Why binary options are a mathematical scam

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About binary options and other financial scams.

Introduction:

First of all, be aware, this article is not for sensible or gullible people. I intend with this article demonstrate how Binary Options are the worst product for trading in the retail ecosystem and how they are used to scam people every single day.

Binary options were born as an investment banking product (created by Lehman Brothers) between institutional traders and funds, and the logic behind them was very simple, i want to bet that a certain stock price will be higher or lower than X point at a certain time.

If i’m correct I will win my deposit back plus a payout ratio, usually about 85%, if I lose, I will lose my deposit.

The benefit of this product was merely the advantage of OTC Trading, trading over the counter, because investment banks and hedge funds tend to trade with big volumes and sometimes they can’t trade the market at short term due to liquidity issues.

When we extrapolate this to the retail market, first of all, we lose our only advantage, why do you need to trade OTC when with your trading volume? You will be earning less than trading with normal products.

Welcome to the journey of binary options, from investment banking to a casino product.

Binary options in the retail universe:

Now we know the basics of binary options, that’s something. But what we don’t know yet is why trading with Binary Options will make dissapear any profitable trade or turn it into less profitable.

As I said, this products are traded OTC, and the counterparty will benefit from the client’s losses. Remember, if you issue a product you are taking the conterpart risks but also the profitability. So their main focus is adjusting the payout ratio to make reduce risks for the issuer and try to win some money.

The main difference between a retail trader and a professional one is the analysis capability. While a hedge fund will have a lot of professional analysts doing research, a retail trader, at best will be doing some technical analysis without doing any previous research and backtesting, I don’t know any single “binary options trader” that knows if his patterns or trading system is profitable.

I heard a lot of things like “My trading system has a 90% acuraccy rate”, and that’s simply impossible, let’s see a simulation first:

Binary Options - 90% Winning rate simulation
Binary Options – 90% Winning rate simulation

Starting with just 1.000€ and using 100€ bets doing just 10.000 trades you’ll be a millionaire. No questions, no doubt. Data never lies.

So, is this the perfect reality for “binary options traders”? It’s that easy to trade?

Well, no.

If you are a retail trader expect to win 55%-60% of the time, and that’s enough for Forex and Futures markets but not for this product. If you think you can win every single day you are lying to yourself. You may win three or four days in a row but there isn’t a system so accurate to have those ratios in the long term. Not even hedge funds or CTAs, maybe only High Frecuency Trading.

Forex Trading Strategy
A great Forex Trading Strategy – Backtest data

This is an average trading strategy I teach on my course, 61% percent winning ratio, and each winning trade on average earns more than the losing ones.

Decent ratios, better payout. Let’s do a simulation to compare better the results of an strategy using binary options vs Forex:

Binary Options 61% acuraccy
Binary Options 61% acuraccy – GBPCAD Strategy simulation
Forex Simulation - 61% acuraccy - Ratio 1 to 1
Forex Simulation – 61% acuraccy – Ratio 1 to 1

As you can see, the difference is huge, less dispersion, smaller drawdowns over time, more money earned… And as i said, this strategy is a great one. Some strategies doesn’t have an acuraccy ratio as big as this one. But maybe the risk reward ratio is bigger, something that you can’t change with binary options.

As i said, an average winning for a intraday strategy will be between 50% and 60%, having in mind that will be some hours in the market. The shorter the time frame or the time exposure to the market, the winning ratio tends to be less.

Binary Options 55% Acuraccy rate simulation
Binary Options 55% Acuraccy rate simulation

With smaller winning rates we start to see the effects of randomness and smaller survival odds, not winning odds but survival, since some of this simulations went broke after a few trades.

We are starting to see a random walk effect without any trend, just something that is completely random without any effect in the market at long term.

Binary Options 50% Acuraccy rate simulation
Binary Options 50% Acuraccy rate simulation

While a 50% winning ratio should be enough in Forex to at least not losing your account, in Binary Options that means losing everything.

In case that you are able to make a profit trading binary options, as you can see, you are going to earn less money, and in most cases, you are going to lose everything. Data don’t lie.

You can lie to yourself as long as you want, but if you see the facts, at least, you can change your habits. Most people are going to lose money over time, and the worst part is that they don’t even know since they don’t research their strategies.

Why they are popular?

I wanted to explain this after learning the statistic facts behind binary options, since this question is more complicated to answer, at least in a polite way.

Let’s state a fact here, the vast majority of people doesn’t have any financial education, they don’t even know how to calculate compound interest, and this gets worse in less developed countries, for example on Latin America and Africa. Since the broker creates the market and benefits from the losses of their clients, the minimal deposit is very low and afforadable for anyone.

If we combine the fact that is affordable with their low survival expectancy, we have an explosive combination to steal money from the pockets of people with wealth dreams. But that’s not all.

Instead of telling you the risks of this product, they use affiliate marketing to have people spreading misinformation about this product for a recompense, usually about $100 up to $1,000.

IQ Option affiliate program
IQ Option affiliates program

As you can see, they make money selling this products to other people, and for doing that they need to tell you things like:

You are going to get rich overnight, just use this magical indicator for free, here is my link.

You can earn a lot of money ‘predicting’ the market direction.

You lose because you are a bad trader, i can teach you if you use my broker.

All lies, seeing the odds of survival, it’s like going to a casino, you may get lucky at the short term, but at long term only the house wins. In this case, the house and their promoters.

People earning more than $200,000 in one month selling a product that, in their own words, is supossed to earn money from the house.

Why they would pay people to promote a business if said people will get them bankrupt?

So, in summary, they profit from your losses, just like a casino but with a more sophisticated aura. And that’s the reason behind any person that says you he lives from trading binary options just makes a living SELLING Options to other people.

More casino products:

Let’s talk about Binary.com and their synthetic indexes, i’m not going to tell that those are a scam, just a casino product.

Synthetic Indices
Synthetic Indices – Binary.com

There is no point in random markets, since they are completely random they don’t have any inefficiency that we can exploit, unlike Forex or Futures, since the participants move the market, not a “random number generator”. In this case maybe a countertrend strategy may do the trick, but they don’t offer enough historical data to test that, so there’s no point trading this product.

As you can see, that’s not a profitable market. The broker is the product issuer and the counterparty, and they don’t want you to win. In fact they hire quantitative analysts to make their products. And them know best than anyone how to make something profitable for the broker, have in mind that even if their indices had a fair distribution, something that i don’t know, they have a spread that makes the odds against you.

Take a look to see how they prepare their quantitative analysts, you are not even a rival to them.

You can’t beat the house, you only can beat other traders in a fair market (Futures, Stocks, Forex).

In summary:

Related: ESMA’s Stop To Binary Options In Europe

Binary Options Fraud

Binary options and the ecosystem related to them, like synthetic indices are made to extract money from gullible and uneducated people with wild and impossible dreams of being rich overnight. The market can help you to make some money if you trade right and have the odds on your side. But for that you need more friendly products.

If I want to buy a contract in the futures market its because someone else is willing to sell me one. If i want to buy a binary option, the broker is the one selling it to me.

Remember folks, data never lies. Don’t waste your time going the hard way with barely regulated casinos or boiler rooms and trade decent products, Forex its ok if you use an ECN brokerage firm, and if you can afford to trade futures even better.

If you want to learn how to make systems with a trading edge don’t forget to visit my forex algorithmic trading introductory course.

Hope this can help you, Víctor. – Follow the edge.

 

 

victor

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