In trading binary options, as well as any other asset (currencies, stocks, futures and so on) much attention should be paid to capital management. Binary optionsIn spite of all its ease of use, it remains a speculative tool, work with which requires cash investments, so without money management can not do.
Important articles about binary options
Capital management tactics in binary options trading
If you are not familiar with this definition, then in a nutshell, money management is strategies of batch investment in transactions and increasing the volume of trades with capital growth. In addition, in the money management includes tactics to protect funds by investing in different instruments, issues of portfolio investments and other options on how to manage your deposit.
Due to the fact that BO is in general a rather simplified tool for trading, which implies only two options for closing a deal - profit or loss - which after the conclusion of the contract the trader can no longer affect, there are a limited number of money management tactics for binary options. Let's go over them.
1. On a binary contract not more than 5%
As with other exchange-traded instruments, ForTrader.org recommends use no more than 3-5% of capital in a single transaction. That is, having a deposit of 1000$, you can conclude a contract only for 30-50$$. If the minimum contract amount at your binary options broker is 5$, then your minimum deposit must be at least 100-170$$. What is it for? To wait out a series of losses while having a margin to continue trading. Rarely a series of losing trades exceeds 8. Meanwhile, during this time, the trader has all possibilities to correct the strategy and understand the reason of mistakes. That is why you should not go all-in, even if you are strongly confident in success.
2. use your profits wisely!
From the previous rule of money management in binary options The second thing you should do is gradually increase the volume of your trades. With each profitable trade your deposit grows, and therefore the contract amount should grow as well, because we calculate it in percent. A smart trader never increases his trading deposit by the full amount of profit. It leaves about 50% to withdraw or in case of a protracted loss.
Let's take an example: you have a deposit of 1000$, trading at 3%. For 10 profitable trades you have made a profit of 255$ (30$ * 85% * 10) to your account. 125$ of them it is reasonable to withdraw or put aside, 130 - to add to the total deposit amount and open transactions further not on 30$, but on 34$ (1130 * 3%). Keep in mind that it is better to increase the trading deposit by the amount of profit after a series of successful trades, when the amount of profit is already sufficient to feel the difference.
This rule of working with binary options (as well as with other tools for trading) will help you feel confident and give you the opportunity to see the results of your work, as well as teach you not to stand still and develop yourself and your capital.
3. Loss risk management in binary options
Continuing the topic of money management and risk management in binary options trading, we would like to remind you about "Stop Levels". Frankly speaking, this point is more suitable for the topic of psychology of trading, but still, it has a lot to do with capital as well.
Determine for yourself the number of losses in a row and the amount of loss, after which you need to review your trading strategy!
Sometimes, getting into a rush and wanting to get even, we make a lot of reckless deals. In order not to lose capital thoughtlessly, pause if you feel the trade is out of your control. This will help you save nerves and money.
Hedging and Diversification as Capital Management Strategies in Binary Options
And the last item is hedging and diversification. We have combined these points because they are largely borrowed from other markets. Applying them in practice as money management strategies for binary options will be quite difficult.
Hedging involves finding assets with high correlation (with very similar price movements) and purchasing two opposite direction contracts for them. Then the disadvantage in one deal should overlap with the plus in the other one. But since the percentage profit of binary options is always less than the loss, this tactic is a failure in advance. That's why Hedging with binary options is possible only when trading the main asset at the same timeThat is, currency pairs or stocks. We talked about this in the previous two articles. In this case, hedging stands next to diversification, because you are using several markets for an overall strategy.
That's not to say it's a very easy thing to hedge and Diversification by binary optionsBut with a serious approach, it can bring good profits. So ForTrader.org recommends paying special attention to this point.
Conclusions: Despite its simplicity, binary options remain a risky asset to invest in. Therefore, you should not relax beforehand. Capital and risk management strategies in binary options are few and far between, but even they can help you improve your trading results with this tool. It's never a bad idea to approach trading wisely.
