Money Management And Binary Options Trading: Keys To Managing Your Bankroll
Whether you’re trading binary options online as a hedge or for speculation, it’s critical that you learn to properly manage your bankroll. Countless traders have enjoyed making a string of accurate predictions only to see their pool of profits disappear in the space of a few big trades.
The reason? Bad money management.
Learning to manage your bankroll is just as important a skill as learning to read candlestick charts, use pivot points, and identify support and resistance levels. In fact, it’s even more important. A single bad prediction can potentially wipe out the profit you’ve accumulated over weeks of hard work. Learn to control your cash, and you’ll be better able to absorb the inevitable “bad bets” you’ll place on binary options online.
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In the space below, we’ll cover money management in detail with respect to binary options online trading. You’ll learn how to control your bankroll to ensure you have enough time to recoup losses on the way to carving out a positive return. Don’t underestimate the importance of properly managing your cash. It will help you to weather storms that might otherwise cause you to lose your shirt.
A Bird’s-Eye View Of Your Binary Options Bankroll
Bankroll management is directly related to risk management. Controlling your money means determining in advance the level of risk you’re willing to assume to participate in a given trade. This in turn will be influenced by the amount of profit you stand to make on the trade.
Let’s use a simple example. Suppose you have $2,000 in your binary options online trading account. Suppose further that you expect to make a 100% profit – i.e. double your money – on in the money trades. Given this scenario, you need to make accurate predictions on one out of every three trades in order to stay level (i.e. break even).
Here are the numbers…
Let’s assume you decide to bet $50 on each of nine trades. Three of the trades need to expire in the money. If they do, you’ll receive $300. Six of the trades can expire out of the money, resulting in a $300 loss. That puts you at the break-even point.
It should be noted that the average returns you’ll see at will range between 70% and 88%. That means you’ll need to make accurate predictions more often than in merely one out of every three trades. If the broker offers rebates for out of the money trades, you’ll also need to take that into account. But you get the general point.
The important thing is to understand is how in-the-money and out-of-the money trades influence your bankroll. The next step is to determine how much of your capital you’re willing to risk on each trade.
Determine Your Binary Options Trading Amount Ceiling
Capital preservation should be your top priority. Use a baseball analogy: the goal is not to hit a home run, but rather to get on base – over and over and over. That allows you to make a string of small profits while minimizing the likelihood of suffering a catastrophic loss.
Many experienced traders recommend limiting the amount you wager on any given trade to 5% of your available bankroll. This percentage is consistent with a popular betting strategy known as the Kelly formula. Although complex math is involved in demonstrating the formula, it is enough to say that it recommends risking 5% – technically, slightly less – of your bankroll.
This point deserves clarification. If you’ve been trading binary options online for a long time, and know your chosen asset(s) like the back of your hand, risking 5% per trade might be reasonable. But if you’re just getting started, we suggest keeping your trades to 1% of your capital.
You’re bound to make a lot of mistakes in the beginning. There’s no reason to let those mistakes erode your bankroll. Consider them to be a small cost of your education, and learn from them. In the meantime, stick to wagering no more than 1%. As you gain practical experience, bump your betting ceiling up to 2%. Consider 5% to be the absolute maximum betting amount.
Test Your Binary Options Trading Strategy On A Demo Account
A great way to cut your teeth in binary options online trading is to sign up with a broker that offers a live demo account. There are several brokers that offer demo accounts, including 24Option, , , and . You’ll have an opportunity to place trades without risking any of your own capital.
Be patient. A lot of novice traders make a few profitable trades within their demo accounts, and assume they’re ready for prime time. When they start putting real capital at risk, their trades start to turn against them. Before long, their bankroll is all but gone and they’re left wondering what happened.
Commit to making at least 100 trades over the course of three or four weeks using your demo account. Resist the temptation to rush into the real money trades just because you scored big on a few “play money” trades. Get some experience. Develop your binary options online trading strategy, and take notes on the results.
The Value Of Setting Personal Trading “Rules”
A part of money management that is seldom discussed is the importance of devising a set of personal trading guidelines. These are “rules” that dictate whether or not you participate in a given trade.
The amount of money you decide to risk on a trade is a type of personal rule you follow, even if your gut is trying to persuade you to do otherwise. Another “rule” may limit the number of trades you place each day or week. You can also determine upfront the types of assets you’ll focus on, and whether you’ll stick to trades for which you can follow price trends.
Without a set of personal guidelines, it’s very easy to get drawn into taking wild guesses in an attempt to chase profits or recoup losses. Trading guidelines act as a buffer to this type of reckless activity. They give you a chance to catch your breath and avoid making foolish – and costly – mistakes.
Bankroll Management When Trading Binary Options: A Few Final Thoughts
A lot of folks think that the secret to making money trading binary options online is to score home runs. They assume that major wins will guarantee their success as traders. The reality is that going for home runs is a recipe for disaster. They are difficult to achieve. Chasing them can be extremely frustrating, especially as you watch your bankroll evaporate.
To recap from above –
- Set a maximum trading amount per trade – for example, 1% of your capital – and stick to it.
- Register an account at two or three binary options online brokers that offer demo accounts. Use the demo accounts to get accustomed to placing trades.
- Create a set of trading guidelines that will guide – and limit – your trading activity.
Don’t worry too much about the losses you incur, especially in the beginning. That’s when you’re still learning the ropes and making mistakes. Remember, you don’t need to be correct with your price predictions to be a profitable trader. The key is to learn from your mistakes while sticking to your binary options online trading strategy and money management plan.
Doing so builds discipline. It makes you less inclined to chase after bad risks. And in a field filled with big risks and big rewards, it’s one of the “secrets” to making a consistent profit over the long run.
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