What is the Break Even Ratio?
The breakeven rate is the percentage of the accurate predictions you will have to make in order not to lose any money. If your percentage of accurate predictions coincides with the breakeven ratio, then you will not lose money but you will also not make any money at all.
As you know, in binary options you will be making money if you predict the future movement of an asset. In order to be able to make a prediction, you will have to invest a certain sum of money.
If you make a correct prediction, you will be paid out with the repayment of the investment plus a % of that investment. In most cases this percentage is never 100%. This means that correctly predicting 50% of your predictions will not mean that you will break even.
In order to break even (not lose anything but also not win anything) you will have to have a breakeven percentage of above 50%. Most traders do not even have a clue that this rate even exists. Brokers usually don’t say anything whatsoever about it either.
How to calculate the breakeven ratio?
But fortunately it is not so hard to calculate this rate. The only things you will have to know about are a few parameters. These parameters are the “In the money ratio” and the “Out of the money ratio”. Using these, you will be able to easily calculate the breakeven ratio.
In the money percentage
The in the money rate is the ratio of the profits you will be making in case you make an accurate prediction. In other words, the in the money percentage is basically the payout percentage offered by brokers.
A payout percentage of 80%, for example, means that in case you make an accurate prediction, the broker will repay your investment and offer you a commission of 80% of the investment amount.
Out of the money percentage
The out of the money ratio is the percentage of your investment the broker will take away in case you do not make an accurate prediction. In most cases, when you make an inaccurate prediction the broker will take away all the money you have invested. In this case, the out of the money percentage is 100%.
However, some brokers also offer so-called rebates. Rebates basically represent the percentage of your investment the broker will not take away in case of an inaccurate prediction. Most common rebates range between 5% to 15%.
So, if a broker offers rebates of 15% on losing trades, then your out of the money ratio is 85%.
Breakeven Ratio Formula
The formula to calculate the breakeven percentage is the following:
B = Ot% / (I% + Ot%)
B – Breakeven ratio
I – In the money ratio
Ot – Out of the money ratio
In order to better understand these, let’s look at a few examples that involve the breakeven rate.
Let’s suppose that the broker offers a payout rate of 80%, meaning that the in the money ratio (I) is 80%. The broker does not offer any kind of rebates at all, meaning that the out of the money ratio is 100% (the broker will take away all loses).
In this case, you can calculate the B the following way:
B = 100% / (100% + 80%)
Let’s remove the percentages for the calculation’s sake:
B = 100 / (100 + 80)
B = 100 / 180
B = 0.5555
Now let’s add back the percentages:
B = 0.555 * 100
And this brings us to:
B = 55,55%
What this means is that in the case of a payout rate of 80% and 0% rebates you will have to accurately predict 55,55% of your investments in order not to lose any money at all.
Example with rebate
Let’s take an example of a rebate now. Let’s continue to use a payout rate of 80%, as in, an in the money ratio (I) of 80%. Now, imagine that a broker offers a rebate of 10%. In this case, the out of the money ratio (Ot) is 100% -minus the rebate, which in this case is 10%, so the Ot is 90%.
B = 90% / (90% + 80%)
Let’s skip the math’s part now. You can calculate this yourself with a pocket calculator:
B = 52.91%
So, as you can see, in this case you will only have to accurately predict 52.91% of your trades in order not to lose any money at all. Choosing a broker that offers a rebate is extremely rewarding as you can see.
Example with boundary option
A limited number of binary options such as boundary options, 60 seconds options and one-touch options offer payout rates of above 100%. What this means is that in these cases your breakeven ratio may as well be below 50%.
However, it’s much more difficult to predict the outcome of these kinds of options and your winning percentage will usually be below 50% even in case you just make random bets without any strategy.
So let’s imagine that a broker offers a payout rate of 200%, meaning that the in the money percentage is 200%. The broker does not offer any rebates, so the out of the money ratio is 100%. Based on this, the breakeven rate is as follows:
B = 100% / (100% + 200%)
B = 33.33%
What this means is that in order for you not to lose any money at all you will have to correctly predict 33,33% of all the investments you have made.
Calculating Binary Options Profit Rates
So, now you know how to calculate what percentage of your investment will have to be successful in order to not lose any money at all. However, obviously you will want to know how much actual pure profits you are making as well.
Calculating this is also extremely easy and works using the formula below:
P = W – B
P – Profit ratio or profit margin
W – Winning ratio
B – Breakeven ratio
So, in order to calculate your profit margin you will have to subtract the breakeven ratio from your winning ratio.
The winning rate (W) is the ratio of successful trades. For example, if you have executed 100 trades from which 84 were successful then your winning ratio is 84%. Let’s take the example below:
You execute 46 trades from which 36 are successful. In this case your winning rate is (36 * 100) / 46 which is equal to 78%.
Imagine that the broker does not offer any kinds of rebates meaning that the out of the money ratio is 100% and offers a payout rate of 85%.
In this case your breakeven percentage is 100% / (100% + 85%), which is 54%.
As such, your profit margin (P) is 78% – 54% which is 24%.
So, let’s assume that you were investing $50 on all of the 46 trades that you have executed in the example above. This means that you have generated a total of $553 in profits.
This is calculated by multiplying the number of trades with the investment amount and with the profit margin:
46 * $50 * 24% = $553
In other words, you have invested a total of $2,300 and have won $2,853, from which $553 is profits.
Naturally, you do not have to deposit $2,300 at once in order to achieve that. You may as well deposit as much as only $250 (for example) and progress in increments of $50 investments. In this case you will be reinvesting your profits.
So, this is how you calculate breakeven ratios and profit margins in binary options trading. As explained initially, binary options brokers most commonly never reveal this to traders. The information we presented above is generally never available at any binary options broker.
However, understanding the above mentioned issues is extremely important if you want to become a winning binary options trader. For this reason, we STRONGLY recommend you do these calculations at every binary broker you register at.
You should also constantly follow your profit margin with the second formula mentioned in this article. This way you will know EXACTLY how many profits you are making.
And this is all for this strategy guide. Thanks for reading this and we would much appreciate if you could share this with your friends or fellow traders so that more people will be able to understand how breakeven percentages and profit margins are calculated in binary options trading.
Additionally, you may as well continue to read our other binary options strategy guides that are listed on the menu on the right in order to learn about more advanced winning strategies.