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4/14/2022by admin

Binary Options Trading vs. Financial Spread Betting

The Isle of Man, a self-governing Crown dependency for which the UK is responsible, has issued licenses to companies offering binary options as 'games of skill' licensed and regulated under fixed odds betting by the Isle of Man Gambling Supervision Commission (GSC). The Roundhill Sports Betting & iGaming ETF (NYSE: BETZ) is a pure-play investment option to get exposure to several of the companies launching online sports betting in Michigan.

  1. In a binary option, you are asked to choose whether an even will or will not happen. In most cases, you end up betting on whether or not an instrument will go up in price, and whether or not it will go down in price. Prices ranges from 0-100 depending on how likely the binary.
  2. Michigan launched online sports betting on January 22, with a handful of companies offering their services in the 10th most populous state in America. I downloaded six of the sports betting apps.

Binary options trading is a trend that is taking off around the globe. If you are familiar with financial markets or a forex trader then you have certainly heard of spread betting. Or, if happen to be in the UK, you probably are already somewhat familiar with financial spread betting because of how common they are in the bookies. You can place financial spread bets at your local betting shops and bookmakers.

This page looks to compare and contrast binary options trading and financial spread betting.


Interest in spread betting (red) and binary trading (blue) over time.
As you can see, binary trading is just recently coming into favor and has just now started to reach the levels of spread betting. Binary options are new, exciting and simplified way to trade.

Overview of Spread Bets and Binaries

Binary options and spread bets are similar in many aspects. They both allow traders to predict the price movements of a wide variety of underlying assets and risk money on those predictions. Neither binary options or spread bets actually purchase the underlying asset in question, they both just allow the trader a way to bet on the price movement.

Binary options are fixed risk contracts. This means when you place a binary option trade your profit and loss is fixed and can only turn out one of two ways. You can only win a certain amount or you can only lose a certain amount. This differs from financial spread betting wins and losses can be theoretically unlimited. If you do not set stop losses points to take profit with spread betting then you can win or lose based on the magnitude of price movement. You can learn more about them here. Actually, most of the content on this site is related to trading binaries in some form or fashion.

With binary options your risk and profit are limited. With spread betting you can win or lose depending on the magnitude of movement. With binary trading, magnitude of movement does not determine the payout amount. If you finish in the money by one pip, it is the same as finishing in the money by 50 pips. With spread betting, you would make considerably more money by earning a 50 pip move and considerably less with a 1 pip move as with spread betting you are usually betting a certain amount on each point move in your direction.

  • Spread bets – each point that moves in your favor you earn more. Each point that moves against you you lose more.
  • Binary bets – as long as you finish in the money you earn the same return regardless of how many points the price moves.

Binary options trading and financial spread betting are quite similar but operate somewhat differently. The main differences arise from the way that trades themselves functions. Both binary options and financial spread betting allow you to make a prediction about an underlying financial instrument and then win or lose money based off of what happens.

Let’s look at binary options first.

Binary options are known as fixed options because you risk a certain set amount of money and when you win, the payoff will be fixed at a certain percentage of your wager. If you lose, the amount of money you get back will also be fixed at a certain percentage. So say you are looking at the price of gold and you think it will go up during the expiry period. You choose High, or Up, or Call (they all mean the same thing) on your binary options trading platform and wager $100.00. If you win the trade and the payout percentage is 75%, you’ll win $75.00 If you lose, and the refund guarantee is fixed at 15%, you’ll get back $15.00 and lose $85.00.

Now consider how financial spread betting works.

With financial spread betting you are betting on what a financial instrument will do. You can place a similar high or low trade. If you think the price is going up, you buy, if you think the price is going down you sell. The big difference is you do not fix your risk when you select how much money you’re wagering on an outcome with financial spread betting. Instead, your losses or wins can both theoretically be unbounded. This is very much like trading in other markets such as Forex. You place an entry, and your winnings or losses pile up according to a formula as the market moves in your direction or against your trade.

Spread betting takes another level of traders psychology in order to properly let your winning trades ‘run’ and stop your losing trades as fast as possible. With binaries it is a bit different because you can place this trade and walk away until the expiry and see if you won or lost. Your risk is automatically fixed with binaries, you have to fix your risk when spread betting with stop losses.

There are ways you can fix your risk and your rewards spread betting. You can set a stop loss, which will automatically close your position should it move against you by a certain amount. If you place a take profit, this will automatically close out a winning position once it has moved in your favor by a particular amount. In this way, you can prevent unlimited wins and losses.

This is why the notion that binary options are superior because “your risk is fixed” is a bit misleading. You can technically fix your risk while doing spread betting or some other trading activity as well.

Best One? Binaries or Spread Betting

Which is better, financial spread betting or binary options? The real answer is it is up to you and your psychology. I like to say that binary options are simple, not easy. Simple to trade, but not easy to win.

Spread betting is more complicated. It is not as simple. It requires you to make more decisions about your trade because even a small trade can turn into a big trade if the price really starts moving. Which is better for you is the question you should ultimately be asking yourself.

Both present traders with relatively simple concepts to comprehend, so you shouldn’t have a problem learning either. As a trader, you have your own unique trading personality, and that may be a determining factor in whether you trade binary options or do spread betting instead. There are other factors too which may drive your decision, including deposit requirements, minimum and maximum trade sizes, and so on. Every broker (whether they offer binary options or spread betting) has unique rules for every aspect of trading, so it may also be a question of which broker is best for you. Do some research, test some trades, and figure out for yourself what type of trading you like to do—it may even be a combination.

  • Getting Started With Binary Options

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The DAX index (Deutsche Aktien IndeX), commonly referred to as the Germany 30 by spread betting providers is the benchmark market index for Germany. The DAX 30 also happens to be one of the most overlooked indices by traders. The big markets such as the DOW, S&P and FTSE are well known and spread traded, but the DAX 30 usually finishes up as an also-ran. This is a pity, as if you take time to know the way the DAX 30 moves, you will see that the index is very volatile (more so than the FTSE 100 or the S&P 500) and although not for the faint hearted, it can be quite good fun when you’re ahead!

Trading the DAX at Bux Markets

The DAX 30 index is the German index of major companies listed on the stock exchange in Frankfurt, and is also known as the Germany 30. This is a market-cap weighted index and represents the main blue-chip shares listed on the Frankfurt Stock Exchange in much the same way as the FTSE 100 does in the UK. The DAX Index itself was launched on 30 December 1987 when it began trading at 1000. The companies are selected in terms of market capitalization and order book volume, and the list is reviewed every quarter to update the companies making up the index. Any company that gets to be in the top 25 will definitely be promoted into the list provided the company has been trading for at least 3 years, and those that sink below the top 45 are likely to be dropped, but there is some subjective selection at the tail end because of the method of ranking. For instance, to be listed in the index, a company has to have at least 15% of its market capitalisation traded publicly and it must also be generating sufficient revenues from within the country to be considered a representative of the German economy.

The DAX is computed using the Xetra electronic trading system and updated every second. The actual contribution of each company to the index, or the weighting of their share prices, is worked out by something called free float methodology. This accounts for the number of shares that are actually available on the open market, as opposed to those held by government or other promotional institutions. The 30 companies are responsible for about 75% of the value on the Frankfurt Stock Exchange stock exchange and as such the Dax index is considered to be the main indicator for the German economy.

Germany is one of the financial powerhouses of the European Union, and the companies that go into the DAX 30 are generally very well known internationally. The most familiar are possibly the car companies, such as Volkswagen, BMW, and Daimler, but the list also includes majors such as Adidas, BASF, Lufthansa, Merck, Siemens, and Bayer chemicals. Therefore the index can be expected to reflect the European and world economic outlook effectively. The index is currently running around 6000 points, and was set to a base level of 1000 back in 1988 when it was conceived, so you can see that it has been building strongly.

The strength of the German economy can be attributed to the performance of some of its biggest companies, the top 30 of which populate Germany’s blue-chip index, the DAX. The index, launched in 1988 includes a number of German blue-chip stocks that will be well-known to many British investors. Companies such as Adidas, BMW, E.ON and Volkswagen all call the DAX home.

Despite having fewer constituents than its British counterpart – the FTSE 100 – the index represents around 70% of the market capital authorised in Germany. The DAX, of course, is not immune if there is a global slowdown, in particular within emerging markets such as China and of course the US. The make-up of the index differs from the resources-heavy FTSE 100 index. The chemicals sector is the largest component of the DAX, representing 21.9% of companies, followed by the automobile sector with 13.2% and industrials with 12.1%.

A large contribution to the index is from Siemens, which accounts for more than 10% of the value which is more than any other company. There are several other companies that account for more than 5% of the index – Allianz Insurance, BASF, Bayer chemicals, Daimler autos, E.ON utility company and SAP software. Perhaps surprisingly, although Daimler is in this list of manufacturers above 5% both BMW and Volkswagen are down around 3%. Perhaps it is because the Daimler brand also includes other badges such as Mercedes-Benz, Freightliner trucks, and the trendy Smart cars.

Along with the UK and US indices, the DAX 30 is considered a major index, and it is likely that your spread betting company will offer several different ways to gain exposure to it, with futures bets for various time periods. In fact, the DAX index can be traded round-the-clock throughout the working week because of the liquid futures markets. Margins are usually around 1% of the market exposure and the bid-offer spread is usually one point during market hours, widening when the exchange is closed. Recently shorting the DAX with a spreadbet has become a popular hedge for spread traders with physical shareholdings. As with all index betting, you need to be careful about volatility and your trading plan should include clearly defined stop levels that require you to end your bet if it is going against you before the losses become too large.

Traders looking to trade the top 30 German companies should take note of the German VDAX index which measures the volatility of the DAX index. The European economic market, although affected by world conditions, can react differently from the US markets and it is worth having a look at the DAX 30 as an alternative index on which to spread bet. Sometimes, you will find that some financial products have a time when they are trading sideways and become harder to analyze, and it is worth having familiar alternatives that you can turn to. The main economic announcements to keep watch include unemployment data, GDP and PMI data originating from Germany which are released once a month between 8.00 am and 10.00 am UK time.

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Reportedly, one shrewd trader took a short trade on the Dax at 6955 in January 2000 betting that the level of the Dax could not be sustained – starting with a modest bet, but as the trade moved in the direction of his short, gradually increasing his bet. He ended up closing the bet at 3550 in September 2001, netting him a cool £1.1 million.

Note: I prefer trading the Dax on a Friday although I tend to trade lighter on a Friday, but at least you get more important news releases, Mondays can quite often range, unless we have news out over the weekend or big news from the Asian session, otherwise it’s best to stand aside and see what happens, better to be bored than take a loss ! Likewise I rarely take any positions in the first hour of European trading for better or worse, I find it’s too choppy and easy to get thrown out of trades, just a personal preference from back testing.

Trading the DAX 30 (Germany 30)

The main stock exchange in Germany is Frankfurt, accounting for about 90% of the country’s market. The DAX 30 is the German main share index, made up from the prices of the top 30 German traded companies on the Frankfurt exchange. This is in terms of their size, or capitalization. As Germany has possibly the largest economy in Europe, what the DAX 30 does is significant, even though London is the traditional financial hub. As such the DAX is one of the more popular markets with spread traders and this is an index that is technically traded to some extent since a lot of people follow this market.

It is worth noting here that the DAX tends to be more cyclical than the FTSE since it is heavily exposed to German exporters and the European banks. However, much of the time you can see a relationship between the FTSE and the DAX. The DAX is also highly correlated to the CAC 40 in France. This is to be expected, as the world’s economies are so linked nowadays, and more particularly the European ones since Germany’s main trading partners include the likes of France, Spain and Italy. However, divergences between cable (Sterling) and the euro mean that they are not locked together, as the currencies have an impact on the well-being of the companies.

The DAX 30 is shown in black, as weekly candlesticks, and the FTSE is superimposed as a dark blue line below. Notice particularly that the DAX is more volatile than the FTSE, which means that traders have the opportunity for more profits. Most major peaks and troughs are echoed between the two indices to a greater or lesser extent.

Sometimes the events are time shifted. For instance, in 2009, the German peaked in the middle of August, and the English market peaked at the beginning of September. But generally, the timing is fairly close, so if you think you can trade the FTSE, then you are halfway to trading the DAX.

For the short term trader, and particularly if you are a daily trader, the DAX has some fascinating properties. The opening is a time that many traders have found to be profitable, and then they go about their business for the rest of the day. Some people say to avoid trading the DAX in the first half-an-hour, due to the volatility, but if you are looking for volatility for your trading account, the first couple of hours are best.

During the first couple of hours of trading you should watch the DAX for signs of a breakout, and place a spread bet appropriately. As the DAX is more volatile than the FTSE, you need to set a stop loss of 10 to 15 points in order to stay in the trade, and this means you want a 25 to 30 point target to make the spread betting trade worthwhile. This is quite possible, and sometimes the DAX can even give you 100 point gain by using this method.

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Spread Betting Example: Trading the DAX

The DAX 30 is Germany’s equivalent of the FTSE 100 in England or the Dow Jones Industrial Average (DJIA) in the United States, but spread betting the DAX needs to take into account some important differences. The DAX 30, as the name suggests, includes the prices of the shares of 30 German companies. Unlike some indices, however, these are based on market capitalization.

The DAX tends to have larger swings than other indices, and this means it is very suitable for active spread betters and day traders, who can trade in and out of positions frequently, increasing their gains. However, the index also suites longer term traders as the DAX tends to to move in well established trends. The market itself is quoted round-the-clock due to the associated futures markets. As with all trading, and particularly derivatives like spread betting, you must be aware of the risks involved, and make sure that your trading plan incorporates measures to mitigate loss.

You will find some spread betting providers who quote down to one point spread when trading the DAX, but there is commonly a two or three point spread. Here is a recent chart of the DAX.

You can see the swings which give you opportunity for good profits, and on this daily scale the length of many of the candlesticks indicates the range of trading each day. The underlying moving average based on 200 days is in an uptrend, and so is the 50 day since the MACD crossed at the beginning of September.

Assuming now that you want to trade with the trend, one of the less risky trading strategies, your spread betting provider might quote 6214 — 6216. If you’re betting that the market will go up, your bet is based on the higher number of 6216. Even when betting on the DAX, you will usually bet in pounds sterling, and your bet is the amount that you receive, or pay, for each point moved.

Say you chose to bet £10 per point at 6216. Based on technical analysis, you’re expecting the index to reach 6425 within two weeks, and your stop loss is at 6110. If the index falls below 6110, then you know that the trend is not sustained, and you need to cut your losses.

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As expected, within two weeks the Dow reached 6425 and your spread betting broker is quoting 6424 — 6426. This means you can close your position at 6424. As you bought at 6216 you have gained 208 points which gives you a gain of £2080.

If the DAX had instead gone down to hit your stop loss, you would have been taken out of the position at 6110 or just below, depending what was available when the stop loss was triggered. Buying at 6216 and exiting at, say, 6108, that you would have lost 108 points. This means you would be out of pocket by £1080.

If you can maintain a reward to risk ratio of 2 to 1 or better, then you will be able to ride out bad times and finish the day with a net profit. No one can predict how every trade will end, but if you work on the averages you will make money.

Spread Betting – Dax 30 Daily Rolling

The German stock market index, the DAX 30, is currently listed on a rolling daily bet at 6052.8 – 6054.8. If you believe in the prospects for the European economy, you may be tempted to take out a long bet, that is a bet that the index will increase, so you stake £12 at a price of 6054.8.

It may take a couple of weeks to get to the level that you anticipate, but eventually the quote is 6148.2 6150.2, and you decide to collect on your bet, and take your winnings. The way to figure out how much you’ve won is as follows: –

The initial price was 6054.8.

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The closing price was 6148.2.

The number of points your bet gains, the difference between these, is 93.4.

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As your stake was £12 per point, you simply multiply these together to get winnings of £1120.80. During the time you held the bet, your spread betting provider would have been charging a small amount of interest every evening when it was rolled over, so your gains would be slightly less than this.

If you have got it wrong and the index fell, it would get to a level where you had already decided that you would need to close the bet for a loss to avoid further pain. Say this happened at a quote of 6035.2 – 6037.2. Now you have to look at your losses: –

The initial price was 6054.8.

The closing price was 6035.2.

The number of points you lost is therefore 19.6.

At a stake of £12 per point, you have lost £235.20, and also been charged interest, as noted above.

If you knew that you were going to hang on to your bet for a few weeks, you might have instead bet on the DAX 30 with a futures based bet. Usually futures bets will have a larger spread, but in return you will not be charged daily interest. The current price for a futures bet two months away is 6058.8 – 6064.8. You will see that this has a spread of six points, and is also higher than rolling daily bet, indicating that the market expects the index to increase. You place a long bet for £8 per point.

Assume again that the market goes up, and the quote is 6145.1 – 6151.1. You close your bet and again calculate your winnings. For this example: –

The initial price was 6064.8.

The closing price was 6145.1.

The number of points you have gained is 6145.1 less 6064.8, which is 80.3 points.

That means you have won a total of 80.3 times £8, which is £642.40. This time there is no deduction for interest because it was a futures based bet.

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Again, the index might have gone against you, forcing you to close your bet for a loss. Say it went down to 6032.7 – 6038.7, and you closed your bet.

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In this case, the initial price minus the closing price is 6064.8-6032.7, which is 32.1 points.

That means you have lost 32.1 times £8, a total loss of £256.80, again with no adjustment for interest.

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