Once you sign up with a binary broker it will become obvious that there is no charge to trade and no commission charged on your trades. This may lead you to wonder how the broker makes their money; after all they are not offering the service out of goodwill, it is a business.
In fact, there are several ways in which a binary broker can create their own profit.
The basic premise of binary trading requires you to predict a price movement; in general fifty percent of traders will predict a price will rise while the other fifty percent will assume it will decrease. Of course, this is not always true as particularly strong trends will persuade more traders to predict the same outcome, but in the long term this will still generally even out to a fifty / fifty approach.
Providing this balance is kept then the broker will maintain an edge and generate a profit. This example may help to explain this: If a broker has one hundred traders then fifty will predict a rise and fifty a decrease. Assuming all traders place a $100 trade the broker will collect $10,000 ( read more about put options ). If the broker offers a payout of 80%, fifty of the traders will be entitled to this and the broker will need to pay out $9,000. This is the original $5,000 of the winning traders plus the 80% return on that $5,000. The other fifty traders simply lose their funds and the broker ends up with $1,000 profit. The traders have not been personally targeted; the broker is simply working the odds.
However, all binary option broker reviews realize it is slightly more complicated than this. It will not always be a perfect fifty / fifty split between traders. In order to get as close to this as possible the broker needs to offer a wide array of options. The larger the range the more traders they will attract and the more likely it will be that they reach their target trading balance. This will allow them to trade off profit on some trades against losses on other and still make an overall profit. However, it is not an exact science and it can go against the broker.
This can lead to speculation that brokers will deliberately set the trades to ensure the traders fail. However this is counter-productive. Simply bring in the middle of the trade will allow a binary broker to generate a profit. Trading against the client can also lead to issues which can place the entire firm at risk. Reputable dealers prefer to take an honest and open approach knowing that they will win more than they lose. They can also supplement their profits with a range of miscellaneous fees and interest on the client accounts.