The most popular instrument in the world of trading last years is that of binary options.
They have been in the market for less than 10 years but seem to have taken a good share of the trading world.
Binary options, however, remind me of the sports betting business. This is because, as well as the betting companies, binary options brokers usually give payouts of around 70 to 90%.
In the most liquid assets we will be able to see 90% sometimes and in the illiquid ones (the majority) we will see something close to 70%. It will all depend on where and when, varying significantly from broker to broker.
Typical binary options account
Imagine that an average payout is of 80%, which means every time we bet 100 units we win 80 if we are right or lose 100 if wrong. Simple, is not it?
I think that people do not stop to think about this too much, but whoever that reasons a bit about it will find out that it is almost impossible to win with a system like that.
Suppose that some candidate to become a day trader opens a binary options account of 500 USD or GBP and start trading 1 minute trades with an 80% payout.
Do you know that betting that the EURUSD will fall or lose the next minute is akin to throw dices?
That is the truth no matter how many systems you see around the web saying that they win 80 or 90% of the times.
The great majority of binary options traders will end up doing 1, 15 or 60 minutes trades (1).
Further that there is not much activity.
Some will do week trades but they will be a minority. They will not be successful in the long term anyway.
Suppose that the previous traders with his 500 USD tries the 15 minutes trade using different assets.
He may bet 10 USD per trade, so to speak.
Imagine that the trader does 8 trades a day using a couple of assets.
The vast majority of traders will end up winning and losing half of the times, approximately, that I can guarantee you.
Using our payout of 80 we get that after 8 trades we have 40 USD lost and 32 won (4 wins of 8 USD).
That is a net loss of 8 USD.
Well, after one week we should have 40 USD lost.
In 10 weeks the trader will be liquidated.
This has been a very conservative calculation.
As I am sure the average binary options account trades more aggressively, you can be sure that the average duration of a binary options account is much shorter than that.
Probably, they last just a couple of weeks.
Of course, there will be people able to resist months but they will be not many.
Some guys will last more because of luck, others because being more conservative and others because trading the longer time frames.
However, the vast majority of traders will not last longer than a month. Some will even go belly up after one day.
These traders will take a long time before they realize that it is very difficult to win in that kind of market and keep trying a long while.
I would understand that persistence if it was the only asset available, but there are other assets where the odds are not that bad, such as Forex, CFDs, futures or stocks.
Why would we want to trade using that kind of return (payout)?
Nonetheless do not think that the payouts in Forex, CFDs or futures are much better in one minute trades. On the contrary, as I already mentioned they are about the same.
In general we had better avoiding the short term trades from 1 minute to 1 hour.
The farther we are from those short term trades the better for our accounts.
- It is hard for me to call these people traders since what they do is pure gambling in a way not different from the lottery. At least in some gambling there is some sort of art.