides adding up to 100.

      If FTSE now moves 12 points down and takes an hour doing it then the price of FTSE to end down may now be 66/70 reflecting the fact that FTSE is now down 7 points and there is only an hour and a half until it closes.

      Here is how you might trade this:

      Table 3.1: Small move trade

Time and action Price of FTSE to end down
2pm FTSE is up 5 points 40/45
Buy at 45
Risk control – plan to exit if price drops to 20
3pm FTSE is down 7 points 66/70
Sell at 66 – profit 21 points (66 less 45)
Cash profit at £10 per point – £210 (21 x £10)

      

      2. Extremes

      Traders often look to catch highs or lows and these sometimes occur in fast market conditions. This poses problems for spread betters because risk is enhanced. If the spread better wants to risk a maximum of 20 points he has a problem because:

       In fast markets 20 points may take around 20 seconds

       He can never be sure where the high or low comes in

      In the table below I set out how a spread better and a binary better may do in such a situation.

      Table 3.2: Trading an extreme

      I know many spread betters who would relate to the spread better’s side of this story and I have been there myself. Although I have never actually broken my hand, I have had the hangovers.

      The key point here is that the binary better can relax because he is never exposed beyond the cost of the bets. So he is not subject to the – sometimes extreme – emotions which can be triggered when market action goes against us. To make money in this situation the market would need to rally strongly and this will not always be the case, but those using binaries can stay positioned whatever the market throws at them and can then take the rewards that may be offered.

      3. Very low risk

      This is an example of a bet I placed myself in the first few days of 2007. US markets had put in a good performance in the first hour or so on Wednesday, 4 January 2007, its first trading session of the New Year, and the Dow was up around 120 points. That rally had traced out five waves which is one of the trading techniques I use when looking for possible reversals and those five waves gave me a sell signal.

      When that sell signal was given I was able to buy the bet Wall Street to end down for 3.9. Now, as you now know, binaries can only move between zero and 100. Buying at 3.9 means that my total risk was 3.9 points and at £10 per point my risk was £39. But my potential reward was 96.1 (100 – 3.9) which comes in at over 24 times my risk. There is no other trading vehicle which offers anything close to that sort of risk/reward ratio, certainly not futures, options nor spread betting.

      In the event US markets plunged down and the bet went above 90. To put this in monetary terms at £10 per point your total risk would have been £39 – potential reward £900!

       That is what I like about binaries.

      Tunnels/Barrier Bets

      With a Tunnel or barrier bet it is critical to read the bet description carefully. Some go to 100 when the underlying market stays within the designated range. For example, the FTSE +50/-50 Tunnel will go to 100 if FTSE does not make a high or a low 50 points or more away from the prior close. Others go to 100 if the range is broken. Some are even more complex and only go to 100 if the underlying market penetrates both extremes.

      Here are two ways in which to profit from this form of bet.

      1. Support levels

      There are three main classifications of market action. The market can either:

      1 go up

      2 go down, or

      3 go sideways

      There are times when it is likely that the market will do something but we do not know what. For example, if a market comes down to a level from which it has previously rallied strongly (such a level is known as support) a number of traders will be looking for another strong rally. But these traders know that if support breaks the market may fall sharply.

      In such a situation the obvious trade may be to buy the market at support. This could be done as in the example set out in the following table (Table 3.3) and if we get the direction right that is fine.

       But what if support breaks?

      In the table we contrast the behaviour of a Tunnel with a more conventional up bet.

      For the remainder of this section I am going to refer to these bets as Tunnels and they will go to 100 if the underlying market stays within the designated range.

      Table 3.3: Trading at support level

      In this example we may consider both traders to be fortunate as the market rallied off the early low which gave the Tunnel trader the opportunity to sell at a better price and the FTSE to end up trader the chance to profit on half of his position and limit his eventual loss. But, on the other hand, markets do tend to bounce at support – which is why it is called support in the first place! It is simply that such bounces do not

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