Why should you use Money Management Techniques?
Before getting into the Money Management issue, let us first talk about the thing people fear the most. “RISK”. Risk has always been a source of uncertainty among many traders who constantly ask themselves whether they should take the risk or not. There is a simple calculation which states that RISK=PROFITS. If you do not take the risk, you will never be able to profit on a Binary Options trading platform. Of course those risks might not always lead to profits if your method of taking it implies no research and hard work. This is where the Money Management techniques come in.
Money Management is one of the most important techniques you should apply while trading binary options on an online platform. This will allow you to handle your capital and invest wisely. Money management comes in various ways and is always useful. Below are some money management techniques that might be useful to you.
The 5/15 rule might be one of the most popular rule on Binary Options trading platform and is adopted by thousands of traders across the globe. This is a very simple and wise way of investing in a particular trade. Each and every trader should remember that they must have a maximum and minimum loss margin while trading in order to affect its overall capital. The 5/15 rule allows the trader to lose a minimum of 5% of his capital or a maximum of 15% of his entire capital invested. For example: A trader who invested $1000 might allow himself to lose 5% of his entire capital portfolio, which accounts to a total of $50 per trade and 15% ($150) in his entire portfolio. This technique can also be found in the passive trading strategy. This is where a trader invests a really small percentage of his entire capital portfolio, which eventually leads to low return on investments. This means that, the less risk you take, the less profit you will obtain.
This follows the same concept as the 5/15 rule, but this is specific to aggressive traders only. Aggressive trading is mostly done by traders who have a good knowledge of the market, whereas the 5/15 rule is suitable for beginners. This technique is whereby the trader invests 10% of his initial capital per trade and up to 30% in his entire portfolio. For example: if the trader has a capital portfolio of $100,000 in his account, he might afford to invest $10,000 per trade and up to $30,000 from his entire portfolio. Again, the more risk you take with your capital, the more your reward will be high.
This is a really helpful tool available on BigOption’s platform. This is whereby a trader forecasts that his transaction will end up out the money and wishes to stop the loss. This is where the sell option becomes really helpful to those traders. The sell option allows a trader to sell his current transaction for a percentage of his investment on the trade. This will allow the trade to keep part of the investment made on the specific trading transaction instead of losing all his transaction capital.
Know when to stop
Most of the times, traders who are out the money, tend to adopt the persistent technique as they think that this will enable them to win trades. In fact, this is a wrong method adapted by many binary options trader, which finally find them with no capital in order to trade. If the market is constantly going against your predictions, you should stop trading on the spot! Do not try to go against the market, you will always lose. Sit down and review your losing trades and analyze the market to see where you went wrong in your predictions. The market is very volatile and uncertain, trend reversals may happen at any moment. Try to analyze those data and reformulate your strategies for future investments. Remember, an emotional trader will always lose money while trading. For instance, BigOption has its brand new Strategy Advisor which you might use in order to get accurate predictions about the market.
Do not invest what you do not have
This is the golden rule before trading binary options with any broker whatsoever. Do not invest money that you have to use for basic necessities such as food, housing, medical care or security. Traders, who lose a lot of money, tend to go against the system and invest more money without proper management technique. You must be sure to get a grasp on the market before starting to trade on any tool available on a binary options platform. Remember one golden rule: Invest what you can afford to lose.