Money management is what all beginners in binary options lack so much. The main reason for the financial losses of novice traders lies not in the absence of a profitable trading strategy, but in the complete disregard for the rules of money management. In the field of exchange trading, there are no systems for making transactions with guaranteed profit. However, despite this, there are many experienced traders who have been trading for many years, while receiving stable profits. The foundation of their success is money management and risk management.
What is money management
Money management — this term refers to a list of rules that allow a trader to keep his capital in a breakeven state. The risk management system enables the investor to get out of any unfavorable situation with minimal financial losses.
Money management in binary options trading is based on general principles. However, there are differences from the risk management rules in other futures markets, such as Forex. A feature of option contracts is a fixed profit and loss. This has both advantages and disadvantages. With a 100% investment, the return on the operation is approximately 70-85%. Therefore, even with a ratio of loss-making and profitable trades of 1:1, the trader remains at some loss.
Binary options money management rules
The main principle is to limit the maximum amount of funds that can be used for trading. The indicator is measured as a percentage of the deposit.
Fundamental principles of money management:
- recommended costs for the purchase of one option — up to 1% of the deposit amount;
- maximum costs per transaction — up to 5% of the balance;
- loss limit for one trading day — no more than 20–30%;
The minimum rate at the Binomo broker is 1 USD, and the lower bar when replenishing the deposit is 10 dollars. It follows from this that, according to the rules of money management, the minimum amount of investments with which it is permissible for beginners to start is $20. In this case, it will be possible to spend 5% of the deposit amount on one transaction. The recommended amount of initial investment is from $100.
Professionals risk 0.01–0.10% of their balance per trade. To do this, you need to replenish your account with at least $1000. Not everyone can afford it. On the stock exchange, profit is determined as a percentage, respectively — 1% of $ 10 and 100 thousand is significantly different. Successful traders usually have large capital at their disposal (this is not necessarily their own funds). This allows them to risk a very small percentage of the deposit, earning large profits. For example, 0.5% of $100,000 is $500 of net profit per day.
The above does not mean that the secret to success in binary options lies in the presence of large capital. If a trader does not have a time-tested strategy and sufficient practical trading experience, then he risks losing both $10 and $1000 with the same “success”.
Practical advice for traders
- Regardless of the situation, you cannot invest more than 5% of the deposit in a transaction. The Martingale strategy, which implies doubling the bet after a failure, is extremely dangerous to use.
- If several unprofitable operations were carried out in a row, it is necessary to take a timeout to comprehend the situation (without emotions). This situation may arise for several reasons. First, some mistake was made in the trading system. Secondly, on the current day the market was influenced by too many fundamental factors (if trading was carried out using technical analysis methods). Thirdly, the trader’s emotional balance was disturbed.
- It is recommended to set a limit for both losing and profitable trades per day. For example, 10 options. After the limit is exhausted, regardless of the result, it is recommended to postpone trading until the next day. This disciplines the trader.
An effective trading strategy, being applied with the condition of ignoring the rules of money management, will soon lead to the loss of the deposit. If a trader trades haphazardly and almost at random, but at the same time strictly follows the rules of money management, then he, of course, will also lose money, but this will happen much later in time. From this we can conclude that money management is in the first place, and specific trading systems are in the second place.