The Importance of Money Management in Binary Options Trading01 Apr 2013, 08:01
The constantly increasing popularity of binary options has generated numerous articles and posts on trading strategies. It seems like traders spend all their time in finding the perfect strategy which no one knows for sure if it exists or not. Some of them are so concerned about strategies that they forget a key point when it comes to trading binary options: money management. No strategy can even be successful in the absence of proper money management. Its importance is even higher on the binary options market given the fact that traders can either win big or lose all their money.
There is no other way to be profitable on the binary options market than to incorporate money management into your strategy.
Risk Control and Money Management
These two concepts are strongly connected. If you manage your money correctly, you will also be able to control the risk. Improper money management, on the other hand, can lead to higher risks and increased possibilities of losing your capital.
The point of all trading strategies is to ensure high profits and to keep the risks at a low level. Thus, it is not only important to choose trades carefully, but also to pay attention to the amount of money you are placing on a trade. Even though it is sometimes tempting to place your entire capital on a
single trade, this is not a successful strategy. It might work several times, but you will eventually end up losing all your account. It involves a high degree of risk and it subjects you to an incredible pressure. Any trade can be the last trade of your career.
Money Management Methods
There are several methods you can use in order to manage your account correctly. A simple and effective one which all traders can use even if they don’t have plenty of experience is the Kelly system. It is a highly popular method and it is incorporated in numerous strategies. The purpose
of the Kelly system is to minimize risks while ensuring profits. Adepts of this system consider that chances of earning money can be impaired by high risks. It makes perfect sense that by keeping the risks at a low level, chances of increasing profits are higher.
How to Use the Kelly System on the Binary Options Market
The Kelly system is one of the easiest methods of money management that one can use. It implies the fact that no more than 1/19 of the account should be placed on a single trade. However, for the simplicity of the operations, 1/20 or 5% of the account is usually used in practice. Otherwise said,
you never expose more than 5% of your account on a single trade, so you can’t lose more than that. If you start with an account of $1000, each trade should have a value of $50. Some traders might consider this value too low, but on the long run it will prove profitable to do so. In case something
goes wrong, you won’t lose more than 5% of your capital and you can resist to several bad trades.
It is important to always make the difference between trading and gambling. In gambling you take high risks and expect similarly high profits which have low chances to occur. In trading, on the other hand, you minimize your risks, but you increase the chances of being profitable. Good traders carefully calculate their risks and always maintain themselves on a position which doesn’t jeopardize their entire capital. A good trading strategy which incorporates money management methods will ensure your tranquility and will keep you safe from bad moves. A losing trade won’t put you out of business.