Money management is the key to successfully operating a binary options trading account. You can never allow your self to risk so much on any one trade that it could wipe you out. Trading $100, $50 or even $25 at a time may not seem like much but if you opened your account with the minimum deposit that $100 could equal half of your account. With odds like that you would only have to lose twice in order to wash your account right out of the market. I’m sure when you think about it like that you can understand why trading $25 may not be such a small trade after all. Most successful traders will only risk very small amounts on each trade in order to protect themselves from catastrophic losses. For best results I suggest setting a percentage you are willing to lose. 1-3% is the usual.
Why a percentage? That is because if you use a percentage the size of each trade will grow as the size of your account grows. An account of $5,000 using 1% as a benchmark trade size would be able to trade $50 increments with each position. When the account grows to $6,000 the trades can grow to $60, ensuring you maximize your profitability at the same time you are protecting your balance. It just makes sense to do it this way. If you were to pick an arbitrary number then you may be exposing yourself to too much risk or you could be cheating yourself out of potential profits.
Position Sizing And The Option Builder
There is another step to the 1% money management technique and that is position sizing. This the process of applying the 1% rule to your account and trades. Let’s say for example that the account is worth $10,000 and risk amount is 1%. This does not mean each trade will be $100, it means that each trade can lose $100. If your broker does not offer a rebate and each trade loses 100% then each trade will be $100. If your broker has rebates or if you are using the Option Builder or some other similar tool then your trades will be different. For example, if your trade returns 15% on a loser then each trade will be $117.65 ($117.65 – 15% = $100). This is one reason why choosing a broker with a rebate is better than one without, you have the chance for greater profits. The Option Builder is a tool perfect for binary traders concerned with position sizing and risk management. The tool allows you to fine tune risk/reward profiles to fit your needs and maximize profits.
Money Management Means More Trading And More Profits
There are several reasons why this true. First the obvious, if you make large trades then you can only make a few trades at a time. A trade that is 25% of your account means only four trades at one time and if one loses you are down 25%, 2 losses means 50%. Trades that are 10% of account value means ten trades at one time and trades that are only 1% of your account mean you can have up to 100 trades open at any one time.
Money management also means you can keep on trading, even if you have a losing streak, because no one trade will damage you. Even less obvious is the fact you can trade whenever you see a signal, no more waiting around for funds to become available. If you are trading positions that are too large and have your account tied up you will not be able to take every signal you see. You will have to wait for a trade to close, profitably I might add, before any new trades can be made.
Risking less and trading more makes it easier to break even and be profitable. Let’s assume you are using my 1% Rule and have an account of $10,000. This means that each loser is only going to impact your profitability by 1%. Assuming you trade 5 times per week with an 85% return and no rebate will require a win percentage of 60% to be profitable. This results in a gain of $55 or 0.55%. Trading at ten times per week required a percentage of 60% also and returns $110 or just over 1% of account value. Trading 20 times per week requires only a 55% ratio which returns $35 but if we assume the 60% rate required for the first two scenarios then profits jump to $220 or 1.1%. Now for the finale, assuming the account is worth $10,000 and you are fully invested using the 1% rule you only have to win 54% of the time to break even. If you assume the 60% win rate that is required to break even when making fewer trades then the returns jump to $1100 or 11% of original account balance.