A key consideration for binary traders is risk management. Binary options offers limited risk to traders of binary options, in that you can never lose more than you have invested. Also even on a prediction that finishes out of the money (OTM), you can still generate a money back refund of up to 15%. Whilst there is no trading strategy that does not encompass some form of risk, there are a number of methods that an investor can make use of to minimize the financial exposure they have when making a trade. This is how risk management works.
There are many trading strategies that you can choose and it is worth looking at as many as possible to see which is right for you. After you select a trading strategy, it is important that you know it works. There are two ways of finding this out:
The first method is to look at as much historical data as possible, taking note of the previous price fluctuations. From this it is much easier to ascertain key information like the support and resistance prices and trends in timing and movement.
The second way to test out binary options strategies is to make use of the demo account. Demo accounts are offered by most binary options platforms, although some you have to ask for it. There are a number of reasons why you should always use at first the demo – test customer service, get a feel of the platform ,use a demo account to actually test the risk management strategies live.
This is an important part of risk management which often gets overlooked, normally because someone is trying hard to recoup losses or becomes greedy with the investment stakes. Making successive bad trades can exhaust funds. Therefore, it is wise for a trader to apply limits to the amounts on single trades, to around the 5 – 10% mark. A figure that gets bandied around is the 8.5% figure. This means a trader will have at least 11 bad trades before they lose all their money and actually, they will receive more than that due to the percentage staying constant. This means that the staked amount lowers with each trade.
A big advantage of placing a set % of the total funds is that the amount risked on each trade will get gradually less and less if you were to be on a losing run. Thus, each loss value will be reduced. Conversely, if you were to be on a winning streak and your total fund is increasing, the amount of each stake will increase and you will maximize your returns. It is also prudent to withdraw money that is superfluous to trading requirements, as a profit only becomes a profit, once it’s banked.
Protect Your Money :
One method to protect your capital when you find yourself on a losing streak is to simply cease trading until market conditions turn around and begin to move in a direction more agreeable to your strategy. However it’s far wiser to carry on trading with reduced investment amounts so that you are still in the hunt and can know a lot better when the trends are turning, seeing the improvement as and when it occurs. In effect, a number of smaller trades may more often than not be more profitable over one larger one as it is not an all or nothing scenario. It is not necessary for all your trades to win to end in the money, whilst a single larger trade offers only one chance.
Successful binary trading is very much about getting the balance right between risk and reward. More returns are normally accompanied with higher risk, along with the reduced likelihood of success. A safer bet will offer a greater chance of success but with fewer rewards which would mean taking longer to build capital. A successful binary options trader will only go for the riskier trade they have firm conviction that their trade is a winning trade. This is achieved by putting in the effort on the research and analysis behind every trade.
The best trading strategy is diversify your portfolio and go for a mix of trades, making sure you are not over exposed to a markets movements. An example of this is investing in call options for gold, silver and the Euro. If the price of the Dollar goes up, there is an increased statistical likelihood that the prices of gold, silver and the Euro will fall, leaving you over exposed to one markets fluctuation in price.
Stay Focused :
It is essential that a binary options trader stays focused on his/her strategy, starting slow and scaling up and doesn’t make wild guesses when making trade. The research needs to be done, but at the same time they must anticipate losses as they will happen. When they do, how you react can be the key difference between success and failure in binary options trading, which is why it is essential to stay focused on your well thought out strategy and not succumb to irrational and emotional trades as well getting greedy when you get on a winning streak.
Important !!! :
Some brokers like TopOption offer a stop-loss risk management feature. Before the asset expires if it looks like it’s going against your favor you can stop the trade early. Rather than losing the entire investment you will lose only a percentage of it. In order to improve the risk management of each individual single trader we will recommend to join to Mike’s signals group on Facebook and start trading binary options with over 3700 real and active traders from all over the world, with professional admins and top traders.
Thank you for reading our Lesson No.3, implement our important highlights that we have listed above for your financial future, please pay close attention to our trusted Brokers list and trade only with an EU regulated and reliable broker and if you are completely new to the business, start this journey with a FREE DEMO account before you “jump in the water” and invest money into a real trading account.