Binary Options And Money Management 101: 9 Essentials For Conserving Your Cash
Making money trading binary options isn’t a matter of luck. It’s about strategy and discipline. You must be able to identify when the risk of a particular trade outweighs the potential return. You also need to have the discipline to stick to your binary options trading strategy, even when you’re tempted to throw caution to the wind.
It’s not as easy as it sounds. There are plenty of bankrupt traders out there who can testify to that fact.
If you want to make money with binary options, you must first learn to manage your money. That means coming up with – and following – a trading strategy, learning to assess risk vs reward, and limiting the size of your investments. It may not be as exciting as “going all in” and swinging for the fences. But you’ll dramatically improve your odds of coming out ahead in the long run.
I’m going to give you a crash course on binary options money management below. Follow the suggestions to shift the odds in your favor. Let’s start with a brief introduction to risk management…
How To Manage Risk When Trading Binary Options
You already know that trading binary options poses a high level of risk. You’re not buying 100 shares of General Electric and holding onto them for 20 years. Your trades expire within minutes. In the case of 60-second binary options, they expire in seconds.
You must learn to manage that risk if you hope to make a profit.
The most effective strategy for limiting your risk is to adopt a “bet size” rule that defines how much of your bankroll can be exposed at any given time. There are two parts to the equation: the percentage of your cash that you put into a single trade and the percentage you have exposed to the market as a whole.
As a general rule, you shouldn’t have more than 5% of your bankroll invested in a single trade. If you’re just getting started with binary options, consider 2% as the cutoff. You can always increase the percentage later. For now, get accustomed to making trades, doing basic analysis, and predicting price movements.
In addition, you shouldn’t put more than 20% of your bankroll into the market at one time. If you have money in 5 different trades, the total investment should not exceed 20% of your cash. Again, that figure is just a guideline. Lower it if you’re a novice. Raise it if you’re a veteran.
Coming up with a reasonable “bet size” rule and sticking to it will go a long way toward reducing your risk. If you’re a whiz at high-level math, you can perform a lot of advanced risk management analysis to reduce it further. But the amount you bet is going to be one of your best tools.
With that out of the way, let’s dig into the 9 essentials of binary options money management. We’re going to move quickly, so don’t get distracted.
#1 – Know When To Cut Your Losses
It’s not always necessary to ride out a losing trade. A lot of brokers give you the option to close out trades before they expire. That allows you to cut your losses.
Suppose you’re trading a contract on gold and you realize early on that it’s destined to expire out of the money. When it does so, you’ll lose your entire investment (you might receive a rebate, but it’s usually less than 10%). By closing the trade early, you can recoup a large portion of your original investment.
How much? Think 50% or more.
Side note: AnyOption was one of the first brokers to offer an “early closure” feature. 24Option now offers it as well. Both companies are on our list of legitimate binary options brokers.
#2 – Don’t Be A Contrarian Trader
How glorious it would be if you bet against everyone and won! Not only would you profit on the trade, but you’d look like a trading savant.
Here’s a quick dose of reality: being a contrarian is likely to result in a lot of losses. If an asset’s price is showing momentum in a particular direction, it’s a bad idea to bet against it. The exception is when your candlestick charts are showing a major reversal coming up.
#3 – Diversify Your Trades
When you first start trading, you’ll probably stick to assets you’re familiar with. For example, you may have a background in stocks. Or you might have experience with gold or certain commodities. It’s natural to focus on those strengths.
But if you’re planning to make several trades at the same time, spread them out over different asset classes. Diversify. That way, if one asset class tanks, it won’t decimate your portfolio. Placing trades in other assets will help balance things out.
#4 – Track Your Results
It’s useful to evaluate your trading results on a regular basis. Doing so can reveal problems in your trading strategy. It can also help you pinpoint things you’re doing well. If you manage to fix the problems and keep doing the things you’re doing well, you’ll make bigger profits down the road.
Set aside an hour each week to review your results. Yes, it’s boring. But it can make you a more effective trader, lowering your risk and improving your chances of making money.
#5 – Use Candlestick Charts
Candlestick charts are a tool for tracking prices. Among other things, they reveal when the price of an asset is nearing the top or bottom of its trading range. That can signal a reversal in its price. The charts provide data that help you determine whether an asset’s price is likely to rise or fall during the life of a particular trade.
Even if you’ve never used candlestick charts, you’ve probably seen them at some point. They look complicated, but are very simple to use.
#6 – Control Your Fear
Fear is natural when trading binary options. And the more money you have at stake, the more fear you’ll probably experience. The important thing is that you don’t allow it to paralyze you. Embrace it and use it as a reason to stick to your trading strategy.
You’re going to have losses. There’s no way around it. Every experienced trader, including those who seem to mint money with their trades, realizes that losses are part of making money with binary options. But they also realize they can significantly reduce their risk by sticking to a trading method they know works.
Fear drives them to do that. Let it drive you to do the same.
#7 – Start With Small Bets
If you’re new to binary options trading, keep your initial bets small. Earlier, we suggested keeping your trades to 2% or less of your bankroll. That means if you have $2,000 in your account, don’t put more than $40 in a single trade.
After you spend a week gaining experience, raise the limit to 3%. The following week raise it to 4%. The week after that, push it up to 5%. That gives you time to learn.
#8 – Set Daily Limits On Your Wins and Losses
A major part of managing your money when trading binary options is knowing when to call it a day. The best way to do that is to set strict limits on the number of wins or losses you accumulate in a given day.
For example, determine upfront that you’ll stop trading once you make 8 trades that expire in the money or 5 trades that expire out of the money. You can also set limits based on the dollar amounts you win or lose. For example, commit to calling it quits once you rack up $200 in profit or suffer $100 in losses (net).
Your limits will prevent you from chasing your losses and racking up more in the process. They’ll also prevent you from making careless trades out of excitement over a string of wins.
#9 – Use Reputable Binary Options Brokers
One of the best things you can do to reduce your risk is to use binary options brokers that have a positive track record. That way, you can have confidence that the broker is treating you fairly.
There have been many reports of shenanigans, such as trades continuing after their expirations, at some brokers. Those types of problems can ravage your bankroll.
We’ve put together a small list of the most reputable binary options brokers in the industry. We keep it updated. If you’re looking for a good broker, we recommend starting with that list.
To recap, bankroll management is one of the most neglected skills among amateur traders. It’s also one of the most important. Use the suggestions above to limit your losses and increase your odds of making a consistent profit trading binary options.