Risk and Money Management: How to Reduce Your Risks in Binary Options Trading
In this article, you will find out how to minimize your risks when trading binary options and earn more with smaller investments. You will also be able to compare brokers based on your risk appetite, as well as download some tips for reducing your risk and maximizing your profits.
You Will Learn:
Read these instructions all the way through, and you will save both your money and nerves. What is even more important, you won't get disappointed with binary trading from the start and will learn the basic principles for successful trading. Below, you will find the most important info for your future business. Be careful and patient. Good luck!
Why People Lose Their Money When Trading Binary Options
Beginner traders often put large amounts at risk when investing in binary options. As a result, they lose their initial deposits quickly and get disappointed with online trading.
Most beginners lose their deposits just because they don't follow the basic risk management or money management rules.
Here's an example:
Sam learned about binary options on the net. He remembered he had wanted to try Forex trading for a while. However, in case of binary options, everything is much easier, and so he decided to explore binaries.
Sam invested a lot of time in finding a broker that suited his needs, he studied popular strategies, and finally made his first deposit. He selected a broker with a minimum deposit of $200 and a minimum investment of $20. So he just deposited $200 and started trading, investing $20 per trade.
After making 5 trades based on one of the strategies, Sam was twice in the money and three times out of the money. His account balance dropped to $170.
At that point, Sam thought that the strategy just didn't work. He decided to try a different strategy and went on trading, investing $20 per trade again. After making 8 trades with this new strategy, he was four times ITM and four times OTM. His account balance now dropped to $150.
Sam got a bit bewildered, but then he discovered that his last two trades were profitable, and so he decided to raise his investment amount, this winning his money back. He bought an option at $50 and lost, His account balance lowering to $100.
Sam went on trading without relying on any system, just switch from one strategy to another. He made another six trades, three ITM and three OTM. His account balance dropped to $55, and his net loss was $145. He got disappointed and angry.
Sounds familiar, doesn't it? Let's see why Sam was wrong:
Why It Is Important to Keep the Risk per Trade Ratio at 2%
Following the money management rules is crucial in binary options trading. For most beginner traders, the 2% risk per trade ratio is ideal and should be always kept.
With any trading strategy, you need to understand it really works and brings profits only when you give it a go and make at least 50 or, better, 100 trades. Before that, any conclusions will be premature.
Whatever strategy you pick, you will still have both winning and losing trades. There's nothing you can do about it. What really matters is that you must win more often than lose. In order to get 75% return on your investment, your strategy needs to guarantee at least 65% win rate. In other words, you need to make 65 or more winning trades out of 100. Otherwise, your account balance won't go up and you won't have profits.
Financial markets are very volatile and often unpredictable. Sometimes, your strategy may fail you, and you may have a losing streak. If you're 'playing big', like investing $20 with a $200 account balance, you'll be losing 10% of your entire capital in a every single trade. If you've got a few streaks like this, you'll soon find yourself in need to top up your account.
You must keep your risk at minimum in order to survive such losing streaks and still save your balance.
Experienced traders recommend maintaining the risk per trade ratio at around 2%. This means you are not risking more than 2 percent of the funds remaining on your account in a single trade.
Before you start trading, calculate your deposit amount based on the minimum investment required by a particular broker. If a broker's minimum investment is $5, your deposit should be $5*$50=$250. This way, you'll be risking 2% of your account balance when investing $5 in each trade, and you'll be able to invest at least 50 times, while testing your strategy. This method is both smart and relatively safe.
How to Increase Profits without Greater Risk Exposure
You can use some simple rules and techniques to not only maintain your risk per trade ratio, but also to increase your profits. In this section, we will explain how to make the most out of your trading activity while keeping the risk within reasonable limits.
Keeping the risk per trade ratio means you cannot invest more than 2% of your account balance. How can you increase your profit then if you cannot boost your investment amount? The answer is simple: you just re-calculate your investment amount, including when your balance is growing.
Let's assume you've got $200 on your account, and you start investing 2% of your balance, i.e. $4. Now, suppose you managed to increase your balance to $250. As per 2% risk per trade ratio, you can ow invest $5 per trade, thus, increasing your profit potential.
However, the opposite scenario may occur as well. Let's assume your account drops to $150. Now you must not invest more than $3 (2% of $150).
It is quite a boring task to constantly calculate your investment amount, especially when you are into fast trading (with short term options), as this does take time.
This is why we've created special tools that automatically adjust the recommended investment amount and allow you to not only follow the golden rule of risk management, but also to never miss your chance to get more profits.
How to Maximize Your Profits and Reduce Risks
Learn how to trade with binary option brokers with these easy to use risk management tables. Just follow the tips on minimum investment get maximize your profit. You'll find this tool under each broker's name.
Select a broker that will allow you to maintain your 2% risk per trade ratio based on your deposit and investment amount. See whether the broker can be trusted and when it was founded. We recommend only reliable brokers. Feel free to pick any of them, taking into account your supposed deposit amount.
In this table, you can compare popular binary options brokers based on the minimum deposit, minimum investment amount, and risk exposure. The recommended deposit amount is based on the risk per trade ratio and the minimum investment. E.g.: The risk exposure at IqOption is 10% ($10 minimum deposit, $1 minimum investment). In order to comply with the 2% risk per trade rule, you need to deposit $1/2%=$50. This is your recommended deposit amount.
How to Trade with Minimum Risk (Step by Step Guide)
This guide will tell you how to minimize your risks. Follow its tips, and you'll have so much more chances to trade successfully. Trade the right way, don't blow up your account!
The golden rule of successful trading is: never ever exceed your risk per trade ratio. Do not attempt to win back all your losses at once! Forget about 'Martingale system' and other stuff of that kind: this is a guaranteed way to get broke! If you've got a losing streak, re-calculate your investment amount, so that you may keep the initial 2% risk per trade ratio.
How to Start Trading Binary Options
This simple step-by-step guide will help you start trading binary options if you're still a beginner. Follow the instructions on this page and read our tips carefully, so that you can save your time, money, and nerves.
What This Guide Has to Offer
By following a few simple steps, you will be able to safely start trading binary options. In just 30 or 40 minutes, we'll guide you through the following:
Ready to start? We'll need only 30 or 40 minutes.