Trading binary options is inherently risky. That is to say, you can experience large swings, both upwards and downwards. On a single option, you can make 80-90% profit, but you can also lose the invested amount. It is therefore important to protect yourself against the risk of trading. In this article, we explain three principles for risk management when trading in binary options. With these principles, you can protect your investment and avoid big losses.
The reason risk management is paramount in binary options trading is simple. As a trader in binary options your most important tool is your money. You use this money to buy binary options, and thus make more money. Should you lose all your money, you can no longer trade, and therefore earn no more money. That then marks the end of your career as an options trader. Therefore you must avoid losing your capital, and make sure you always have enough left over to continue to trade.
Three principles to protect your capital
First, you do that by choosing the options you buy. You want to buy options for which the probability for pay out in returns is large. For example, you can determine this by using technical analysis. But you can also follow the news, and pick binary options on shares whose values are expected to rise (or fall). Remember: with binary options, it doesn't matter how much a stock rises or falls. If the rate is 1 pence higher (or lower) than the strike price, you receive the complete profit on your investment.
Secondly, you control your risk by never risking your entire capital at once. If, for instance, you have GBP 500 on your trading account with a broker, then never buy one option one option for 500 pounds. Instead, spread your risk twenty times at 25 pounds on different options. With this, it is obviously inevitable that on some of those options will incur losses, which implies that you will lose the invested 25 pounds. However, the other options that make 80-90% profit each, make up (cover) for the losing options. So, at the end of the day, you still make a profit anyway, despite the losses that you may have incurred in between. Do this day in, day out, and you will notice at the end of the month that you have netted a hefty profit.
Thirdly, it is important to keep your emotions in check and take decisions with your head, not your heart. If you have a bad day, if you're not feeling well, if you're drunk, or if you've just experienced something shocking, then do not trade. The options market will still be there tomorrow, and there is no rush. Wait until you feel good and are completely sharp to make smart trading decisions.
The most important rule of risk management
Finally, and we cannot emphasize this enough, never ever trade with money that you cannot afford to lose! NEVER!!! If the money at stake is indispensable for you, it puts you under pressure and you make emotional decisions; you buy the wrong options, risking too much money on one option, and eventually lose everything. There have been many aspiring options traders who never made it to the top because they put too much at stake. Do not make the same mistake and only trade with money you can afford to lose.
If you stick to these principles of risk management to protect yourself against losses, you can maximise your profits with binary option trading.
