One of gambling strategies, Martingale has been used in France since the 18th century. Does it apply to the binary options market?
Martingale’s principle is very simple: double the bet after every loss. It has been used in games that rely on being 50% effective, such as “heads or tails”.
Let’s say John invested $1 and wants to bet on heads regularly. It’s tails. His next bet is $2. If it’s tails again, then his next bet is $4. If it’s heads, he’s lost $3 (1+2) and his net profit is $4. Thanks to this strategy John gained $1. If he wins, he goes back to his original bet. But what happens when he only has $7 and he was wrong 3 times in a row? There’s only one answer: he’s a bankrupt. This is why using martingale not only requires significant capital, but also high stakes limit. Still, we risk losing the entire capital (a losing streak is always possible) and we do not earn much at the same time; you’re very likely to win small amounts of money and there’s a slight risk of losing significant capital.
Martingale has also been used in the present-day gambling, e.g. in roulette, bookmaking or Forex. There are also those who use its principles in binary options. Still, martingale’s popularity is a product of its simplicity not effectiveness. It may seem a very sensible strategy that ensures minimizing losses, but if it’s that effective, how come we don’t triple the bet every time we lose?
The table below shows why following the strategy may be extremely risky, especially in the long run:
Doubled games Stake ($) Chances of losing the next bet The cost of winning ($) The amount won ($) Profit ($) 0 1 50% 1 2 1 1 2 25% 3 4 1 2 4 12.5% 7 8 1 3 8 6.25% 15 16 1 4 16 3.1% 31 32 1 5 32 1.5% 63 64 1 6 64 0.8% 127 128 1 7 128 0.4% 255 256 1 8 256 0.2% 511 512 1 9 512 0.1% 1023 1024 1 10 1024 0.05% 2047 2048 1
The chances of losing 9 times in a row are 0.1%, but – at the same time – when somebody follows the strategy for 1000 bets, chances that they will enter a losing streak at least once are extremely high and such a streak may cause a terrible loss.
Binary options do not offer doubling the stakes. Profits range from 70 to 80% of the stake, so following this strategy in its most typical version will not help us make a profit– it will cost us the minimal loss, which is why to make use of this strategy we need to go even higher and – sometimes – triple the stake.
Let’s go with an optimistic scenario and assume that our options make 80% profit. This means that our stake should be increased by more than 120%. Since brokers have different minimum and maximum settings, the range of martingale usage differs. For instance, if a broker offers the minimum of $10 and the maximum of $10000, then after 8 losses we won’t be able to go higher and it’s over for our martingale strategy. What’s more, as we risk more than $5000 to earn no more than $10, it doesn’t seem worth the risk.
If you really want to go with martingale, make sure that its effectiveness is about 70%. Also, go through your past strategies and check how long your losing streak was. Still, remember that your strategy may fail even 10 times in a row, because every strategy may just have a bad day and history does not always repeat itself. It’s best to wait it out than go with systems that cause your account to be in the red. What’s more, betting low in the beginning helps since you may just find out that you don’t have enough money to go with this strategy.
Hedging binary options strategy means opening two compensating opposite options at the same time so that the options are protected. For instance, a “high” option is offset by a “low” option, and the other way round. This strategy has been successfully used in the Forex market, but it’s forbidden by some brokers. Opening two opposite, equally priced positions in the Forex market (a longer and a shorter one) causes them to counteract and, theoretically, they become neither losses or gains. Such a situation can be used when we’re not sure of the outcome of the opening position. Then, using tools such as take profit, profit target, stop loss and limit, we can minimize the risk of closing the position with a loss by opening a counteracting position.
But how can we use hedging in binary options? As we know, winning means making a profit of 70-85%, so opening two counteracting options means at least one of them is a complete, 100% loss. Globally we’ll lose either way. Even if we take into account that some brokers refund up to 15% of a failed option, then – in the best-case scenario where the potential gain from both options is 85% and the refund is 15% – we’ll break even. What kind of security is this then?
Hedging strategy and binary options
Let’s say that we open a “high”-type option at $20. According to our analysis, it’s the more probable direction than a “low”-type option. Still, we want to make sure. Therefore, without changing the asset, we open a “low” option, but at $10.
What happens when we’re right about our “high” predictions?
Let’s look at these three possibilities:
- the option makes 70% profit;
- the option makes 80% profit;
- the option makes 85% profit.
The first scenario, when our “high” option brings $14 profit ($20×70%) and our “low” option brings $10 loss, the net profit with the Hedging strategy is $4, so 20%. Adding to that the maximum possible refund that’s available with some brokers (15%), we’ve made $5.5 (14-10+1.5), so 27.5%.
The second scenario, when our “high” option brings $16 ($20×80%) and our “low” option costs us $10, the net profit with the Hedging strategy is $6, so 30%. Adding to that the maximum possible refund that’s available with some brokers (15%), we’ve made $7.5 (16-10+1.5), so 37.5%.
The third scenario, when our “high” option brings $17 ($20×85%) and our “low” option costs us $10, the net profit with the Hedging strategy is $7, so 35%. Adding to that the maximum possible refund that’s available with some brokers (15%), we’ve made $8.5 (17-10+1.5), so 42.5%.
What happens when we’re wrong about our “high” predictions and “low” is the winner?
Let’s take a look at these three possibilities again:
The first scenario, when our “low” option brings $7 profit ($10×70%) and our “high” option costs us $20, the net profit with the Hedging strategy is $13, so 65%. Adding to that the maximum possible refund that’s available with some brokers (15%), we’ve lost $10 (20-7-3), so 50%.
The second scenario, when our “low” option brings $8 profit ($10×80%) and our “high” option costs us $20, the net profit with the Hedging strategy is $12, so 60%. Adding to that the maximum possible refund that’s available with some brokers (15%), we’ve lost $9 (20-8-3), so 45%.
The third scenario, when our “low” option brings $8.5 profit ($10×85%) and our “high” option costs us $20, the net profit with the Hedging strategy is $11.5, so 57.5%. Adding to that the maximum possible refund that’s available with some brokers (15%), we’ve lost $8.5 (20-8.5-3), so 42.5%.
Is it worth it?
Hedging strategy is easy to follow. As it’s been shown, it restricts both the losses and the gains. There’s no guarantee of a stable profit. The strategy is effective when choosing brokers with the highest refunds. It’s up to the trader to know what’s most important: minimizing or maximizing the risk and gains.
Here’s a simple strategy drawn up by our fellow trader: using the basic indicators in such a restrictive way that only few signals are generated, making them more effective.
It’s all about seeking the overbought and oversold moments.
We set the chart on 5M time interval.
In the price chart we install the following indicators:
- 2 x simple moving average (SMA), one set at 100 (here: yellow) and the other at 50 (here: purple).
- Bollinger Band set at 20 and 2.5 (not the default/standard settings).
- The RSI set with the period of 3 and levels 10 and 90.
- ForexMTN on the RSI chart for better visualization (optional).
CALL – if 100 SMA is below 50 SMA (a signal of an upward trend), and the price chart is below those two lines. Also, if the signal candle’s chart closes below the scope of Bollinger Bands. To confirm the signal we check the RSI (there’s a blue signal if it’s oversold). If the above is true, we enter the call option on the next candle for 30 minutes.
PUT – if 100 SMA is above 50 SMA (a signal of a downward trend), and the price chart is above those two lines.. Also, if the signal candle’s chart closes above the scope of Bollinger Bands. To confirm the signal we check the RSI (there’s a red signal if it’s overbought). If the above is true, we enter the put option on the next candle for 30 minutes.
PUT option (click to enlarge):
If we want more signals, we can test this strategy on 1M chart and set the expiry date at 15 minutes. Bear in mind that the right RSI level is crucial.
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One of such strategies has been developed by a fellow well-versed trader who’s worked on it for many months. This strategy is characterized by high success rate (up to 70-80%) and fewer signals. As we all know, it’s quality over quantity: you can always make up for the signals with an adequate stake. This strategy should be used with short expiry dates (15 minutes – 1 hour). It adjusts to the current trend and can be used on many currency pairs (we send the recommended pairs along with the strategy). It’s semi-automated, which means that the signal is generated automatically by means of an arrow and an alarm. It can be used by the beginners.