Binary Trading. John Piper

than a year ago I wrote Binary Betting – an introduction to binary betting. At the time my publisher had to hold me back. Explaining how binaries work is clearly an essential thing to do. But my passion is trading and it is the trading of binaries that really interests me.

      Don’t get me wrong, Binary Betting is a great book and was the first book written about this important new way of trading. I was not the first trader to discover binary bets, by a long way, but I am proud that I was the first to share it with other traders.

      But as I was writing Binary Betting my publisher kept reassuring me. “Don’t worry,” he would say, “once people understand the basics you can write the book you want to. Just stick to the basics this time.”

      Well, it was a long, hard grind but we got it done.

      And now I have written the book I wanted – here it is!

      In this book you will find that binaries come alive rather like a Porsche 911 in the hands of a good driver. No longer will you be at the whim of the market, a few ticks away from hitting your stop, but you can trade the most outrageous moves in complete safety. I am not saying you will always win but you can plan your strategy in the knowledge that you will never, bar a few exceptions, get stopped out and that you can only risk what you put down on the table.

      Today in the UK over 70% of adults get involved in some form of gambling and trading. At the same time we have more opportunities to gamble and bet than ever before. It is estimated that around four million Britons take part in the £5.25 billion online gambling business.

      This book is about a relatively small sector within the online gaming business. Binary bets, as we know them now, were only introduced in 2003, but they offer many benefits over other forms of betting and trading. Here is a brief summary of those benefits. Only one of these is exclusive to binary bets, but no other form of betting offers the same powerful combination:

       the ability to bet on both sporting events and financial markets

       fixed-odds betting allowing tight control of risk

       constantly updated prices which can move very quickly

       the option of opening a bet at any time

       the option of closing a bet at any time – you don’t have to wait until the game is over

       low minimum bets so you can cut your teeth without risking the ranch

       high maximum bets so you can rake it in once you know what you are doing

       the ability to place bets on the internet, via suitably equipped mobile phones (PDAs), and (sometimes) by telephone

       the availability of some unique bets giving unrivalled flexibility

      If you are looking for fun, rather than cash, then this book will show you how to have fun in a way that will also give you a good chance of making money. But there will be times when you have to choose between fun and cash – you can’t always have both.

Part I – Essentials

      1.A Day in the Life of a FTSE Binaries Trader

      The FTSE on 26 November 2007

      It’s a tough life for us traders

      Getting up early to review the charts before FTSE opens can be simply too much bother for some traders but I consider it essential. As I do this I make notes and here are today’s:

Date: Monday 26 November 2007

Location: Naithonburi Beach Resort, Phuket

FTSE’s prior close: 6262.1

200 day MA: c.6420

Major Trendlines: c.6000 – 6500

Notes: FTSE has bounced well off Thursday’s (22nd November) low at 6026.9 – see chart below – and it looks like it is time for a pullback (possible five-wave form developing) so I plan to go short today. The big question at this time is whether this rally is going to build a head of steam into the Christmas period. Elliott Wave patterns suggest two main alternatives. Either a feeble wave 4 rally which could stagger into Christmas, or new impulsive action which would give the bulls some real festive cheer. Either way I expect more upside but FTSE may well want to re-test 6026.9 first – it is this re-test that sets the scene for the trade today.

      Right, it is now time for breakfast on the beach. Damn hot it is to – I said it was tough! I have around six hours until FTSE opens and the fun begins, I have to try not to be too miserable in this island paradise up to that point.

      As this is titled “a day in the life” I suppose I ought to mention the sunbathing, wave jumping, and lunch...

      Actually I will mention lunch.

      I ordered king prawns and they were around 12” long! Pretty impressive prawns. And freshly barbequed. It doesn’t hurt that they cost around £6 – I would have paid ten times that in the UK, although no restaurant in the UK can compete with a Thai beach for ambience.

      Anyway at 2:50pm (7:50am in the frozen wastes) I was back “on station” at my PC expecting an early rally and looking to sell as I think it is time for a pullback.

      Market opens

      The early action supported my view with a failed break above 6300 (meaning FTSE poked its head above 6300 and promptly fell back) and at this point I bought the following bets:

      1 FTSE to end down >50 points – bought at 14

      2 FTSE cash low to be <-100 – bought at 8.9

      Both of these bets should prosper if we see a decent fall, even if FTSE does not go all the way.

      I did consider the bet FTSE to end down but it was priced at around 40 and this did not offer such good odds. To put this in trading terms the risk/reward was not to my liking.

      Here is a chart of the action including the sell signals on the day itself. I have also marked the possible five-waves up on this chart. The five-wave pattern is a technique from the Elliott Wave Theory and I will be discussing and explaining this thoughout the book.

      Chart 1.1: FTSE 100 Index, 24-26 Nov 2007

      A quick note on binary betting

      For those of you unfamiliar with the delights of binary trading I ought to make a number of important points.

      Unlike with spread betting I am not worried if I do not catch the high – I cannot get stopped out of most binary bets, even if I wanted to. The fact a market may go 30 or 40 points against me is not of major concern as long as it goes the right way eventually.

      If I buy a bet at 40 my maximum profit is 60 (100 – 40) as a binary bet can only move between zero and 100. That is a reward of only 1.5 times my risk (60 divided by 40 = 1.5 = 150%). But consider this ratio on my other two bets. Buying at 11.4 gives me a potential reward of 88.6 (100 – 11.4) and a ratio of almost 8:1. Buying at 8.9 is even better giving a potential reward of 91.1 (100 – 8.9) and a ratio in excess of 10:1.

      Consider this in the context of risking a total of £100 on each bet:

       Buying at 11.4 allows £9 per point (11.4 x £9 = £102.60). My maximum potential reward is then £797.40 (88.6 x £9= £797.40). In percentage terms that is a return of 777%!

       Buying at 8.9 allows £11 per point (8.9 x £11 = £97.90). My maximum potential reward is then £1002.10 (91.1 x £11= £1002.10). In percentage terms that is a return of 1023%!