Too often I hear of traders boasting of how great their trading system is. How it generates huge profits with guaranteed signals. Just as often I hear these same people tell stories of how they lost their ass and wiped out their accounts. If these traders had such a fool proof system then how come they so often lose as big as they win? It comes down to the system. Many traders don’t fully understand what a successful trading system is or what it looks like. It is much more than a tool, strategy or success rate. A successful system allows you to make steady, incremental gains while protecting your account from wicked losses.
To understand what I’m talking about let’s start with some simple definitions. First, what is a tool? A tool is a device or implement used to do a job. For the binary options trader this could mean an economic calendar, oscillator or other form of technical analysis. Tools can be used to measure the market and they can be used to pin point entries and exits. Tools are not a strategy by themselves but they are a big part of what a trading strategy is built on. Take MACD for example. MACD is a very useful and widely respected trading tool. It measures the convergence and divergence of two moving averages; traders use it as a measure of the markets momentum. However, on it’s own and without a plan or direction this tool can provide just as many false signals as it does good ones.
To avoid false signals and whiplashes you must apply strategy to your tools. What is a trading strategy? The Webster’s Online Dictionary defines strategy as a careful plan of action or policy designed to achieve an overall goal or aim, usually over time. Investopedia goes on to say that it is an investors plan of attack to guide their investment decisions. This plan is based on risk tolerance, individual goals and capital requirements. Strategies can be based all or in part on a tool or group of tools but are still not a system in and of themselves. The strategy tells you what and when to trade but the overall system will also tell you how to trade, all the while keeping the long term safety of your account in the forefront. Let’s refer back to the MACD. By itself it is a tool but when you apply a set of rules to the indicator you can transform it into a strategy. Some common rules used with the MACD are to only take trend following signals and/or only take signals when asset prices are at or near an important support/resistance line. Over time it is likely you will hone your strategy as you gain experience.
So, What Is A Binary Options Trading System?
Now we get to the crust of the biscuit. What is a trading system? First let’s refer back to Webster’s. A system is a regularly interacting or independent group of items forming a unified whole. When I went to Investopedia to see what they had to say on the matter I was shocked to find the largest definition, explanation or discussion on a topic I have ever seen on that site. It literally took up pages and could have been an independent site. Needless to say there is a lot to know about trading systems. At heart though they are just like Webster says, a group of interacting parts that form a whole. The first two parts are the tools and the strategy. The tools do the work, the strategy directs their overall purpose but there is still one thing missing.
Money Management For Binary Options
No matter how you define it money management is what lets you sleep at night. Wild trading, risky habits and, dare I say it…gambling… are sure ways to lose and can keep you up late worrying about losses. Especially if you are trading your rent money, grocery money or even worse your date money. Money management is in effect a system within your system. It dictates how much each trade will be and how many trades you can make at one time. Most importantly it does both of those things in a way that ensures your account is never in danger of catastrophic loss. I like to use the 2% rule. When I first started out I used the 1% rule but since then I have gained enough confidence in my system that I felt comfortable increasing my risk. The Percent Rule helps you to define your risk tolerance and apply it to your trading.
Implementing the 2% rule means that I never risk more than 2% on any one trade. As an example let’s assume an account is worth $2,000. This is not an unreasonable amount to assume a newbie may open an account with. Two percent of the $2,000 is $40. This means that each trade cannot risk more than $40. If there is no trade insurance or rebate with your broker this means no trade is going to be more than $40. Until your account grows. As the account grows so too does that 2%. Eventually the $40 will be $100 and then $400 or more.
If your broker has trade insurance or you are using a broker with Option Builder, AnyOption or any other broker that allows you a rebate your trades will be a little different. Assuming that the rebate on a trade is 15% this means that your trades will actually be $47. This is because the rebate offsets the total loss. Think about it like this; $47 – 15% = $40. Depending on your account and rebate structure you can have between 45 and 50 different trades open at any one time without risking catastrophic losses to your total account balance. Remember, a complete system includes all three aspects; the tools, the strategy and the money management. Using them together is the surest way to a successful career trading binary options.