By Darrell Martin
When binary trading, it can seem difficult to know exactly what your maximum profit and loss will be when looking at the binary price ladder. Normally, traders will go into their Nadex accounts and click on the bid or the offer opening a ticket, which then requires them to fill in the quantity of contracts they intend to trade. After filling in this detail, the ticket will then provide the desired risk and reward information. This is one way to figure out the maximum risk or reward, but there is a simple technique that can be used without opening an actual ticket.
Here’s how to do it:
Look at a binary price ladder, such as the one pictured below from Nadex.
If selling, the bid side is the max profit potential. Therefore, the max loss is $100 minus the bid quote. If buying, the offer side is the max loss. Therefore, the max profit is $100 minus the offer quote. Notice how when figuring the max profits and losses on the buying and selling, they are opposite.
Let’s look at some examples using the Wall St 30 binary price ladder above. Look at the top of the offer column. If you were to buy one contract for 5.50 that would be your maximum loss on the trade. Your maximum profit would be $100 – 5.50 = $94.50.
The first quoted price in the bid column is 1.75, so let’s analyze that number. Since you’re selling, 1.75 would be your maximum profit potential. The maximum you could lose on this trade would be $100 minus the bid quote of 1.75, so $98.25.
Let’s look at some examples of trades you might be more likely to enter. The Indicative Index is currently shown as being 16428.73, therefore, the Wall St 30 (Mar) >16420 shows the bid price of 51.00 and the offer price is 57.25.
If you were to sell a contract, your max profit potential would be $51 while your max loss would be figured as $100 – 51.00 = $49.
If you were to buy a contract, your max loss would be $57.25 with your max profit potential being $100 – 57.25 = $42.75.
The following may make it easier to wrap your head around this concept.
When selling:
$100 – $51 (bid price, profit potential) = $49 (max risk)
When buying it’s the opposite:
$100 – $57.25 (offer price, max risk) = $42.75 (profit potential)
Of course, you can always open a ticket to see the maximum profit and loss, but this technique makes it easy to see right on the binary price ladder. When binary trading, it is important to know what the bid and offer sides are, what they mean and how you can quickly calculate the risk and reward on each one of the potential binary strikes that you may trade.