The NCAA® tourney started yesterday and March Madness is in full swing. 64 teams began yesterday with dreams of winning 6 consecutive games to become National Champion. As traders, we are always looking for trading set ups and analyzing probabilities of success. Because the NCAA tourney is a single elimination tournament, that means that each team must win 6 consecutive games. If you’ve ever watched the tournament before then you are well aware of the vast amount of upsets that are unavoidable. Even when there is a high probability of success you must be aware that losses will be incurred, and this applies to trading as well.

What if I told you that last year’s National Champion Villanova, which happens to be my alma mater (everyone saw that final shot last year, right?), has an 88% chance of winning each game they play in this year’s tourney. What would you say their chances would be of repeating as national champions with an 88% chance of winning each game? Well, surprisingly, even if Villanova had an 88% chance of winning each game they would actually be an underdog to repeat with only a 46.44% chance of success of 6 consecutive wins. (0.88*0.88*0.88*0.88*0.88*0.88=46.44%).

When trading binary options you are constantly forced to analyze the risk vs. reward of a trade compared to the perceived probability of success. If you are risking $80 to make $20 then you should believe there is at least an 80% chance that your binary option expires in the money if you plan to hold it until expiration.

Here is a chart of the Crude Oil chart at about 7:52 a.m. ET this morning, which is based off the indicative Index that is the April NYMEX® Futures price. Along the right axis are some of the daily binary options available on the NADEX exchange, which expire at 2:30 p.m. ET today, leaving about 6.5 hours until expiration.

If you bought the >$48.50 binary option for $80 then you would be risking that $80 for a maximum profit of $20 if the contract expired in-the-money for full value of $100. Crude Oil is currently trading $0.46 above the $48.50 strike price, which is why you will be risking $4 for every potential $1 in profit for this trade. What if you planned on making 6 trades every day, with each trade having an 80% chance of success? What would the probability be on any given day that you are profitable on all 6 trades if they each had an 80% chance of success? The answer is 26.21%. (0.80*0.80*0.80*0.80*0.80*0.80=26.24%). This applies to longs and shorts, regardless of your market expectation. If you’re a trader that plans on making high probability trades where you’re risking $4 for every $1 of potential profit then you should be aware of the very real possibility that losses will be incurred on a regular basis, just as upsets are all but guaranteed in the NCAA tourney.

To see for yourself the types of defined risk trading opportunities on the Nadex Exchange open a demo account today and they’ll provide you with $25K of practice funds to experiment with before investing any of your hard earned real cash.

Exchange fees not included

*Nadex Risk Disclaimer*

*Trading on Nadex involves financial risk and may not be appropriate for all investors. The information presented here is for information and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Any trading decisions that you make are solely your responsibility. Past performance is not indicative of future results. Nadex instruments include forex, stock indexes, commodity futures, and economic events.**Nadex binary options and spreads can be volatile and investors risk losing their investment on any given transaction. However, the limited-risk nature of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.*