Money Management in Binary Options

24option-bonusMoney management is the most crucial aspect that differentiates a future profitable trader from a trader who blows up his account.

All binary options traders need to pay close attention to money management in order to succeed. Lowering your guard after a series of profitable trades and then betting the ranch is certainly not the way to go.

First a trader of binary options needs to know what money management is. The term ‘Money Management’ is a very generic term and can be confused with handling one’s finances but in relation to trading the term signifies a broad meaning of managing your risk by controlling trade size.

Money management is basically how you manages the money in your trading account so that they you survive the unlikely but possible event of a series of losing trades. Money management also determines how much two traders with similar skills and similar trades can still have different returns while trading binary options.

Let’s take an example of a simple binary options trade to clarify.

  • A trader assesses that the price of a security will be above a pivot X after two hours,
  • He goes and buys a CALL binary option on it of two hours expiry worth $500 with payout of 80%,
  • After two hours the security does not trades above the pivot point and the trader looses the whole $500.

In the above scenario, if the trader had only $500 to trade, he committed a serious mistake in money management as he now can’t recoup his losses. But if the trader had a capital of $100,000 he only lost 0.5% of his total account equity and can recoup his losses by making profitable trades in future. So as you can see it is all a question of trade size in relation to your capital.

For a trader who has set a maximum of 10% for losses he can bear in his trading account, it will take a string of 20 straight losses of 0.5% to lose 10% of his account equity and if a trader has great trading skills, he can avoid a string of 20 losses and ensure that he never reaches the maximum loss limit.

A trader with poor money management skills can instead commit 40% or even 100% of his account equity in a single trade and end up blowing his account or making it reach a point of no return.

As a general rule in trading and money management, profitable traders don’t commit more than 1-2% of account equity in a single trade and ensure that they survive the dry and the losing spells that markets hand over traders of all breeds regularly.

Binary options can also play an important role in money management through hedging. Let’s take an example to explain that. Assume that a trader has a trading capital of $100,000.

He has already invested in 100 shares of Apple at $540, making his investment in the stock worth $54,000. Assume that the trader is bullish on Apple and feels that it will trade at $542 in two hours which will result in making him a profit of $2,000. As a hedge, the trader goes on and buys a PUT binary Option worth $1000 with strike price at $540, payout of 80% and expiry in 2 hours.

Now, consider a scenario where Apple shares trade at $535 in two hours.

If the trader had not bought the binary option contract, he would have been making a loss of $500 on the trade
Since the trader bought the binary option contract though he lost $500 on the trade in shares, he also made a profit of $800 in the binary option contract and will be making a net profit of $300 even after being wrong on the trade.

Money management is what ensures that even if a trader is proved continuously wrong in the markets, they are able to survive and reach back to profitability. Binary options are one of the best trading instruments available for traders who have good money management skills due to their high payouts and instant profits. Traders who lack money management skills must first devote time and energy in learning it before they start trading in binary options.

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“Money Management in Binary Options” дл запии 2 комментариев
  1. Michael Obrien says:

    The reason Binary options don’t work in the Long Term is because in trading, you want to have an opportunity to make a multiple on your risk. Eg Risk $100 you want to make $200+ or $150 at least. That way you can be right only 50% of the time and still make money.

  2. GordonBarker says:

    It is a problem that binary options industry has become a shady place with so many brokers and information products like robots, systems, etc. One should definitely make their own research before investing real money into it. Just a handful of brokers allow demo accounts.

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