Any type of investment can be a risky business and trading binary options is no exception. It may not be as risky as some other forms of options trading because you can limit your potential losses to the amount you specify for your trade, which is then fixed and can be relatively small. Nevertheless, you may hit a bad run and make a series of losing trades, which is the time you need to practice good money management in order to keep on trading.
Safeguarding your Funds
Money management is generally viewed as a defensive strategy that is intended to keep you in the game when things aren’t going as well as they should be. The aim is to get you through the bad times and ensure you still have money to trade when things improve.
One obvious way to preserve your capital when you hit a bad run is simply to stop trading until things turn around and start to run in your favor. However, if you don’t trade, you won’t know when your bad run has ended and when you should start to trade again.
It’s far better to keep trading but with reduced stakes so that you’re still in the game and will see the improvement when it happens. In fact, a series of small trades can often be more profitable than one big one because it’s not an all or nothing situation. You don’t need all your trades to win to finish up in the money whereas, with a single large trade, you only have the one chance.
Set Trading Amount
A recommended money management strategy is often to limit the value of each trade to a set percentage of your remaining capital. A figure that’s frequently quoted is 8.5%, which means you’ll have at least eleven trades and they all have to go bad for you to lose all your money. In fact, you’ll effectively get more than that because the percentage stays constant and so the amount of the stake falls with each trade.
An advantage of staking a set percentage of your capital is that the amount you risk on each trade will get progressively less when you’re on a losing streak and so the value of each loss will be reduced. Conversely, when you’re on a winning run and your capital is building up, the amount of each stake will become greater and you’ll maximize your profits as a result.
The aim, of course, is to make money in the long term and on a consistent basis. Consequently, if you are successful and your capital builds up, withdraw some of it from your trading account so it’s no longer available to trade. If you are staking a set percentage of your capital, this will prevent the amount of each trade getting too large. It will also remove the temptation to trade simply because you have the money available.
Don’t forget that you’re in this to make a profit. But it’s only truly a profit when it’s safely in your bank account. So, successful binary options trading is as much about a proper money management strategy as it is about the assets you trade and the predictions you make.