Capital and Risk Management Strategies when trading Binary Options.

capital and risk management strategies binary options

 

Capital and Risk Management in trading binary options

Risk is an integral part of trading and traders need to understand that binary options allows them to minimize such hazards by using various strategiesto eliminate any risk attached to their option trading activities.

Assessing Risk involved beforehand

While option trading is different from traditional stock market exchanges, traders engaged into the latter own the asset and any liability attached to it alongside. They will therefore make a profit only if the asset value increases above the price value at which the asset was bought, known as the strike price. However, digital options trading do not require the trader to own the asset but instead they only need to purchase an option on the asset as per its directional movement in a determined timespan. Therefore, if someone has executed a put option, he can still generate profit even when the market drops, something which would have been impossible in traditional stock market. Therefore, the first and most important risk factor has been eliminated in digital options trading as traders do not have to worry about huge losses as they would only lose the amount invested in case the asset does not perform according to their previsions.

The 5/15 Rule: A Passive Approach to Trading

Beginners as well as experienced traders have always used the passive capital management plan to minimize risk. Known as the preferred strategy for most traders, it offers the possibility of having complete control over trading and guarantees against losses. Using the 5/15 rule will undoubtedly help capital growth. The technique is very simple as the trader only has to invest 5% of the amount on any single trade and up to 15% in for a portfolio of trades.

Example:

risk management strategy - 5/15 rule

A trader has $10,000 in his trading account. Either, he can use 15% in a single big trade, i.e, $1500 in one trade or use 5% in 3 different trades. The idea behind is not to exceed the 15%, i.e, the total amount to be used in a trading session should not exceed $1500. The trader can divide his trade volume into 5 different trades and use $300 per trade, which will amount to $1500 for the whole session.    However, there are some binary options trading platforms that require smaller amount for a single trade. Therefore, the trader who is using the 5/15 rule can distribute the $150 among various trade options. For example, he can open 10 trades with only $15 using the speed option or 60 seconds trading tool.

Diversification: Minimizing Risks

Diversification is the key to a successful trading career. As the saying says, do not put all eggs in the same basket, the same principle applies for binary options trading. Traders are encouraged to diversify their trade volume into various smaller trades than a single big one. This can easily be achieved in conjunction with the 5/15 rule, as it allows the trader to have better control over his trading activities. Secondly, traders are advised to diversify the assets that they trade with. Usually, someone who started their trading career with the EUR/USD pair will continue to trade with the latter. Although it is advised that they should stick to their asset of choice, there is absolutely no harm in trying other currency pairs or any other interrelated assets. The understanding of asset correlations will undoubtedly help the trader to diversify his trades. For example, someone who is familiar with the USD/CAD pair needs to understand that the latter impacts on Oil, a tradable commodity on the binary options trading arena. Another way to diversify the assets portfolio is to open small trades with various currency pairs. Traders can choose the major currency pairs and learn about their respective movement. The diversification of assets can be complemented with the 5/15 rule.

Example:

A trader has $1000 in his trading account and decides to use the 5/15 rule. So, instead of investing $150 in a single trade, he can diversify it into 3 smaller trades with $50 each. Firstly, he can use $50 to trade on the EUR/USD pair, another $50 with another currency pair and finally the remaining $50 on a different asset such as a stock or commodity.

Monitoring binary options trades

The trade volume method is really simple, yet effective for novice option traders as they allow the latter to monitor their progress and performance. First of all, you need to deconstruct all your daily trades to analyse the losses, profits or even trades that have ended at-the-money. If someone finds that most of their trades are resulting in losses, then it should be understood that the educational part hasn’t been done properly and the individual needs to invest more time into learning and apprenticeship, so as to reduce the risk of losing. Many online brokers offer either demo accounts or other incentives for traders to test their trading platforms. Traders should make the most out of those offers and test their techniques while they are at it. For example, BigOption offers novice traders 2 risk-free trades, on their most popular account, which means that they are entitled to those 2 trades without any chance of losing. All the profits generated during those trades will be remitted to the trader while BigOption takes care of all the losses. Anyone who wishes to enter into the binary options trading should take into consideration the above mentioned techniques and monitor their trades with the proper capital and risk management strategy.
Priscilla Camryn By: Priscilla Camryn
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