Money Management Strategy and Systems in Binary Trading

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4 strategies for managing money and risks in binary options trading

There are few strategies for managing money and risks in binary options, but even they will help you improve your trading results with this tool. Approaching trading wisely is never superfluous.

In binary options trading, like any other asset (currency, stocks, Futures and so on.) considerable attention should be paid money management. Binary options, in spite of all its ease of use, they remain a speculative tool, work with which requires cash investments, therefore money management can not do without.

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Money Management Tactics in Binary Options Trading

If you are not familiar with this definition, then in a nutshell, money management is strategies for portioned investment in transactions and increasing trading volumes with capital gains. Besides, in money management includes tactics for protecting funds through investments in various tools, portfolio investment issues and other options for how to properly manage your deposit.

Due to the fact that BO as a whole is a rather simplified tool for trading, which involves only two options for closing a deal – profit or loss – which a trader can no longer influence after signing a contract, there are a limited number of money management tactics for binary options. Let’s go over them.

1. On a binary contract no more than 5%

As with other stock trading instruments, recommends use no more than 3-5% of capital in one transaction. That is, having a deposit of $ 1000, you can conclude a contract for only $ 30-50. If the minimum contract amount for your binary options broker is $ 5, then your minimum deposit should be at least 100-170 $$. What is it for? To wait out a series of losses, while having a margin to continue trading. It is rare when a series of losing trades is more than 8. At the same time, during this time, the trader has all the options to correct the strategy and understand the cause of errors. Therefore, you should not go to all-in, even if you are very confident in success.

2. Use your profit wisely!

From the previous money management rule in binary options the second follows: increase the volume of the transaction gradually. With each profitable transaction, your deposit grows, which means that the amount of the contract should also grow, because we calculate it as a percentage. A smart trader never increases his trading deposit by the entire amount of profit. It leaves about 50% for withdrawal or in case of protracted losses.

Consider an example: you have a deposit of $ 1000, trading at 3%. For 10 profitable trades, you made a profit of $ 255 ($ 30 * 85% * 10) in your account. It’s quite reasonable to withdraw or postpone $ 125 of them, add $ 130 to the total amount of the deposit and open transactions not further for $ 30, but for $ 34 (1130 * 3%). Keep in mind that it is best to increase the trading deposit by the amount of profit after a series of successful transactions, when the amount of profit is already sufficient to feel the difference.

This rule of working with binary options (as, incidentally, with other tools for trading) will help you to feel self-confidence and will give you the opportunity to see the results of work, as well as teach you not to stand still and develop yourself and capital.

3. Loss risk management in binary options

Continuing the theme of money management and risk management in binary options trading, we would like to remind you about “Stop Levels”. Frankly, this item is more suitable for the topic of the psychology of trade, but nevertheless, in many ways it is connected with capital.

Determine for yourself the number of consecutive losses and the amount of loss, after which you will need to reconsider your trading strategy!

Sometimes, getting into a rage and wanting to recoup, we make many rash transactions. In order not to lose capital thoughtlessly, pause if you feel that the trade is out of your control. This will help you save your nerves and money.

4. Hedging and diversification as a money management strategy in binary options

Well, the last point is hedging and diversification. We combined these items because they are largely borrowed from other markets. Putting them into practice as a money management strategy for binary options will be quite difficult.

Hedging involves the search for assets with a high correlation (with a very similar movement of quotes) and the acquisition of two reverse contracts for them. Then the minus in one transaction should overlap with the plus in another. But, since the profit on binary options as a percentage is always less than the loss, this tactic is a failure in advance. therefore hedging of binary options is possible only with simultaneous trading of the main asset, i.e. currency pairs or stocks. We talked about this in two previous articles. In this case, hedging is next to diversification, because you use several markets for a common strategy.

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This is not to say that this is a very simple activity – hedging and diversification of binary options, – but with a serious approach it can bring a good profit. Therefore, recommends paying special attention to this item.

Conclusions: Despite its simplicity, binary options remain a risky asset for investments. Therefore, do not relax in advance. There are few strategies for managing money and risks in binary options, but even they will help you improve your trading results with this tool. Approaching trading wisely is never superfluous.

FORTRADER magazine experts

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Money Management On Trading Of Binary Options

Any trader with some experience knows that productive work in financial markets is being done only by three components: the trading system of adequate reliability, strict personal discipline and efficient money management.

While the first two factors seem to be all clear, then the third causes some difficulties.

So, today we will review it. In this situation, we would notice that the optimal organization of money management and complete awareness of work will be useful not only for beginners, but also by many traders who consider themselves as quite experienced.

What is the money management?

At first, we need to realize that a little strange term as “money management” implies just an optimal and balanced strategy in financial organization, giving the most possible profit.

It is interesting, that despite the necessity of the access to the funds, and that it is a fundamental factor in successful trading, focusing on money management is often ommitted, most of traders perceive it as something already understood.

It often happens when even experienced traders make a few successful,yet low-profit deals, and then go for larger, risky ones, loosing all the previously gained profits.

Only then, they begin rather chaotic search of information about proper management of assets.

Upon this situation, the understanding comes and they realize that success is not determined by quick gamble earnings, it requires a long-term discipline for any steady income.

If to put all the information together, it becomes very clear that the money management is a science, teaching the effective management of investments for future profitable trading in the long term.

The rules of money management

The successful trades are ensured by the implementation of only one recommendation, that it is not necessary to trade transactions in excess of five percent of your deposit.

This means, that if, for example, on your deposit of five hundred dollars, the transactions should be not exceeding twenty-five dollars, the interest rate is fixed between ten and twenty-five dollars even, regardless of profitability or unprofitability of a single operation.

You shouldn’t ignore this recommendation in any way, especially the beginners.

Of course, with your life experience as you go, the interest rate can be gradually increased, first to 6, and later, to 10 percents, however, even with such restrictions expanding the range is strongly not recommended, it is the way to protect yourself from losses caused by your emotions.

In some cases, it will be very difficult to follow, because there are deals that are so attractive in their apparent obviousness, but it is necessary to overcome yourself, even under extremely tempting conditions. As one old saying tells, when you move slower, you will get farer.

The basic principles of money management

You must not only know, but also observe a few specific features, it can help you to create your personal effective money management policy. We can show the key principles and you should try to focus on those:

1) Sober trader.

Probably the main thing that distinguishes an experienced trader from the beginners, is the ability to assess the risk and prospect soberly, without undue fervor. Of course, sometimes emotional decisions can bring good dividends, but most of the transactions carried out spontaneously are tend to fail.

Trading is not a lottery, it is a serious matter, that requires, for success, exploring many nuances of the market, a very deep analysis of its specificity and continuous strategy improvement. You should work in clear mind and you will be able to ensure profitability.

2) Calculate the volume of the deposit.

Only the correct calculation of funds to be used in the transactions, thus allowing the trader to correctly implement each particular deal.

It is extremely important not to go beyond your personal set up range.

In addition, it is not a good idea to make a deposit with your last savings. Every experienced player in the options market must have a certain amount of preserved money, giving a chance even after the absolute loss of the initial deposit to to return back to the market.

3) Trade with the trend.

Every successful trader knows that trend is the direction of the price change for a certain period of time.

All trends are divided into three groups, it is descending (decreasing prices), the ascending (respectively the increase) and flat (side shift).

If you want to open the transaction in accordance with the trend, the probability of profit high enough and far exceeds the potential risk.

4) The correct balance of risk and profit.

Your understanding of the importance of the ratio between the benefit and risk in the transaction comes with life experience. An experienced trader often intuitively regulates this ratio with the risk limit and the amount that the trader can lose without pain.

5) Planning for profitability.

When you start the business of binary options, you need to choose a right broker, to give you more reliability and better profit margins.

That is, the percent is charged to the trader upon positive completion of the transaction, it is better to consider the largest.

6) Minimization of losses.

To explain this factor is quite simple. There are several rules, known as the Stop Trade. We can list just three of them, the most basic ones :

  • On every trading day, it is recommended to start with the definition of the maximum number of deals that are planned to be opened on each trading session.
  • You should clearly define within the limit number of loss-making operations before entering the market and after this, you can leave the auction.
  • You should set a specific amount of profit, which is needed to close the session.

7) Diversification of risks.

This rule can be seen as a step involving the spread of a large volume into several transactions.

For example, if you have three hundred dollars, allocated to work for one session, much more effective and safer is to make six deals for the fifty dollars than for the entire amount.

Additionally, it will be much safer if every contract would be placed at different times or will be used with different tools.

8) Trade their system.

The organized, systematic work is more efficient in any type of business.

So, the trader gradually develops its own strategy, based on personal experience and preferences, observing actions of other traders, trend indicators and many other data.

Of course, there are commonly accepted strategies developed by recognized experts of the market.

However, many strategies mostly used by the beginners, more experienced traders gradually supplement these strategies, and sometimes they can completely transform it.

9) Is there a difference between money management and capital management?

Both of these concepts are recognized on the Russian-speaking Internet, so many people perceive them as two different terms for the same process.

Despite the fact that these concepts are very similar, it should be noted that money management is a concept that is better attributed to the management of risk in open deals. To definition of the concept of money management can be quite short. The main rule of this concept is the recommendation to diversify and hedge risks, and also you “shouldn’t put all your eggs in one basket.”

The money management is the art, which serves as an excellent tool to the effective trading strategies and helps to raise the level of personal discipline and financial culture.

It is better to learn to manage risks than to allow risks to manage yourself !

Money Management for Binary Options Trading

The following binary options lesson teaches the basics of risk and money management.

Risks Management Strategies for Binary Options

The amount of money that an investor should risk on a trade is a function of a number of factors which include the amount of money allocated to trading binary options, and risk management strategies that can optimize the returns of that portfolio.

Risk management is generally considered a defensive strategy as the techniques that are used are focused on minimizing loses and avoiding the risk of ruin. A basic concept of risk is that it is highly correlated to reward. As an investor increases the amount of capital they are willing to risk, their potential reward increases. The key to a successful investment strategy is to determine the optimal risk to assume to achieve a specific return profile.

Pre-defined Risk / Reward

One of the benefits of binary options trading is that the returns are fixed, and the most an investor can lose is the amount risked on an individual trade. With above or below options, an investor will usually see a return of 75-85% of the amount risked on a trade.

For example, a trader who makes a $10 trade will usually see a return on a winning trade of 18%, assuming an 80% return. There are also many high yielding binary options such as one-touch options which can have a payout profile as high as 350%. Even in the cases of high yielding returns, the most an investor can lose is the amount risked on the trade. To learn more about the win-rate required for different payouts, read this lesson here.

In other forms of trading, a risk to reward ratio of 1:2 is the standard target. For example, if a trader sets his stop-loss 10 pips below the current price then he’ll aim for a 20 pip take profit (1:2). In binary options, the stop-loss/take-profit is irrelevant because of the fixed risk-reward of the trader, which would be 100:85 for an 85% payout.

Risk can be defined as the possibility of loss. For example if an investor purchases a call binary option, there is a possibility of a price decline, which puts the investor at risk. The loss itself is not the risk; instead the possibility of loss is the risk. There are a number of techniques to control the risk, but with binary options the risk is pre-determine and so are the gains.

To achieve the most attractive trading size, investors need to determine most efficient amount of capital to use when making an investment. There are a number of strategies that can be used to determine the trade size of an investment, which include a fixed bet or a fixed-fraction bet.

1. In a fixed betting system, the amount of capital remains the same no matter how large the portfolio grows. In this instance, an investor would place trades of $50 dollars regardless of whether the trade becomes proportionately too large or too small. A $50 dollar bet on an account size of $1,000 dollars seems reasonable, but it would be considered large on a $100 dollar portfolio and small on a $100,000 portfolio. Generally a 5% trade size of the total portfolio is considered reasonable, for trades that an investor has strong confidence in. That would mean on a $1,000 portfolio that is geared toward trading binary options an investor would risk $50 dollars per trade.

To remedy this problem of the equity within the portfolio drifting out of proportion to the fixed bet, an investor can define a bet size as a fixed fraction of the equity within a portfolio. A 5% fixed-fraction bet would, on our original $1,000, also lead to a $50 bet. If the equity rises or falls, the fixed-fraction bet stays in proportion to the equity. So if the portfolio became $10,000 the fix-fraction bet would increase to $500 dollars.

2. Another technique a binary option trader can use is to alter the bet size based on the payout and volatility. For example, short term 60 second options would require a smaller bet size as the payout is smaller and the volatility is greater than a daily above or below option. Additionally, traders should avoid situations where they are taking bets on days when there is high volatility based on an important economic data release, unless the binary option trade is predicated solely on the results of the release.

Generating the optimal bet size is a process similar to probability. This process of finding this optimal number has been best described by the Kelly criterion, developed by John Kelly. Kelly created a simple formula that describes the optimal strategy for non-correlated trades.

Kelly Criterion formula: f= (bp – q) / b

• f is the fraction of the current portfolio

• b is the net odds received on the trade

• p is the probability of winning;

• q is the probability of losing, which is 1 – p

There are a number of ways investors can modify the Kelly Criterion to find a process that is more in tune with their trading style. One of the most important concepts in determining trade size is risk relative to reward. If the reward of a trade is compensated beyond the relative risk it is considered a robust bet.

Trade size is an important concept that should be analyzed prior to creating a portfolio in an effort to achieve the most efficient risk adjusted returns. Trade sizes that are too large will potential create the risk of losing an investor’s entire portfolio at some point, while bet sizes that are too small will never meet and investors expected returns.

More About Adam

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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