[Please read the disclaimer -Ed.]
All forms of trading require some level of risk management, and binary options trading is no exception. The good news is that risk management need not be complex in order to be highly effective. The fact of the matter is that all traders have their own risk appetite, with some being willing to take on more risk than others. Regardless of where you fall on the risk acceptance scale, the following information will be beneficial to you when planning out your strategies and executing your daily trades.
Financial risk management
How much money should you commit to each trade? Emotions can play a strong role in this decision, so it is advisable to set a plan in advance and to stick to it. For example, you could decide in advance to always trade with the minimum amount allowed; at least until your profit growth has reached a set goal. This is one of the key tenets of binary options money management There are many different ways to go about establishing limits with regards to per-trade sums. Just be sure that you do have some plan (and limits) in place from the very start. If emotion is allowed to dictate these decisions, you could quickly find your account balance at $0.
Strategy risk management
Testing new binary option trading strategies and putting them to use can be both exciting and profitable. The bad news is that excitement can lead to mistakes. Consider always testing strategies either in a demo account or on paper. It is recommended that an unproven strategy should be tested up to 100 times before it is used in a binary options platform. No time for testing? The next best option would be to trade with the smallest amount of funds possible. Many brokers now have low per-trade minimums (in some cases, as low as $1), so do not be afraid to use them when testing and utilizing new strategies. If they prove to be effective, you can then increase your investment amounts.
Hedging is one strategy to consider if you would like to limit losses. In the binary options realm, hedging equates to covering both sides of the market. When trading binaries, there are several expiry options to choose from. This allows traders the chance to enter into trades on a single underlying asset, covering both sides — Call and Put. This type of strategy can certainly help you to mitigate risk, but do pay special attention to your technical analysis and the amount of money devoted to each of the positions.
Trade volume considerations
The number of binary options trades that you execute daily will of course impact your bottom line. It can be tough to plan this number in advance, because the simple truth is that on some days, market conditions are just better for trading than others. Here again, emotion can play a role. If conditions are optimal and you’re generating lots of profit, it can be tough to walk away. The same can be said of several losses, after which you may be tempted to continue trading in hopes of recovering lost funds. Do consider setting a minimum and maximum number of daily trades, after which you can focus only on the best entry opportunities each day.
Fund management considerations
Fund management relates to how you actually manage your deposits and withdrawals. It can also relate to bonuses, and whether or not you choose to accept them. You must have money in your account in order to trade, this is a fact, but there are a few things to consider in addition to this. Are there deposit and withdrawal fees? If so, you may want to limit the number of transactions. Did you accept a bonus and need to meet trade volume requirements? If so, this must be factored into your trade strategy. Make sure that you have a firm understanding of what funding and withdrawing from your account will cost you in order to keep the total costs low.
The key to successful risk management is planning. If you are new to binary options trading, now is the perfect time to outline a plan. Your plan can be adjusted as you progress, but forge out a plan before getting started. If you’ve already been trading binaries and are running into problems, know that it is never too late to form a new plan. You can have a “do over” if you’ve drained your account. Yes, an additional deposit may be required, or even a broker change, but you can go back to square one and take a different path to success.