Binary Options Money Management The One Strategy you Really Need

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7 Binary Options

When it comes to investing, especially when you are first starting out, experts will always tell you never to invest more money than you can afford to lose. This may seem like overstating the obvious, but it should also make you aware of an important point; there are as many losers when it comes to trading binary options as there are winners. This only highlights further the need for a well thought out money management strategy before you start trading binary options.

An effective money management strategy will help take the extra pressure off as you trade because you are using surplus income that will not bother you as much to lose if your binary option trading does not prove to be successful. A general rule when you are first starting out is to start making your initial monthly trades by using no more than 5% – 10% of your disposable investment income for the month and then gradually increase this to 20% – 30% a month as your binary option trading skills increase and you become more successful.

Here is how that works. Say you have decided that you have a total disposable investment income of $1000 for the current month to trade with. The 10% starting figure we mentioned means that your first trade should be no more than $100. You then make a binary options trade for $100 or you can do two binary option trades for $50 etc… If your option finishes out of the money your total disposable investment income for the month will be reduced to $900 and if your trade finishes in the money you will then have increased this total to $1100.

By only investing a small amount of your total disposable investment income to start, it allows you make more trades during the month and trading over this longer period of time and should give you a better chance of coming out ahead. It also will allow you to chart your results as the month goes along and adjust the total percentage amounts according to how your month is working out trade wise. This is a proven binary option trading strategy that will help you consistently maximize your monthly investment pot.

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Is It Possible To Make Money Trading Binary Options?

Trading binary options online has become possible in 2008. It was a new way to make fast profits online for financial speculators. Trading binary option is open and available to anybody over 18 (one should check local government regulation before trading BO).

Binary options allows the user to speculate and place trades, which are essentially bets, on the direction of financial assets from a basket of currencies, stocks, commodities and indices. In binary options your losses can never exceed your deposits and your return is clearly defined at entry.

It is no secret that trading on the world’s financial markets by buying and selling positions has made many millionaires. It is also a fact that the markets bankrupted many more. The line between winning and losing can be very subtle. While trading may not be for everyone, the unprecedented ease of access to financial trading online has certainly made a lot of people happy about new possibilities.

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Is it really possible to make money? If so, how much?

The big question is can you really make money trading binary options? Short answer is yes, but it’s not that simple. Whether you make money or lose money really depends on a number of factors including your risk management, trading strategy, the options that you choose when you enter the trades, your broker fees, your trading psychology, etc. There are simply too many factors to consider but of course it is possible to win and make money, but it’s not as easy as binary options advertising has us believe.

Brokers will often entice people with all types of bonuses and ads that suggest making money trading binary options is very easy. Although the actual act of trading binary options is easier than Forex it is not easier to win and make money consistently in binary options.

Here is a mathematical formula to calculate break even ratio in binary options:

  • B – Break even ratio – (shows how many times you need to win to break even)
  • I – In the money ratio – (shows broker payout for winning trades)
  • Ot – Out of the money ratio – (shows your losses for losing trades)

Using the above formula you can calculate the break even ratio assuming a set of fixed parameters. Assume your broker pays you 90% for wins and takes 100% for losses.

B = 100% / 90% (in the money) + 100% (out of money)
B = 100 / 190
B = 0.5263

What this means is that in the case of a payout rate of 90% and 0% rebates on losses you will have to accurately predict 52.63% of your investments in order not to break even. This break even calculation can change quite significantly with different options. A 90% payout is very generous and rarely seen in binary options.

Let’s look at the numbers and for the purpose of further illustration let’s assume that we are dealing with a trader who has a trading strategy with 75% of wins. (There are numerous signal providers that achieve those levels.) 75% of wins is quite high for most standards. He also uses a binary options broker who offers only 70% of profit on each winning trade.

In one month he takes 52 trades and on each trade he puts $100. His total investment will be $5200. It averages out to about 2 trades per trading day. Let’s also assume that each trade has a payout of 70% and a return of 0%, as is the case with many binary brokers.

When we divide the total sum of his investment of $5200 between the 75% of winning and 25% of losing trades we split the working capital between $3900 which was spent on the winning trades and $1300 spent on the losing trades. Now let’s take the $3900, the 75% of his total trading capital, and add 70% of return payout on the winning trades which will produce $2730 of profit. His losing trades, the 25% of total trading capital, cost him $1300.

*The end result is wrong, it is $6630 which makes it 27.5% increase

So now that we know how much profit was made, let’s take those numbers and put them into the mentioned breakeven ratio formula to see how many times he actually needed to win in order not to lose any money at all.

This financial calculation is quite modest because it assumes a return of only 70% on wins where many brokers offer payouts over 80% and some brokers also offer returns on losses, only about 5-10%, but this will change the numbers significantly.

In addition, there are a few binary options signal providers who consistently achieve higher percentage of wins than 75%, which would also drastically improve profits as well.

So, only for the purpose of further illustration of what would happen if the overall wins were 80% and the return payout also 80% we’ll continue with our calculation. In this case $4160 is our winning capital, namely the 80%, and the remaining $1040, the 20%, is the losing capital. The winning capital of $4160 generates $3328 of profit (80% of payout for wining trades) and the losing capital of $1040 is simply lost, we’ll also use 0 return for losses in this calculation. So, out of 52 trades for $100 each the profit is $3328 and loss of $1040. Remember, that’s only in one month of trading.

As you can see the difference in earnings is huge between the first and the second example. A 24 percent per month as opposed to 2.5 percent per month is a world of difference. This is why it is so important to understand your risk exposure in binary options. Let’s see how many times he needed to win to break even:

Professional traders understand that and seek options and ways to keep the odds in their favor. For example trading with brokers that offer 85%-95% on wins and some return on losses. In addition there are ways to trade binary options to receive even higher payouts, as high as 200%.

Of course were profits can be made in a such a quick way there is inevitably going to be more risks involved. You can make money trading binary options online, there is no doubt about that, but you can also lose money. Following a reliable binary options signals or strategy or a professional trader in live sessions can really help you succeed in trading binary options online. It could be the difference between winning and losing.

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.

Important Binary Options Articles

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, ForTrader.org 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.

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, ForTrader.org 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

FORTRADER Magazine is a large team of experts in trading in financial markets. Traders, managers, investors, programmers, testers, technical administrators – we all work for you every day for many years. Sometimes we write articles together, then the whole journal becomes the author.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

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