Money and Risk Management with Binary Options

Trading is a game of probabilities. The sooner traders realize this, the better.

There’s not a holy grail or a golden recipe that wins one hundred percent of the times. It simply doesn’t exist.

However, profitable trading exists. Besides a trading strategy, one needs to have a sound money management plan. And to respect it.

A trading strategy may be:

-         based on indicators (trend indicators or oscillators or both)

-         based on a trading theory (Elliott Waves, Gartley, Gann, Point and Figure, Drummond, etc.)

-         any trading approach that has a chance to generate a profit.

On top of that, when trading binary options, one needs to say not only WHERE price goes, but WHEN. This is the most difficult part of them all. Below are some things mandatory in any binary options risk management plan.

What Makes a Good Money Management Plan?

Managing money means managing risk. Binary options risks come from three distinct areas:

-         the amount to put on a trade

-         the financial product and the direction

-         the expiration date.

Believe it or not, the direction is the least important one. How about being bullish on a currency pair, the market moves in your favor all day and right before the expiration date makes a U-turn?

In the Forex market, this would have been a profitable trade, especially for scalpers. In binary options trading, the expiration date played a trick. Hence, we should start with it as the main pillar of a sound money management plan.

Avoid Short-Term Expiration Dates

By all means, avoid the one-minute and five-minute expiration dates. Even the hourly ones!

Trade with the end of the day, week and even month as your expiration date. After all, if someone gives you over 75% rate of return on your investment, why would you not wait a bit?

And it is not like you must wait for a week or a month. If you trade a binary option in the afternoon, end of the day is just a few hours later.

The same is true in the case of an end of week expiration if you buy the option on a Thursday or end of the month if you buy it in the second half of the month.

To make it in this market, you must think differently. Binary options brokers use all kind of tricks to get you: fear and greed are their best allies. Rationale and logical thinking are yours.

Let me give you an example: when picking an expiration date for your option, you’ll find out you can’t just pick whatever the expiration you want. You should pick one provided by your binary options broker.

It may come as a surprise to you, but brokers set these expirations dates when the market is most volatile: at daily, weekly and monthly fixings, and daily, weekly and monthly closings, or when important economic releases will hit the wires.

To mitigate this risk, set yours way beyond. The only way to do that is to avoid trading smaller expiration dates. The sooner you get this, the sooner you’ll start being a real trader.

Trade Only a Few Products

Over the weekend, look at the economic calendar for the week ahead. Check the important events, the currencies affected, and so on.

Pick only some currency pairs, for example. You don’t have to trade everything! This way, you already have a disciplined approach based on fundamental analysis.

If for example, there is an important USD event like the Non-Farm Payrolls (it comes out on the first Friday of every month), you may want to avoid trading USD pairs that week. It is known that the dollar will range until the release, so chances are the market will not go anywhere. Hence, your options will have a hard time to expire in the money.

Or, if you do trade, set an expiration that to go beyond the NFP release, like the end of month or end of next week.

Direction and The Amount to Trade With

Perhaps the most important thing is the amount to trade. After your analysis (both technical and fundamental) ends over the weekend, it is time to decide on the amount to trade.

Let’s say you have a $1000 trading account. Divide it into ten equal parts to trade every week. Therefore, for the week ahead, the amount to risk is $100.

Next, divide this $100 between the financial products you decided earlier to trade. Let’s say two currency pairs, one index, and gold. This ends up risking $25 on every instrument.

Moving forward, you don’t want to trade the whole $25 sum in one trade, do you? You’ll want to split the risk. So, split it into five different parts, for example.

This will give you five different opportunities to trade a binary option for every four financial instruments. See what we’re doing here? We’re splitting the risk. Or managing the risk, whatever you want to call this.

Conclusion

If you follow the steps ahead, you need to lose ALL your trades in ten consecutive losing weeks. What are the chances for this to happen?

Let’s do some simple math. It means two hundred options will have to expire out of the money in the next ten weeks after you started trading.

That’s improbable. Even if you know nothing about trading. But if you do know some about trading financial products, then this system is the perfect money management plan for your binary options account.

 


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