Money Management Review: Do Not Let Brokers Tempt You Into Poor Choices
Early on in this blog, I wrote a number of articles on basic money management for binary options trading. How you manage your bankroll can determine how much fun you have, if you are trading for entertainment, or how much money you can make, if you are trading seriously to profit. If you want to stay in the game, the rule is to trade conservatively. Now and again, it is a great idea to go back to basics and review these key points. I was reminded of this the other day while I was looking at a broker called CVCoption.
CVCoption is one of a number of new binary options companies that have sprouted up in recent months. There is nothing about the site that stands out aside from the ludicrously high minimum investment amount. While the amount is not listed anywhere on the site, you will find that the platform rejects your trades if you wager less than £100.
Wow … £100? You are probably asking yourself how much you have to deposit in order to trade on a site that requires that your smallest trades be £100 (including short-term trades like 60-Second options). £10,000? £100,000?
Nope. Just $500.
What Is Wrong With This Picture?
A website like this is a problem because the company is actually encouraging new traders to make bad decisions when it comes to bankroll management. By allowing traders to join the site with as little as £500, the company is opening its doors wide to inexperienced traders with small bankrolls. Those traders are then forced to invest £100 or more on each of their trades. How many times does £100 go into £500? Just five times! Each of your trades would account for 20% of your entire bankroll if you joined the site with the minimum deposit. You would only need to lose five trades in a row in order to blow your bank account completely.
Five trades is not a lot. Even if you have limited experience with trading, you probably can recognize that right off the top. Then again, companies like this are counting on you to embrace blind optimism instead of that reality. Even if you have a top notch trading system, something that performs reliably and offers amazing results over time, a losing streak of five trades in a row is far from unimaginable. And if you have anything less than that? Good luck trading for more than a few hours or days—or minutes, if you are doing the short term options!
Aim to Invest Around 3% Per Trade
New traders are often surprised when they find out that the majority of pro traders who trade for a living only invest a tiny percentage of their bankroll on each trade. Three percent is a common amount. For some it may be even less, even as little as one to two percent. When you get up around 5%, you are already looking at the very upper end of the acceptable bracket, and an amount that would be uncomfortably risky for many responsible traders. Ten percent is right out, and 20% is unthinkable.
Not planning on trading for a living? Ask yourself the reason you are trading binary options. Is it to have a good time? How would you manage your bankroll at a casino? You would not walk in with £500 and spend it all on just a few spins of the roulette wheel, would you? You would probably end up walking out the door in less time than it took you to drive to the casino. Even casual gamblers manage their money so they can derive as much fun from their bankroll as possible. Because brokers like CVCoption actively encourage new traders to trade without money management rules, it bears repeating:
The smaller the percentage you invest on each trade, the more trades you can make without losing it all.
Here are a few quick money management tips that you should keep in mind.
While Funding Your Account:
• Choose a broker you can afford. Being able to afford to trade on a website is not just a matter of making the minimum deposit threshold. It is also a matter of looking up the minimum investment amount on the broker’s site to make sure that it is not set too high. If you plan to start trading with £500 or the equivalent in US Dollars or Canadian Dollars, you cannot afford to trade on a site that sets the minimum trade amount at £100. A minimum trade amount closer to £10 would be affordable. For more tips on how to choose a broker click here and here.
• If you do join a site with a higher minimum trade amount, you need to deposit a bankroll that corresponds if you are trading seriously or professionally. For example, say you want to trade on a site that offers a minimum trade size of £25. Even if the minimum initial deposit is set at £200, you would want to deposit closer to £900. Otherwise you would be trading too high a percentage of your bankroll. If you cannot afford the higher deposit yet, it is a wise idea to wait until you can.
• Do not ignore withdrawal thresholds. If you join a site with a minimum deposit amount of £100 and a minimum withdrawal amount of the same, you should definitely deposit more than the minimum amount. Otherwise you will not be able to withdraw your money unless you win.
• Your trades should all be about 3% of your total bankroll. Less is fine, and slightly more may be acceptable to you, but do some testing (if you are a serious trader) to make sure that you are going to be okay if you experience a losing streak. If you are trading for fun, feel free to invest a larger percentage, but remember to ask yourself how many trades you can lose before the fun is over. You may even want to ask yourself how many trades you want to be able to make before you run out of money, and use that to calculate the amount to invest.
• Invest the same amount of money on every trade. You may feel a temptation to put more money on the trades you are feeling most confident about, but that does not justify doing so. These are actually the only trades you should take, and you should always invest around 3% on them. When you vary your trade amounts, you are taking trades you feel more and less confident about. You should only take the very best trades. When you start bending and breaking the rules, you also set yourself up on a track to fail, since you are no longer trading with self-discipline.
• If you experience a losing streak that exceeds the largest losing streak you had during testing stages (again for serious investors), it is time to stop trading with real money. Go back to demo testing or backtesting until you figure out the issue and are able to correct it. This will prevent you from losing more money while you are troubleshooting. One of the most important rules of money management is simply never to lose money you do not have to!
Money management is actually one of the easiest aspects of binary options trading to learn. Unlike learning a trading method, it does not require extensive research or practice. Unlike trading psychological, it does not require deep reflection. All you need are a few simple rules, some common sense, and the discipline to apply them consistently as you trade. Use those rules to inform your choice of broker to trade with and to decide on your initial deposit. Do not let bad brokers steer you into making bad decisions. Make smart choices about managing your money, and use those choices to guide your selection of an excellent broker that will support your trading career.