Transaction costs are inescapable when you’re trading the markets. Whether you’re trading the spot forex market or purchasing binary options through a European exchange like EUREX, you always have to pay if you want to play. Under regular market conditions, costs come in the form of either a commission or a spread, with different arrangements available depending on the asset traded and broker used. However, binary trading brokers do not charge any per-trade fees or make any money from commissions, something which has both advantages and disadvantages.
In binary options trading, transaction costs are generally up-front in nature, with no additional costs other than what is factored into the final payout amount. Instead of analysing fees per se, traders are advised to study the difference in terms between one side of a trade and the other and how they relate to the probability of success. This is known as the break even ratio, and calculating it is integral to success when trading binary options. While the simplicity of the cost structure may seem attractive to new investors, the opaque nature of costs can make options trading more complex and expensive than other forms of trading.
Break Even Trade Ratio
Calculating the ratio and profit margin in binary options trading is probably the single most important thing to understand. The ratio is the percentage of accurate trades needed to actually make money. If your percentage of winning trades coincides with it, you will break even. If your percentage of winning trades is greater then you will be profitable. While all that might seem simple at first glance, what many brokers won’t tell you is that you need more than 50 percent of your trades to be right in order to reach the even point. Because costs are built into binary options in a somewhat opaque manner, it’s vital to understand and calculate it prior to every trade.
Break Even Formula
The formula to calculate the percentage is quite easy to understand, as long as you have the relevant data to hand.
B = Break even ratio
I = In the money ratio
O = Out of the money ratio
B = O% / (I% + O%)