Risk Management in Binary Options
Just like any other form of financial trading, risk is involved. 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.
How to do risk management?
The risk management rule generally adopted by many experienced traders is that no more than 5% of the account amount should be exposed to the market in a trade.
What this simply means, is that if you have an account with a $1000 broker, you do not have more than $50 invested in a trade. Depositing amounts greater than that is extremely risky, especially with binary options which is an “all or nothing” type of business.
It's not like forex where you can cut your losses early if you see that you are probably in a bad trade.
Em binary options, unless your broker returns a percentage of the capital invested in out-of-the-money trades, or you have the opportunity to sell the contract before expiry (variable options) if your trade is bad, then you need to make sure you use correctly the only means of controlling risk available to you.
Calculating your risk in binary options is really very simple. For every $1000 in your account, you can only pay $50 and expose this capital in a single moment. So the first step is to identify and sign up with a broker that will allow you to place positions within the limits of your acceptable risk appetite.
Brokers have made this very easy, as the moment an investor presses the button to buy a contract, the contract acquisition cost is immediately shown.
He cannot lose more than what he spent to buy the digital options contract, so for every contract purchase, the value at risk is known and the potential reward is also known. This allows the operator to do whatever is necessary to keep their risk within acceptable limits.
A typical example for a $5.000 account. The expected payout for the Buy/Sell trade is $500. In binary options, payouts are made up of your invested capital and profit.
So for a payout of $500, this transaction will cost the trader $267,67 or $268,70, about 5% of the account size. However, this is a simple operation. If you want to make 2 trades then you need to split your payout in two and then select a trade that will reflect an investment of 50% of the expected gains from both trades.
The essence of all this is to protect your account from the devastating effects of losses on a single trade where too much capital was invested. Imagine a situation where an investor with a $5.000 account tries to hit a $2.000 payout and invests $1000 in a trade. If the trade is out of money then he lost 20% of his account in just one trade!
Too often many investors succumb to the destructive emotion of greed and try to dare the market in this way.
We all hope to win, but the truth is that we cannot win in every negotiation there will be bad days. This has happened to everyone; even the great Warren Buffett lost millions in October 2008.
But what separates those who re-emerge as successful traders from the rest is the ability to control their risk. Control yours too.
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