Just for the sake of completeness, I will cover binary betting here, though I don’t consider it in the same way as financial spread betting. Binary betting is a straight up-or-down bet. Do you think the FTSE 100 is going up in the first hour of trading? Fine, make this bet, and if you are right your winnings are a set amount – regardless of how much or little the FTSE went up.
As such, it is more like gambling, and there’s no such thing as working out the risk and reward ratio to see which bets are better. There is a risk and reward ratio, but that is dictated by the terms of the bet which are set by the bookmaker. I would sooner choose my own.
Another issue with binary bets is that they are available on a much smaller range of financial products, so you cannot move around to find the market that is most active or predictable at the moment, as you can with spread betting.
In favour of binary betting, you have a limited downside (although you also have a limited upside), and it is very easy to understand. It is more like taking out a bet on the Grand National, rather than trading on the stock or Forex markets. Still, because it is so simple, people who are put off by the idea of spread betting, and particularly by the idea that you can lose more than you stake, are likely to think of binary betting.
Just as an example so you know what I mean by a straight up-or-down bet, here’s a binary bet on the FTSE. You ask for a quote on the FTSE Index for the day, and the bookmaker gives you 48-55 as the prices. The first figure is for betting that the FTSE will be down at the end of the day, the second figure is for betting that the FTSE will be up. Say you want to bet the FTSE will be up, then you can buy at 55, say £1 per point. That’s a cost of £55.
If the FTSE finishes the day higher, then you get back a set amount, £100. If it doesn’t you get nothing, and the bet has cost you £55. On the other hand, to bet that the FTSE would be down would have cost you £48, paying out £100 if you were right, and losing you your entire stake if you are wrong. No matter how much or how little the FTSE moves, the bet depends solely on whether it finishes above or below its previous level.
You can also see where the bookmaker makes his profit from this example. If you took out both an up and a down bet it would cost you £103, but the bookmaker only pays out £100. That’s the same thing as the spread in spread betting, and keeps it easy to understand.
Now if you seriously want to pursue binary betting, I suggest that you take a scientific approach to it, and do some analysis to put the odds in your favour. Just as there are punters who choose their pick for a flutter on the Grand National by using a pin in a list of names, there are some who approach binary bets the same way, and take a complete guess. But you know that the bookmaker will win in the long run because of the built-in margin, so this is not a plan.
You might choose to do some analysis of the FTSE, for instance discovering how often after an up day the next day is an up day, or how often after the first hour is up the FTSE finishes the trading day up. Whatever you think might be related to the future outcome is worth analysis. Then it’s a relatively easy application of maths to see if the bookmaker is offering odds or prices that allow you, on average, to win. You can be sure that the bookmaker does his own calculations when setting his quotes, but he may not be looking at the same aspects as you.
Still, for the would-be serious student of the markets I do not feel that the binary bet gives you enough scope or reward for your efforts, and generally do not recommend it.