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Published On: Tue, Nov 20th, 2012

Binary Options: Recovering from Consecutive Losses

Once you have attained or designed a trading strategy, then acquiring a very good understanding of the concepts of risk and money management will be extremely important in determining just how successful a Forex trader you will become. You need to realize that no matter how well your trading strategy performs, it can still be improved greatly by merging it with a good money management strategy.

You should utilize risk and money management has a statistical tool to help you calculate how much you should wisely risk per trade. For example, if you were to risk too large a percentage of your total account balance per trade than you may not receive the full benefits of your strategy’s positive performance if your positions continuously registered losses. Once you have designed a well-proven money management strategy, then you should always attempt to use it in combination with the following important trading concept which states: ‘do not risk too much of your balance at any one time’.

One of the most sapping binary options experiences that you can endure, especially if you are a beginner, is enduring a sequence of successive losses. You may be fascinated to know that many novices actually attain some success when they initially start trading binary options. Unfortunately, the ecstasy of producing such profits tends to breed over-confidence resulting in the bulk of them eventually sustaining sizeable losses. Once this disheartening pattern sets in, newbies then commence to stack up successions of losses which they have substantial difficulty overcoming.

This is because many investors often become avaricious after enjoying fruitful runs causing them to over-trade by staking more than their account balances can safely support. They also begin to treat their profits in a more offhand way than they do their own money. Most beginners also attempt to counter losses by increasing the position sizes of their new position after each consecutive failure. However, unless you have analyzed and amended the main reasons for your losses then such actions will only serve to quickly wipe out your account balance.

If you are or have endured this demoralizing series of events, then you will know that your unseen and most deadly foe is equity drawdown. Not only does this factor produce a substantial compounding influence but it also affects the size of profits that you must then attain in order to just breakeven. The following table displays the hazards of drawdowns by demonstrating the effect of a consecutive number of 10% losses on an original equity of $20,000.

 

Account Balance

% Total Loss

% Profit Need to recoup original equity

$18,000

10%

11.1%

$16,200

19%

23.4%

$14,580

27%

37.1%

$13,122

34%

52.4%

 

After analyzing the above table, you will no doubt deduce that drawdowns are a compounding factor that can quickly erase your entire account balance.  In addition, you will have to acquire profits that rise in size exponentially in order to just breakeven following each loss. As the value of your account plummets, recovery will become increasingly more difficult, if not impossible, should you persevere in using the same strategy.

To correct this situation, you will need to undertake immediate action by ceasing to use your present trading strategy immediately. You will then have to exert a considerable amount of patience in order to attain a long series of successive small wins in order to extract yourself out of this chaos.  Expert consensus advises that you should correct this problem by reverting back to the drawing board and reviewing your trading strategy. In addition, you should chuck any ideas of quick profits out of the window and begin a new approach that entails advancing your risk exposure per trade in small incremental steps.

If you concentrate on enhancing your skills and controlling your losses, then you will very gradually recover your initial position. If you do have to deposit new money into your account into order to prevent margin calls, then make sure that they are minimum sums. Your chief task is to generate proof that you can really attain profits constantly. As such, you should implement small well-controlled steps in order to accomplish this task. If you do not, then you can be totally assured that binary options possess the ability to blow your equity clean out of the water.

Visit the main binary options page.

 

 

 

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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