Risk management is the foundation for building a successful trading system not only for binary options , but for any type of trading. An equally important factor is money management , but proper money management begins with compliance with risks.
What is risk management? To put it simply, risk management is rules and actions that help reduce the number of losses in the market and make it possible not to lose more than planned. This approach allows any trader to “stay afloat” many times longer, since if all the rules are followed, even with constant losses, it will not be possible to “drain” the deposit very soon.
In this article, we will look at what you need to know about the risks in binary options trading and how to follow them correctly.
Content:
- Why is it necessary to observe risks in binary options ?
- Emotions regarding risks in binary options .
- Loss vs Profit in Binary Options Trading .
- Types of risk management in binary options trading .
- Selecting multiple assets for binary options trading .
- Fixing trading volume when trading binary options .
- Fixing the number of losing trades when trading binary options .
- Elimination of the Martingale system and similar ones from binary options trading .
- Refusal of high-risk investments when trading binary options .
- Transfer of capital into trust management .
- Conclusion .
Why is it necessary to observe risks in binary options?
Risk management in binary options trading is necessary at a minimum because there are no trading methods , strategies , trading systems or indicators for binary options that could make a profit 100% of the time. The risk of a loss is present in every transaction, and it does not matter what market it is and what type of trading (binary options, stocks, Forex or cryptocurrency ).
The reasons why a trader receives a loss can be completely different, but most often this is due to:
- Incorrect money management (capital management).
- Wrong trading psychology in binary options trading.
- Bad mood, fatigue, stress.
- Indiscipline.
- Failure to follow the rules of the trading strategy.
- Treating binary options trading like playing in a casino (gambling).
- The desire to recoup losses.
Therefore, the essence of risks in binary options comes down to not losing most of your deposit (or all) in one transaction. If a trader loses his entire deposit during trading in a very short period of time, then he should first of all pay attention to what risks are allowed when buying options, and only then look at the trading strategy.
Compliance with risks in binary options allows traders to keep their trading account operational for as long as possible, so that by the time the series of losing trades ends, they have the opportunity not only to return what was lost, but also to receive additional profit.
Emotions related to risks in binary options
Every new trader comes to trading almost always because of the desire to make good money. And you want to earn not $50 or $100 a month, but at least $1,000. But as is usually the case, the initial deposits of “newly minted” traders do not exceed $100. And with such a deposit at the initial stage, it will not be possible to earn a lot and consistently, and setting goals of $1,000 per month does not make sense, since this will equal 1,000% growth, which not even the most experienced trader can show in a stable plan ( that is, from month to month). And this is why trading accounts are “merged” very quickly, since instead of competent trading, high-risk trading with binary options is carried out.
Loss vs Profit in Binary Options Trading
For any person, emotionally it is many times more difficult to accept a loss than to accept a profit. An elementary example, which most likely many have encountered, is a situation where a trader managed to earn $100 while trading, and there is a feeling that the amount seems good, but this is not enough for a decent life and he needs to earn more. But when a trader loses the same $100, especially if it happens quickly (turbo options), then the feeling of loss cannot be compared with earning the same amount, because everyone comes to the market to earn money, not to lose. That is why it is necessary to always adhere to the established risks, since this approach always makes it possible not only to return losses, but also to make a profit.
Types of risk management in binary options trading
There are many ways to comply with risks, but several basic and non-basic ones can be identified:
- Reduce risks by trading only 1-3 assets.
- Reducing risks by fixing a trading volume equal to a maximum of 2% of the deposit (classic percentage).
- Reducing risks by setting a fixed number of losing trades per day.
- Refusal of the Martingale system and similar ones.
- Refusal of high-risk investments (for example, investments in cryptocurrencies).
- Transfer of capital into trust management.
Note: Please note that points 1-4 are fundamental and most important to follow, and points 5 and 6 are only indirectly related to binary options trading.
Selecting Multiple Assets for Binary Options Trading
Taking into account point No. 1, it is worth considering that when a trader chooses a large number of assets for trading, the chances of making a loss increase. Most financial instruments do not move in the same way, and on one asset a certain strategy may bring profit, but on another it will already bring a loss. Therefore, the best option would be to limit yourself to a few permanent instruments, for which you can find or create your own trading strategy.
Fixing trading volume when trading binary options
Point No. 2 cannot be attributed only to risks in binary options; it also applies to money management. The bottom line is not to risk more than 2% of the deposit in one transaction. And the larger the deposit, the smaller the trading volume should be. Ideally, this value should be 0.5-1%.
Fixing the number of losing trades when trading binary options
Point No. 3 implies control over the number of losing trades per day. Thus, by establishing, for example, that trading stops after 3 losing trades a day, the trader reduces the chances of losing the entire deposit, because on binary options you can make 100 trades per day without problems, which means that even at 1% risk, you can lose most or all of your trading account. Therefore, it is definitely worth establishing the number of unprofitable trades beyond which trading will not go.
Excluding the Martingale system and similar ones from binary options trading
Speaking about point No. 4, it is most likely not worth explaining that the Martingale system and others like it, if acceptable, are only for very large trading accounts, where even with a large number of transactions, the account amount will not suffer much. Therefore, it is better not to use such trading systems if possible. To understand what losses such trading can bring, you can use the Martingale calculator .
Avoiding high-risk investments when trading binary options
Point number 5 implies investments that can bring a very large loss. For example, for a classic investor in the stock market, a loss of 10% per month will be simply huge, while in cryptocurrency such movements can occur several times a day. That is why cryptocurrencies at this stage are not considered by most large companies and hedge funds as investments.
This point applies to binary options only in the case of trading with an expiration of 1-5 minutes. Over such a time period, the same Bitcoin can rise and fall by 1-2%, and therefore, such volatility is impossible to predict and the trader may think that there should be growth, but the price will immediately begin to decline without a chance of an increase. If we talk about long expirations, then point No. 3 can be ignored, since the loss on options is always fixed and in the long run it does not matter how many percent the price falls.
Transfer of capital into trust management
Point No. 6 also has little relation to binary options, since capital is mainly transferred to management for classical trading and investing in various markets. There is also copying transactions or social trading , which, for example, is provided by the binary options broker Pocket Option , where the trader does not actively participate during trading, but this has an indirect relation to the transfer of capital.
Still, if an investor decides not to directly participate in the trade, it is necessary to be very careful in choosing who the funds will be transferred to, and also carefully choosing the trader whose trades will be copied.
Conclusion
Despite the fact that most traders ignore the rules of risk management (90% of people do not control risks), all of the above is worth knowing and applying not only in binary options trading, but also in any other markets.
As soon as a trader makes a list of rules for observing risks and begins to follow them, profits will begin to appear even when using weak strategies in trading, since the majority of successful trading is not knowledge or tools, but the right approach.
See also:
To leave a comment, you must register or log in to your account.