Friday, 6 July 2018

Risk Management for Binary Options Trades



Binary options trading has an element of risk involved. This is because it is very volatile. That is you can double your investment in a day and you can lose all or most of your money in an instant if you are careless or greedy. As such, the concept of risk management is one that every binary options trader should take very seriously.

The generally accepted risk management rule adopted universally by professional traders is that no more than 5% of the account size should be exposed to the market at any given point in time. What this simply means, is that if you have a $1000 binary options account, you should not have more than $50 in the market at any given time. Trading anything more than this is extremely risky, especially as binary options is an “all or none” type of market.

It is not like forex where you can cut your losses early if you see that you are probably in a bad trade. In binary options, unless your broker is the type that gives back 15% of invested capital in trades that are out of the money, or you have the opportunity to sell off the contract before expiry (variable options), then you are out of luck if your trade goes bad. So you need to be sure that you properly utilize the only means of controlling risk available to you.

Therefore Calculating your risk in binary options is actually very easy. For every $1000 in your account, you can only afford to expose $50 at any single time. So your first step is to identify and sign up with a broker that will allow you to place trades within the confines of your acceptable risk appetite.
Binary options brokers have made this very easy, because the moment a trader pushes the button to purchase a contract, the trader is immediately shown the cost of purchasing that contract. He cannot lose more than what he spent purchasing the binary options contract, so for every contract purchased, the amount at risk is known and the potential reward is also known. This enables the trader to do what is necessary in order to keep his risk within acceptable limits.


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