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So What Have We Learned?

Interestingly, with 80% odds then Kelly indicates you need to improve your probability of winning from a random 50% to just 56% and allocate 1% of your resources each time in order to creep out of the zone of certain ruin and maintain (admittedly agonizingly slow) positive returns.

And therein lies a BIG CLUE – the Kelly trading strategy is asymptotically dominant over using, for example, flat bets and it is crucially also dependent upon accurately knowing your “edge” (the probability that you will win).

If you either don’t have an accurate handle on the odds or are not prepared to play the long game so as to allow probability to work its magic in your favor then you may as well fall back on guessing and good luck to you (you’ll be needing it).

Quick tip: One good way to stretch your resources out and thus mimic the long play is to place numerous small bets rather than fewer larger ones. Remember it’s binary, like coin tossing, so you need lot’s of goes to see the effects of probability kick in.

But let’s say that you are willing to study the data. How hard is it to discover a trend that occurs with a 60% probability? Doesn’t sound like much – 60:40 – does it? Another way to look at it though is that 80% of the time you will lose as often as win, but that extra 20% of the time is all winnings.

And that is exactly what Kelly confirms (try it with even odds i.e. 100% and 60% probability). Even when accounting for the less than stellar 80% odds that binary options offer, you still have a 10% win ratio advantage.

The key is never to over-bet. If the calculation indicates you should wager say 5.5% then so long as you stay at or under that level of exposure you will in all probability (pun intended) consistently win. The fastest route to sure ruin is over-betting – try it and see.

The other feature you may notice is that although the individual bets can jump around pretty wildly with Kelly, over time the results are remarkably consistent since the equation is using feedback to correct these oscillations and smooth things out.

So, the real take home lesson here? Even if you don’t want to trade according to the Kelly Criterion you can still use the simple calculator above to gauge whether any particular payback/probability combination represents a likely winning or losing scenario (and if you don’t really know the probability then it’s (probably) a losing one). Because ultimately…

The best binary options strategy is to comprehend that binary options trading, like all forms of gambling, is a numbers game and you need to understand how the numbers play out if you are to stand any chance at all of walking away with a pile of loot (or at least the shirt still on your back).

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