Money management in binary options: types, rules, recommendations

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Money management in binary options trading

Binary options trading may seem like a very simple form of trading, since all you need to do to make a profit is to click on one of the two buttons (Call or Put). However, many novice traders do not take into account that in the same short period of time you can make not only a profit, but also a loss, and this loss will be even greater than the expected profit. And answering the question why most traders “leak” their deposits on the market, we can say with confidence that there is only one reason for this - a violation or complete absence of the rules of money management (money management) and risk management (risk management).

Money management directly affects the profitability of any trading system or trading strategy for binary options , and this article will discuss in detail effective rules and methods of money management.

Content:

Why is it important to follow the rules of money management in binary options?

In trading, there are often periods when even seemingly profitable signals end in a loss. No one is immune from losses, and they happen to everyone, from beginners to professional traders.

Why might there be a loss-making period? There may be several reasons for this:

Trading against the trend .
Misunderstanding of the market situation.
Trading in a bad mood or during stress.
The market has changed, and the trading strategy no longer works as well as before.

Many traders forget that trading is a business that does not forgive mistakes and it is necessary to insure yourself by any available means. That is why money management in binary options is a very important part of trading, and proper adherence to its rules can save you from large losses even during long unprofitable periods.

Types of money management in binary options

Money management calculation There are three main types of money management (money management) for buying options:

Fixed (initial deposit).
Fixed (current deposit).
Floating.

These methods have the same essence, but work differently and will suit different traders depending on their experience in binary options trading.

Fixed type of money management in binary options (initial deposit)

The fixed type of money management implies that the trading volume in each transaction will be fixed, and the classic rule states that it is worth using no more than 2% of the deposit in each transaction and since this percentage will be fixed, the transaction volume will remain the same regardless from the outcome.

To calculate the required percentage of the deposit, you can use a calculator, or you can use a formula that looks like this:

Deposit amount / 100 * Required percentage

If we assume that the deposit is $237 and we need to know how much 2% will be, then we can use the following formula:

237 / 100 * 2 = $4.74

In a similar way, you can calculate the interest for any deposit.

What does a trading volume per trade of 2% of the trading account give to a trader? This percentage of trading volume makes it possible to make as many as 50 unprofitable trades, and since even the most unprofitable strategy can give about 30% of profitable signals, it will be very difficult to “drain” the entire deposit.

Therefore, if a trader has a profitable trading system that is capable of generating more than 50% profitable signals, the likelihood that the deposit will be lost during a losing period is as small as possible.

It is worth noting that the larger the amount available for trading, the smaller the percentage of the deposit should be used in each transaction. For example, for $10,000, a trading volume of 0.5-1% will be much more convenient to use, as it will reduce the psychological burden on the trader.

Fixed type of money management in binary options (current deposit)

Calculation of trading volume for a transaction The only difference between this type of money management and the previous one is that when you receive a loss, the amount of trading volume decreases, and when you receive a profit, it increases.

For example, let's assume that the option payout percentage is 80%. In this case, with a trading volume of $2 (2%), the trader could make a profit of $1.6 and his deposit would already be $101.6, and therefore the trading volume in the next transaction can be increased, since 2% of $101.6 would already be $2.03.

With a loss, the trader would have $98 left in the account, and on the next trade the trading volume would be $1.96, since this would be 2% of $98.

Note: please note that the differences between the first and second methods will be minimal and it makes sense to use the second method only on very large deposits, where even tenths of a percent will equal hundreds of dollars. On small deposits it is easier to use the first method.

Floating type of money management in binary options

Floating money management is different in that for each trade the trader uses a different percentage of the deposit for the trading volume. To use this type of money management, you can use:

Trade different trading strategies at the same time.
Trading one strategy in different trading sessions .
Making high-risk trades or trading on news using the economic calendar .

This type of money management is not suitable for beginners without experience, since it is not always immediately possible to understand what percentage of the deposit a trader can risk on certain transactions, especially if trading is carried out using different methods.

If we talk about the benefits of this approach, then when a trader deviates from his trading system and wants to buy an option, for example, before the release of important news, and the standard volume is 2% of the deposit, then you can use 0.5% in this transaction, which will not allow to lose a lot even with a negative outcome.

Note: for traders without experience, it is better not to use this approach and not to deviate from the trading strategy, as this can lead to unnecessary losses, which will negatively affect subsequent trades psychologically.

Calculation of risks when using money management in binary options

Money and money management A more careful calculation and comparison of different percentages can help novice traders understand why it is worth sticking to the smallest possible percentage for trading volume per trade.

For example, we took two situations with a deposit of $100, when 3 losing trades were made in a row and 1% of the deposit was used for each trade and 5%.

Using 1% trading volume:

$100 - $1 = $99.
$99 - $1 = $98.
$98 - $1 = $97.

Using 5% trading volume:

$100 - $5 = $95.
$95 - $5 = $90.
$90 - $5 = $85.

As a result, using a trading volume of 1% the loss would be only $3, and using 5% would be as much as $15! Of course, an amount of $15 does not seem like a lot, but if you compare it with $3, then it is 5 times higher and that $12 difference would provide additional chances for profit and the opportunity to make as many as 12 new transactions.

Also, do not forget that $15 of $100 is 15%, which is a fairly large amount of loss, since to “recapture” it will require much more effort, not to mention the psychological pressure on the trader.

And of course, the larger the deposit, the larger the amount of this 15%, and it is not difficult to calculate that for $1,000 it would already be $150 (the average size of deposits for beginners).

If we talk about profit, then with a payout percentage of 80%, the profit could be:

For 1% - $0.8.
For 5% - $4.

Money Management in binary options The most interesting thing is that in this example, beginners will look at how much profit could be made, and professionals will look at what the maximum amount could be lost. And it is precisely this approach that distinguishes professionals and amateurs, since a potential loss is always more important than a potential profit, and one of the rules that is always worth remembering is that it is much better to receive a small profit than to receive a large loss.

What other rules should you follow when following money management in binary options?

In addition to the standard calculations of transaction volumes and percentages when trading binary options, there are other important rules that will also help beginners not to lose too much while trading. These rules include:

Control of losses based on a percentage of the deposit . Setting goals helps you not to lose what you have earned during a trading day/week/month and not to lose more than you have already lost over the same time periods. For example, you can take a profit goal for the day in the amount of double or triple the amount of the loss for the day. And if the maximum loss per day is 3% of the deposit, then the profit limit can be adhered to in the amount of 6-9%. When the loss limit is reached, trading must be stopped.
Control of losses by the number of transactions . The point is to select the maximum number of losing trades that can be made per day/week/month. When this number of transactions is reached, trading stops.
Exclude “overclocking” systems from trading . For example, systems such as Martingale or Anti-Martingale .
Portfolio building . The essence of this rule is not to keep all your trading capital with one binary options broker . If the amount is not small, then it would be more correct to distribute it between two or three brokers.

Conclusion

As soon as a novice trader can understand how important it is to adhere to the rules of money management and risk management in binary options trading, making a profit will not be long in coming. Therefore, before you start trading, it is important to study all available money management methods, try them on a demo account , and only after that switch to a real account. This approach will save a lot of money and nerves, and will also give you an understanding of what approach should be used in trading.