Money and Risk Management in Binary Options

Managing risk in financial trading has been the debate of many successful traders, and psychology specialists who conduct research on the ways humans deal with risk, any kind of risk. It has been found that a good money managing system can make a huge difference in the traders bottom line. In fact in an actual trading test where 2 traders executed identical trades in the stock market, the results were compelling. These 2 traders did exactly the same transactions, bought and sold the same stocks, at the exact same times, but one had money management in place whereas the other didn't. In the end, the money managing trader made 20 times more money than the other trader!

Risk management in the spot markets is very tricky because you have to use stop orders, and these are often triggered unnecessarily, causing very nasty and unnecessary losses, even though you have predicted the trend of the market correctly. But luckily if you are trading binary options you won't have to worry about the complexity of the stop order placement. Instead you will have to focus on binary trades, how to cut losses there, and close winners early as well. Binary options by their nature offer good payout, at much, much lower risk!

Reducing Market Risk

Traders can reduce market risk by being prepared to be wrong on their market opinion. Once you can accept that you might be wrong, or at least be wrong on the timing, then you can limit potential losses using a binary trade in the opposite direction, one of much shorter expiry time. Market risk management is about assessment. If for example you expected the market to rally for 10 days, but instead it dropped too much on the first day, you have to determine if it can still make it back in the previously expected trend. Be warned of certain parameters such as the 200 period moving average, on the 1 hour and daily chart. If the market reversed sharply and settled on the other side of those averages, the chances are that your opinion was 100% wrong, and the market in our example will keep on declining, therefore you would have to close your original trade and even maybe reverse it. See our article about Predicting Price Movement for some greater insight on these averages.

To reduce market risk, you have to remove ambiguity and be more determined on your decisions, not a wishful thinker. Binary options will allow you to cut losses and reverse direction very fast, even when you are 100% wrong, but you need to be prepared. They will also allow you to hedge trades during total uncertainty, by where you accept market uncertainty and risk, but you simply negate your open trades, is like having no trade at all for several hours or days until uncertainty clears.

Money Management

Smart traders and investors have long term plans. They usually look one year out into the future, and start trading with a fixed amount of money, per trade, and stick to that amount for about one year, no matter the successes they encounter. A fixed amount per trade will help you do statistical calculations and enable you to see the large picture after one year of full time trading. If you are a very short term trader, such as into 5 min trades, you might want to do your statistics over just 2 months, therefore sticking to the fixed amount for only 2 months. But for longer term trades it is recommended you do it over one year. 

After your trial period is over, be it 2 months or one year, you can infer useful statistical information and make up a money management plan. Most serious professionals use an X percentage of their available balance of funds per trade (for example 5%) and as with every winning or losing trade, the balance goes up or down, or at the end of every trading week the balance has either gone up or down, the trading size is adjusted accordingly. The week is a nice period to adjust your trading size upon. This kind of money management enables you to risk less and less when your trading fails, but also enables you to risk more and more as it performs better. The final result is much higher profitability in the end!

Remember that if you use multiple types of trades, 5min, daily, one touch weekly etc, each one should have its own dynamic X percentage fixed trading size for the trading week ahead. Usually you might want to risk much more on a one-touch binary option with 30 days expiry time, than on a 5 min binary option. Therefore the dynamic portions of your trading balance, for these different trades, should be chosen in perspective.

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