Published On: Tue, Nov 20th, 2012

Binary Options: The Mechanics of Money Management

You must strive to ensure that money management becomes a central component of your binary options trading strategies. Sadly, most beginners completely fail to appreciate the significance of this concept and, as a result, most of them flop. One of the optimum methods of accomplishing this task is to develop or attain a binary options strategy that competently controls the following aspects of trading: money, mind and method.

Specifically, you need to control the money aspect of your trading by devising a risk strategy which will help you safeguard your account balance. You must also evolve your mind so that you will possess the levels of fortitude and self-control necessary to implement your plan successfully. Finally, you should design a trading method by structuring it on your preferred components of fundamental and technical analysis. However, even if novices do try to build a strategy, they have a leaning to concentrate only on the method part of trading. As such, they totally overlook the money and mind features resulting in final products that are usually seriously defective. Your primary mission as a binary options trader is to always provide maximum security for your account balance because without it you will not be able to trade any further without making extra deposits. This is a practice that you must attempt to evade at all costs. However, human nature will entice you to focus on profits first instead of losses. In addition, you will discover that many newbies suffer from a mental tendency of thinking that all their positions will be winners. As such, they totally discount what could happen should this not be the case. As binary option trading is influenced by so many factors, you must realize that losses are virtually inescapable. You must therefore understand that successful investors are those that master the art of quashing their losses by applying adequate controls. This is why you must design a money management plan which is a system that will allow you to diminish your risks whilst optimizing your profit potential. Accomplishing this task is vital to achieving success especially as binary options trading can involve high levels of volatility and leverage. Never overlook the famous trading maxim which states: “take care of your losses, and your profits will look after themselves.” You must also realize that binary options trading is all about odds and that you only possess total control of your own account balance until the instant that you activate a new trading position.

From that moment onwards, price governs the day which implies that you will not know for sure whether your trade will conclude in a profit or loss. However, you do have the capability to limit, by deploying a well-tested money management policy, the maximum loss you will endure should price advance against your open positions. You should also construct the design of your money management strategy on two simple principles which are a well-defined risk-to-reward ratio and accurate position sizing.

You must devise a trading strategy that exhibits a minimum risk-to-reward ratio of 1 to 2 because you need to cater for inescapable losses as a basic component of your trading plans. Position sizing signifies the size of your account balance that you are prepared to risk per trade and is measured in lots. This factor is very significant as it must be connected carefully to the size of your account balance in order to deter you from overtrading. Many traders expend a significant amount of time studying how to initiate new trades without developing a good strategy about how to exit them. There is more to this skill than you may initially think because human nature can be heavily involved if not controlled properly. For example, you may start becoming apprehensive that price could suddenly retract and move against your position. Fear could then make you exit your trade prematurely before price rebounds back into its original direction. Under such circumstances, you will be left watching in frustration as you witness serious profits amassing which are now completely out of your reach. To overcome such problems, you need an exit strategy that you can trust and that has been thoroughly tested. Specifically, you should research into the many relevant factors that can help you devise an exit strategy, such as using different time frames and technical indicators.

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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.