You must be familiar with an old saying, “To make money you need to spend money”.
This cannot be more accurate for binary options. If you do not expose your money to buy the options, you will get profits. Even though this is not that easy as it sounds, you need to start investing your money in binary options trading to understand the business.
If you are not very sure about your buy, you can start with a small amount. But as you proceed, money management strategy becomes one of the most critical steps to success in the long term.
An effective binary options management strategy while trading online is very crucial to generate long-term sustainable returns. It necessitates a trader to emphasize the amount of money they invest on the items they select to trade.
To make a money management strategy, it is not essential to predict the market movement, but you must rely on solid statistical data to save your money from going down. If you feel confused about planning a money management strategy on your own, we can help you out.
Good to know:
- Money management is crucial in binary options trading and involves strategies for managing investment capital and controlling risk in order to achieve sustainable returns.
- One key strategy is the percentage rule. Traders invest a fixed percentage of their account balance per trade to effectively manage risk.
- Strategies such as the Kelly Criterion help determine optimal bet sizes based on probability.
- Trading notes help traders identify strengths and weaknesses in their approach.
What you will read in this Post
What is money management?
The two critical features of a successful trade are money management and risk control. But it is interesting to know that these two features are interlinked with each other.
Money management itself is a way to control the risk of losing. These two are all about how smartly you play, how you can control your greed, how you do not come out from the trading market, and how you start from basics and use binary options for the long term.
Money management is the process of managing your total investment capital. For many, investing all their money in binary options is not a fruitful idea. Similarly, many people will grasp why ‘portfolio’ management contains components of allocation and diversification. However, when it comes to managing a binary options bankroll, the same concepts apply.
Money management has many more benefits. It gives the trader a clear vision of how much is safe to invest in binary options; it also provides a sense of satisfaction that their money is safe and can continue their trading.
Risk management is a defensive strategy since the techniques used help reduce the risks associated with binary options. The main concept of risk is to receive a higher reward.
In other words, if a trader is investing more in binary options trading, then the reward they will get after winning is even higher. Therefore, the key to developing a successful investment strategy is determining the best risk level to attain a given return profile.
Binary Options money management strategies:
The experts mention many strategies to do the right money management in binary options. You can read the following few successful strategies to do efficient money management.
#1 Percent rule
According to the Percent Rule, each trade is always X percent of your account. In simpler words, you always invest a specific percent of your trading amount in your every trade. However, experts say that you can invest a 3% maximum of your trading money in each trade.
But many cautious traders only invest 1% or less. This is best for beginners because it is better not to lose your money if you do not know the right strategy. The reason for this is as follows.
- It eliminates the guesswork in transaction size and is critical in terms of trading psychology. So, there is no chance of how much this exchange should be or allowing your emotions to dictate judgments for you. For instance, an underconfident trader may invest very little even when the chances of winning are high, and an overconfident trader may invest a considerable amount even when the chances of winning are negligible. This strategy frees up your thoughts to concentrate on what is truly important.
- This is called a percent rule, as the only percentage is used to determine the investment threshold you should make. Using a definite amount is not appropriate since the size of the trading account may vary. But, if you use a percentage, then with your trade size, the amount would also increase. For example, when you trade $20 to make $36, it may seem like a small amount, but when you are trading $2000 to make $3600, there will be absolutely no change if that is what 5 percent of your account is.
- The main motive of using the percent rule is to gain some experience. If you jump up to higher values right from the beginning, you may face subsequent losses. Therefore, you must be confident enough before becoming an experienced trader. Using the percentage rule will help you with gaining experience.
A crucial part of this rule is its regulation. Just as you focus on reducing the percentage of investment in Binary Options, you should also focus on increasing it when you get a fair chance. For instance, if you are buying an option for gold and you know that the final value will increase for sure, there is no meaning of using 3% or 5% of your investment. Instead, you can simply raise to 6-7% or even more with confidence, depending on your surety. These instances give you a big profit.
However, do not ever get carried away by your emotions and make mistakes that can pay you bulk. One example is following a martingale as a strategy. These strategies are known to finish the careers of many traders.
#2 Setting goals
Even though many traders set a goal to work efficiently, it is not a good trading practice if you take an expert’s advice. Setting goals put pressure on your brain, and you impulsively end up making wrong decisions.
Therefore, we advise you to do free trading without any target. Yes, if you want, you can set a long-term target for six months or a year, but setting it every day or every week is not a very wise strategy for money management.
It is extremely difficult to become emotionally detached from your trading when particular profit goals are given undue importance.
#3 Calculating the risk
With the percentage rule, you must keep track of the risks in the binary option you will face. Doing this is very easy. For example, you have $1000 in your trading account. Now, if you are going to invest 5% for each trade, there is $50 for every trade until you do not lose or win anything.
Therefore, you must find and register with a broker who will allow you to trade within your acceptable risk tolerance parameters.
However, since we have used 5% in this example, this doesn’t mean you will use the same percentage. Your calculation would be based on your risk tolerance and account balance available. 5% is still higher, and if you are a beginner, you should start with 1% or even less.
#4 Pre-defined risk
One of the most interesting advantages of trading in binary options is that the loss is fixed. The maximum amount a person can lose is only the amount deposited by him. Therefore, only risk the amount which you can afford to lose.
Make two scenarios in your mind. One when you win the option. But the other scenario is you lose. In the second condition, calculate the loss and imagine if you would afford this loss. After the loss, would you be able to continue trading? If you get a positive response, then only proceed further.
It is not surprising that many traders have invested considerable money in a single trade without calculations. Thus, losing a significant amount led to finishing their trading career forever.
#5 Kelly criterion
This is similar to calculating probability. For example, the Kelly criterion helps in calculating the optimal bet size. John Kelly first discovered this process and thus was named the Kelly criterion.
Kelly devised a straightforward formula that specifies the best strategy for non-correlated trading.
According to John Kelly,
- F+ (bp-q)/b
- F= fraction of the current portfolio
- b = the net odds received on the trade
- p= probability of winning
- q= probability of loosing
- q can also be determined by 1-p
After putting this formula, only if you get a reasonable probability, you may proceed with a greater amount of money for the trade.
#6 Perfect broker
Perfect broker is those who have very fewer withdrawal fees and other fees. However, you may notice that you do not get 100% of the payout even after winning. And even you also have to deduce a certain amount during withdrawal and other online procedures.
Therefore, you need to choose a broker with minimum charges and maximum output to increase the profit. Some brokers with low minimum trade are IQ option, Quotex.io, race Option, Binary.com, Binomo, etc.
Strategy for analysis and improvement
The most underutilized sub-strategy is an analysis and improvement approach. This is important to find the weak points in your trading and helps you to keep track of them. Without this approach, long-term success is far away.
A binary option is easy but learning the strategies to make the best use of the binary option is not a very easy task. With time you will have to try different strategies to keep going.
It takes a lot of time to understand which strategy is working for you and which is not. In addition, there are so many options available these days that it seems difficult to link all of them together.
Therefore, if you do not analyze the trends and strategies in binary options, as a newbie, you will face a lot of complications in trading. However, with analysis, the folds of complications seem to open up little by little.
#1 How to analyze
There is no one particular way of analyzing trade and improvement strategies. However, the most common way is to use a diary. Use the trading diary for noting down all the aspects of your opinions, doubts, and decisions.
After investing, you can record which indications you utilized, the time frame, the asset, and the expiry date. You can also record your current location, mood, time of day, trading device, etc. After you finish the trade, write the results. If you have won, write the amount and the other pointers that you might want to mention.
Now, after a few days or months, come back to your trade diary, take out the pages of your last trade, and study it thoroughly. Naturally, you will be going to find the weaker points.
These points can be silly things like you have won more trades in mornings than afternoons, or trade was successful more with a pc than with a mobile phone. You make take down the difference for future reference.
#2 Spot the trends and identify your strengths and weaknesses
Now that you have taken down good notes go through all of them. Do not forget to read the reports for the lost trades. It will help you to understand your weaknesses. Once you practice this for a significant amount of time, you will notice changes, and meanwhile, you will gain a lot of experience.
You don’t have to have to maintain a diary. You can also keep a screenshot of your results or maintain a spreadsheet or a document folder, whatever is convenient for you. The aim is to follow your work track.
Conclusion: Use a money management strategy for longterm success
One good thing about the binary option is that risk is under control. If you compare binary options with other trading options, the money management strategy works better. You can only invest the amount you are comfortable with, and you do not have to lose any other additional amount. And if it’s again, then it’s definitely a lottery.
Now that you know the strategies to manage your money while trading in binary options, you can do great in the long term. All you need to do is act smartly and spend wisely.
Frequently asked questions about money management strategy:
How do you always win in Binary Options?
You can validate winning statistics and do a thorough due diligence analysis before making a selection. For this, you can follow the Kelly criterion. Make sure to avoid a broker who offers to trade on your behalf. They are attempting to get you to increase your deposit and subsequently enter a losing deal. Binary option brokers only profit if you lose.
What is the most profitable options strategy?
According to experts, selling out-of-the-money put and call options is the most profitable options strategy. This trading approach allows you to earn a substantial amount of option premium while also lowering your risk.
How do Binary traders make money?
The most common way by which the binary trades earn is by pricing the binary options. The other ways include the trading activities of the traders. Pricing structures for binary options brokers are typically obtained from their market makers.