Risk Management Or Profit Block
Risk management is an important aspect of binary options trading, the Catch 22 is too much management, or the wrong kind, can manage you out of your profits. Think about this. The stock is market is very risky and risk takers are rewarded with profits. The bigger the risk the bigger the profits. These profits, the lure of these profits, attracts millions of people to the investment world each year, and each year most of them barely make any money, and many of them lose their asses. Why? For those who chose to let others invest for them, laws in place limit the amount of risks that average people can take and by so doing, limit the amount of profits they can make. For those who chose to invest and trade for themselves poor money management, excessive risk or black swan events keep them from making profits or worse, wipes them out of the market.
This doesn’t mean that you should go out and take on the biggest risks you can, or that simply using a money management technique is enough, that would be dumb. My point is that there is a fine balance between risk management and handicapping your ability to make money, a balance between playing to win and playing not to lose. How does this apply to binary options? In a couple of ways and the first I want to bring up is the old Martingale strategy. We all know that Martingale can be a fun way to play at the casinos, it’s a fun little trick that helps us defray losses for a time in order to hopefully make that big win before the losses pile up and end our night out. What many fail to recognize is that when applied to binary options Martingale may keep you from losing, but it also prevents you from making profits.
- Martingale is a betting technique that starts out at a set figure, X, and keeps all bets at that figure, X, until there is a loss. The next bet is then 2X so that a win will cover the loss on the first trade and produce a win of X. If that trade is a loser then the next trade is then 4X so that a win would cover the losses of X+2X and a profit of X. Each time a loss is incurred the next trade is then doubled to cover the loss of the previous trade and all others before it, and a win of 1X.
When you trade binary there is no big win, all wins are the same, or basically the same, whatever your brokers average payout is. By using the Martingale you can delay taking the loss on one trade, but you will never hit that big win. You may have a streak of wins, but that streak could just as easily become a string of losses that leads to a big trade, one big enough to wipe you out. If it does turn out to be a winner yes, you recover most of your losses but not all because binary doesn’t pay out at 100%. This means that any Martingale strategy you use, if it is to fulfill its true purpose, must increase each successive trade by MORE THAN 100% in order to cover the losses on the trade before it. This means a geometrically expanding figure that can go from $100 to $225 to $506 (assuming 80% payout) and on and on with your risk growing exponentially out of control in order to make a measly win of 80% the original trade, if you hit on a winner before you wipe yourself out of the market.
Clearly Martingale is not the best method here, it is playing not to lose. Savvy traders will suck up the original loss, focus on their win rate and use a more sound money/risk management technique that limits losses to an amount that will not hurt your account, even if you have a losing streak, and allows winners to win. I call it the Percent Rule but it is called many things by many people, basically it says that all trades are a PERCENT of your total balance. By using a percent instead of an amount the size of the trade will grow as the account grows so that your profits grow in tandem. Losses suck but what can you do, everybody makes losses some time, the percent rule prevents them from growing out of control. So long as your win rate is above the rate needed to be profitably you are in good shape, no single loss will prevent you from making the next trade and the net amount of wins will more than offset the losses. Basically, it will ensure long term success, profitability and trading. I personally use the 3% rule in my own accounts, all trades are always 3% of my account balance, some people go lower at 1% and some as high as 5%.
No matter your approach you need to take a step back and ask yourself the question, am I playing to win or playing not to lose? If your management helps limit losses and leaves profits free and clear then you are on the right track, if not you can always use the Percent Rule, it hasn’t failed me yet. In the end, it is far better to accept each loss as it comes and move on to the next trade rather than compound those losses with additional losses and allow emotions to cloud your judgement.