There’s a lot that can be said about risk management in any kind of trading, but it is especially important to discuss in binary options trading, simply because it’s addressed so infrequently. Trading of any sort is not a game, it’s not a leisurely activity, and it’s certainly not something that should be done recreationally. Yes, it’s fun and it’s exciting, but it’s not a video game by any means. Treating it as such, even inadvertently, is dangerous.
Know Your Risk
Every single trade that you will make has risk. That is the tradeoff for being given the opportunity to make more money. There’s a chance that you can earn a ton of money, but you can also lose some. Binary options have a special kind of risk involved because they are all or nothing type trades. If you risk $10,000, you can earn a high rate of return on that—sometimes up to 81%–or you could lose it all. If you only have $10,000 in your trading account, putting all of that into something with this magnitude of risk is not smart.
Taking a smarter approach to trading is far superior. It decreases your risk of ruin, keeps you trading for longer, and allows you to slowly build up wealth. This is a safeguard against getting lucky on a few big trades and then thinking that you know everything that you need to know about trading. Some people get lucky right off the bat, and it inflates their ego. This is great that they’ve made money quickly, but it promotes a sense of confidence that isn’t warranted. As you might guess, this only creates opportunities for future mistakes. Odds are, they will be far bigger than the earnings that were originally made.
Most experts say that you should never risk more than 1 to 2% of your account size on a single trade, but there are more accurate ways of evaluating how much risk you should take on at a time. You will need tools like your payout rate and the probability of success on your side of things for a correct trade. Take these into account, plug them into your account’s size, and then round down to find which fixed risk amount is best for you. If your broker demands a minimum trade amount of $25, yet this is more than 5% of your account size, then you are increasing your risk of ruin and edging yourself one step closer to losing money. Unfortunately, this is the situation that many traders find themselves in on a daily basis.
There are some brokers that offer insurance on your trades, and others that allow you to end trades early. These features should be used sparingly. They have a purpose, but they are often overused. By looking at the math behind these trades and always thinking about probabilities and payouts, you are going to begin to learn to use them right over time. They can be handy tools when it comes to hedging positions, but other than that, there is little purpose in using them as they cost you profits in most situations.
Nobody trades with the end goal of losing money. But if you don’t take your risk levels into account, you will end up losing money eventually. It might not happen today, and it might not happen next month, but the variance of binary options plus the automatic edge that brokers create by paying out less than they take in gives you a big disadvantage to overcome. If you don’t compensate for this, you will lose out—and that’s the exact opposite of what you could be doing.