Table of contents:
- 1 Structure a Money Management System
- 2 The most popular Money Management Strategy
In recent years, traditional stock exchange trading has been confronted with rapidly growing “online trading”. And it is not only Forex brokers who have increased their activities and marketing efforts, but many things have also changed in the area of Binary Options.
Binary Options Trading and Forex trading are not as different as one might think. If you look at the products in binary trading, you will notice that they are mostly currency pairs. Therefore, a good Forex trader is able to trade Binary Options as well. Is this also that case the other way around? Probably not.
The answer we get is through the “time” component. In the case of a Binary Option, not only must the direction of the market be determined, but also the time at which the option should be sold. Price and time have always been something like the “Holy Grail” in trading. In the Forex market, it is difficult to predict when to sell. When trading Binary Options, the “solution” to the time problem of buying is virtually delivered as the time to sell is already determined.
Forex trading and Binary Options trading have one thing in common: a “money management system”.
This should be structured in such a way that it minimizes potential losses, stabilizes the account balance for as long as possible and, if possible, is a little profit in the meantime. However, the priority of any money management system is not to make money immediately. First and foremost, one must work towards not “losing” money. Only then is the focus on profit.
Why you should use a money management strategy for Binary Options:
- Limit your loss
- You do not blow up your account in a few trades
- Sustainable growth of your account balance
- Do not get caught into emotions
Structure a Money Management System
In this sense, a money management system should always follow a so-called “trading strategy”. One does not buy an option merely for the sake of buying. There must be a solid reason for this to be based on a strategy.
This can be a technical approach:
- For example, you buy a call or put option when the price diverges from an indicator such as the RSI (Relative Strength Index)
- Or there is fundamental analysis.
Either way, a purchase decision must be based on a strategy.
What to act – an important decision!
First of all, on the weekend before a trading week, you familiarize yourself with the Economic Calendar (easy to find online), which informs you what news is coming up in the coming week. Since you’re not trading all the currency pairs, indices, stocks, or other assets offered by the broker, focus on those stocks that you think will fit your strategy for the coming trading week.
For example, if you notice a “bullish” (price-driving) deviation (divergence) in the EURUSD currency pair on the 4-hour chart, you may try to buy call options (assuming the price goes up) on this currency pair in the coming week’s trading, and so on.
You select only a few currency pairs that you want to trade. If there is important news (marked red or otherwise) in the economic calendar, you will avoid trading this pair at that time (just before and sometime after the release, the affected market is usually very volatile, meaning that the chart shoots seemingly randomly from one direction to the other and vice versa). In such a case it is better to choose another currency pair or adjust the expiration time.
Avoiding “Short-Term” expiration times
To the chagrin of many Binary Options traders, this rule must be followed under all circumstances. It is essential to think and plan for the long term in order to actually earn good money later. 60-second and 5-minute expiration times are not suitable for serious, well-thought-out trading. They do not solve the problem.
Always trade realistically! That means: choose expiration times until the end of the day, week, or month. You may find it hard to believe, but markets spend most of their time consolidating (returning to price averages after an excessive up- or downswing). Of course, brokers know this very well. So you make sure that you do not choose short-term expiration dates.
Choosing the level of investment with a Money Management:
The next step is to decide how much to invest in the coming trading week. A $1,000 account could be divided into 10 equal parts. This will result in a value of $100 per week for the next 10 weeks. This is how you split the risk you take. That is money management. All right? First you try to stabilize the account so that the account is not emptied. Only then do you focus on making money and making a profit.
The most popular Money Management Strategy
Professional traders limit their risk in each trade. That means you only invest a percentage of your account balance per trade. It is very popular to only use 1 – 2% of the account balance per trade. This is a big advantage because you can trade for example 5 positions at the same time without killing your account balance if you make wrong decisions.
The key to long-term success is to trade without emotions and a good strategy. So if you got a $1,000 account balance you can invest with this 1% rule $10 per trade. This maybe sounds not worthwhile but if you make the right trade you are earning (depending on your broker) 7 – 9 $ of profit. That means you made a yield of 7 – 9% on your account balance. If you continue to do this, your account will grow very fast.
- Use a fixed percentage of your account balance per trade
- $1,000 account balance with 1% risk management
- This means a risk of $10 per trade
- You will grow you account without blowing it up quickly if you got some wrong trades in a row
Start trading with only $10 deposit an $1 investment amount. See the broker list below. Create a free demo account:
Split the amount
Now that we have both – a product and an amount to trade with, the “weekly amount” is divided into equal parts. Suppose we decide to trade four products in the coming week, then we divide the $100 into equal parts of $25 each. This has already reduced the risk of losing more money.
Further division for several Entries
We don’t want to trade just one option for $25, so we split it again into five equal parts. This reduces the risk even further. Since the result of trading with Binary Options is calculated as a percentage, splitting has no effect on profitability. However, it does increase the chance of making money.
On Mondays and Tuesdays, trading with an eye at the end of the day in terms of expiration time. From Wednesday on, we already look at the end of the week or even the end of the month. It seems like a long time of waiting, but if we get 80% or more for our patients, it should be worth it.
It’s also important to remember that if you set a trade in the second half of the day with expiration time “end of the day”, there are only a few hours to wait. The same applies to the end of the week or month if you set the trade in the second half of the day.
If you follow the steps mentioned above, the risk is well spread over different assets and different expiration times. Therefore, it becomes relatively unlikely that all 20 options (or more) will make losses (“out of the money”) at the end of the term.
Should this actually happen, you have still not risk more than one-tenth of your equity. Following the above system, it is extremely unlikely to lose all trades – in any one week. In any case, at the end of the ten weeks, you know more about trading than you think and still have enough money in your account to continue.
Conclusion: A Binary Options Money Management Strategy is important
From my experience, I can say that without a money management strategy you will blow up your account and lose your investment. Many beginners start without money management and they risk more than 20 or 50% of the account balance in one trade.
This is not a good strategy and no professional trader does stuff like this. You will get caught in emotions and want your investment back. The best way is to invest only a small percentage of your account balance per trade. It is easier for your brain to open these trades. And you can cope with some losses in a row.
See my other articles about Binary Options:
- 15 Rules for Binay Options – Tips & Tricks
- 5 best Binary Options Broker 2020 – Review & Comparison
- Are Binary Options a gamble?
- Are Binary Options a scam?
- Are Binary Options Robots a Scam? – Honest review
- Best Binary Options App – Comparison & Review
- Binary Option Markets
- Binary Options – Call and Put
- Binary Options – Range Options – Boundary Options
- Binary Options – Touch Options
- Binary Options 60 seconds Trading Strategy & Tips
- Binary Options Bollinger Bands Strategy
- Binary Options commodities trading
- Binary Options demo account – Recommended For Beginners
- Binary Options Money Management Strategy
- Binary Options News Trading
- Binary Options regulation – Why is it important?
- Binary Options review – Critic and warning
- Binary Options RSI Strategy
- Binary Options trend following strategy
- Binary Options volatility strategy
- Binary Options vs. CFD Trading – Which one is better?
- Binary Options vs. classic options
- Binary Options vs. Forex Trading – Which one is better?
- Chart analysis for Binary Options
- Forex Trading with Binary Options
- Hedging Binary Options: Can You Hedge Against Losses?
- How risky are binary options?
- How to avoid Binary Options Scam Brokers
- How to trade Binary Options – Trading Tutorial
- How to Trade Stocks with Binary Options – Tutorial
- Is Binary Options Trading safe? – Consumer protection
- Learn to read Binary Options Candle Sticks
- Trade Binary Options with MetaTrader
- Trade Pivot Points with Binary Options
- Warning about Binary Options – A form of betting
- What are Binary Options?
- Why Binary Options Signals are a scam