Binary Trading. John Piper

ideas to give yourself better odds of success.

      As an example I will look at a fairly high priced bet which would be expected to come good. I include the Dow 100/100 Tunnel in this category. This bet goes to 100 if the Dow stays in a range 100 points either side of the prior close. It goes to zero if the Dow touches those extremes.

       But how often does it do this?

      This is a good example of something you can test for yourself. Get hold of daily data on the Dow going back a year and work out how often the Dow will stay in this Tunnel. You will find it is well above half the time.

       What is the price of the bet?

      It will vary from day to day but what price would you find attractive? Once you know that, all you need to do is monitor the market and then take the price when it becomes available.

      Conversely, the 60/60 Tunnel on the Dow will be taken out far more often and if you trade these instruments you need to be aware of the statistics. If you know that the Dow or FTSE has a less than 25% chance of exceeding a range and you have bought a Tunnel with that range it will make far more sense to hold to expiry as the Tunnel will close at 100 if the market does stay within the range. But if the odds are nearer 70% that would be an entirely different matter.

      (I have given partial answers to some of the questions raised by the above in the Appendix. There is also more information in Chapter 10.)

      It is important to check out such data yourself as this could be the foundation stone of your trading system. If you are going to become an expert in your system you need to put in the groundwork.

      One of the reasons why so many fail at trading is that they simply do not do the background work. You need to decide on your style of betting/trading and then research every aspect exhaustively.

      In Chapter 6 of Binary Betting I gave as an example a high bet on the Dow. Here too some simple research can give you extremely valuable information. How often will the Dow close in a range between 60 and 80? It is not difficult to find out and once you know you can judge whether this bet gives you an edge.

      Pricing and probability

      The pricing of a sports bet

      With a sports bet all the time the game is played, or the race is run, the binary bet prices will be changing giving you more opportunities.

      With a football game the price will reflect the probability of either side winning the game, some of the key factors being:

      1 the number of goals scored and by who,

      2 the time remaining, and

      3 whether any men have been sent off.

      The concept of value

      But it is important to note that although the price will reflect the probability; it will not be the probability. Other factors will influence price, for example how much money is on each team.

      My statement:

       the price will reflect the probability; it will not be the probability

      may confuse you but it is an essential point. There is a concept known as value which is often applied to bets generally. Professional gamblers are very familiar with the concept as it is how and why they win. A bet has value if it offers better odds than the event itself would lead you to expect. So if the horse, Mr. Splodge, with a binary priced at 8/11, has a 25% chance of winning the binary price should really be 23/27 or thereabouts.

      If you can buy a bet which should be priced at 23/27 at 8/11 then you are clearly getting good value. Similarly if the bet is priced at 8/11 and there really is a 25% chance of Mr. Splodge winning the race then the price of 8/11 may be an attempt to reflect the probability of the event but it will clearly not be that probability – which is 25%.

      It was this concept I was referring to when I was talking earlier about the art of binary betting and said that you should

       give yourself a further edge by choosing bets with a higher probability of success.

      Don’t be concerned if you have trouble with this at this stage. This is something you will develop a feel for as you become more experienced.

      The pricing of a financial bet

      If you are betting on a financial market, perhaps the FTSE 100 Index, then throughout the session the binary prices will be moving to reflect three factors:

      1 The time left on the bet until expiry.

      2 The price of the underlying market as distinct from the price of the bet itself. In particular how far up or down the market is on the day.

      3 Volatility – the speed of market action.

      How far up or down a market moves is a measure of its distance from parity and I define parity as when the market (or index) is unchanged over the relevant period. This period may be a day or a week or an hour, among other time frames. Many binary bets are based on the prior close and in that case it is how far the market is up or down since that prior close that is important. But if we are looking at an hourly bet which may run from 3pm to 4pm then it is the “close” at 3pm that is important.

      However, weight of money is also an important factor and prices will move as money flows in one particular direction. One of the betting companies told me they work on the assumption that if a lot of money goes onto a bet they have mis-priced it.

      Some would see this as manipulation or as unfair. But a successful trader will see it as an opportunity!

      A final word on pricing

      I have said that binary bets can only move between 0 and 100. In fact, although almost every bet I have ever seen has been priced between 0 – 100 there is no reason why other prices may not be chosen, say 32 – 212 (a Fahrenheit scale), or -50 – +50 (where parity is zero). But 0 – 100 is far easier to understand.

      I have seen some bets priced differently, as I said in Binary Betting. For example, on TV’s X-Factor where the pricing was that the winner’s binary rose to 50, the 2nd place to 30, 3rd to 20 and 4th to 10. Together these add up to 100. This can also be the case with horse racing and is why the brief example I gave above on Mr. Splodge may be quoted differently in the real world.

      I am told that the very early binaries were priced between 1 and 10 but this is no longer the case.

      Summary

      In this chapter we looked at four strategies:

       Buying near certainties – high probability bets

       Buying very cheap bets

       Buying low and the trading the bet

       More complex strategies

      We then looked at the key factors that affect binary prices and discussed the probability of success.

      3. The Key Bets

      In this chapter we are going to look in detail at the principal bets, offer suggestions for how you might like to use them and back this up with examples.

      We are now going to look at five of the more interesting binaries for an in-depth analysis of what you can do with them. The five bets are:

      1 Up/Down (reversals)

      2 Tunnels/Barrier Bets

      3 OneTouches

      4 Hi/Los

      5 Football Match – play for the goal

      Up/Down