Money and risk management
Binary Options Trading – Money and Risk Management
Binary options trading has enabled many people to become extremely wealthy, and quickly. However, there is a downside to this. As a result of the success many traders have, others get the (wrong) impression that financial success is an "automatic given" and that there are no risks to trading binary options.
This, of course, is not the case. There are certainly risks, and many traders who fail to heed those risks can find themselves losing very large sums of money. Even veteran traders, for all they understand the trends that markets and indices are following, are not successful with every one of their trades.
Proper money management techniques can help traders keep track of their earnings and losses, and prevent from falling into the traps that many traders fall into, and make it easier to weather the storms of unsuccessful trades and occasional losses to come out with a consistent profit over the long term.
These money management techniques listed below do not represent a comprehensive list, and many traders develop additional techniques that fit their needs, personality and trading style. Nevertheless, it can provide some good tips to get you thinking in terms of protecting your investment and your resources, no matter much experience you may or may not have.
- Start slow, and allow yourself time to build up
If you are a beginning binary options trader, chances are that you have not developed an understanding of global markets and asset trends yet. That's to be expected. But, as long as you are building up that understanding, you want to be very cautious with your trades and investments.
Don't jump in with huge investments when you don't yet grasp market trends and movements. There is no shame in investing the minimum amount when you are still getting your proverbial feet wet. While minimal investments mean lower profits, they also mean lesser losses, and that's exactly what you need while you are getting a sense of the world of binary options.
- Take advantage of the various tools that online brokers provide
The best brokers out there are those who have a reputation for wanting their clients to earn profits. They recognize that binary options trading can, and should, be a win-win situation, and in the interest of such, they often provide various tools and services designed to enable you to master the markets and the trading skills.
The most successful traders are those who are willing to use these tools to their advantage, rather than assuming that they can trade profitably without any assistance.
Some of these tools include:
- Educational videos and training webinars
- Trading signals
- A "Trader's Choice" bar, indicating what other traders investing on an asset believe it will do
- The opportunity to observe and replicate the transactions of the broker's most successful traders.
All of these tools enable you to begin trading with guidance, so that you are not throwing your funds away in what would otherwise be little more than a guessing game – and that's never what binary options trading should become.
- Never trade above a certain percentage of your total account at any given time.
How much you are willing to trade at any given time really depends on how aggressive or conservative a trader you are. Of course, when you are first starting out and learning the markets, it makes sense to trade far more conservatively. As you get to know the markets and read their movements, there will be plenty of time to invest more aggressively – and the to earn more on each trade.
It is generally recommended that beginning traders (and more experienced, yet conservative ones) keep each trade between 3-5% of their total balance. More moderate traders generally will trade between 5-7% of their total balance, and the most aggressive traders between 10-12%.
For example, a conservative trader with a starting account balance account of $5,000, should not risk more than $150 per trade. For a moderate trader with that same account, the upper limit should be $250, and $750 for more aggressive traders.
If you risk more than 15% at any given moment and fall into a “losing streak”, you risk losing everything with as few as five or six unlucky transactions.
- Make sure that you practice consistent and disciplined trading
Don't let yourself get carried away when things are going well one day, but also don't panic and try to over-compensate when they are going poorly. It can be very useful to determine what percentage of your balance you are willing to earn or lose on any given day. For beginning traders, the more conservative the percentage the better.
For example, if you are trading no more than 10% of your balance per day and you have started the day with five excellent trades and have surpassed that limit – don't push yourself too hard to trade more. Things can turn around very quickly while you're feeling cocky and on top of the world, and before you know it, you could be down 10% for the day. Better to enjoy the good day that you had, and begin again the next day with a higher principle balance upon which to base your trading limits.
Likewise, if the day starts off poorly with several unsuccessful trades, many traders go into "panic mode" and feel that they cannot stop until they recuperate the morning's losses. This is a terrible mistake. Much better to "call it a day" and regroup the following day – risking a little bit less on each trade.If this continues more than two or three days in a row, it's worth reconsidering your trading strategies and finding one that would be more successful.
- Set reasonable short-term and long-term red-lines and goals for yourself
Usually, the most successful traders are those whose trades are profitable approximately 75-80% of the time. But not every day will go so well, even for the most veteran traders. On any given day, decide that if you lose a certain number of trades, or a certain percentage of your funds, that you will stop trading for the day.
For long-term strategies, it is highly recommended that you decide upon a minimum balance that you will allow your account to hold. This is especially good for beginning traders who are still finding the right trading strategy for themselves. A trader who has invested $5,000 should be able to recognize that if his balance drops below, say $3,000, then it is time to reevaluate his trading strategies.Be realistic
Of course, most binary options brokers advertise how easy it is to make millions of dollars using their platform, and they show you pictures, videos and testimonials of the newly wealthy to back up their claims. Is it possible to earn the kind of money these brokers say that you can? Absolutely yes! Will it necessarily happen to you with your first week, month or even year? Possibly, but it's unlikely.
Trading binary options is not a mere guessing game. It involves understanding the market trends, and how those trends will affect global markets, stocks, currencies and commodities. Besides investing money, serious binary options traders are those willing to invest the time to learn the field. Allow yourself the learning curve, and when you start off, keep your trades – and your risks at a minimum. You may even lose a bit early on, but over time, as you gain the experience, that will change.
If, as we said above, you keep your trading consistent and disciplined, you can see excellent profits over time. Imagine this: a trader has $5,000 in his account and decides to aim for 5% profit every day as he is learning the ins and outs of binary options. After one day, his balance is up to $5,250. By the end of the first week, that trader can have a balance of $6,700. A $1,700 profit while you are getting your feet wet and learning through experience is very respectable. And it allows you to increase your goals as you become more comfortable with trading binary options.
The point is to stay realistic. Don't expect to earn $10,000 in your first week, or $50,000 in your first month. Those amounts may well come over time as you come to understand why the market behaves and reacts the way it does, but give yourself that time. You won't regret it.