Money Management in Binary Options Trading
In the last years, retail traders saw the online trading business expanding rapidly. Not only Forex brokers increased their activity and marketing efforts, but also binary options ones. Binary options trading and Forex trading are not that different. If you look at the products offered for binary trading, most of them are currency pairs.
This makes a good Forex trader able to trade binary options too. Is this valid the other way around? Probably not.
The answer comes from the time element. In the case of a binary option, one needs to set not only the direction the market will go but also the time. Price and time have always been the holy grail in trading. In the Forex market, time is difficult to forecast. In binary trading, solutions exist.
Both Forex and binary options trading have one thing in common: a money management system. When you think of it, it should be structured in such a way to limit the potential losses, to result in the trading account surviving for as long as possible, and to make some money in the meantime.
However, the priority of any money management system is not to make money. First, you need to be sure you’re not losing, and then to focus on making money.
Structuring a Money Management System
With this in mind, a money management system should follow a trading strategy. You’re not buying an option just for the sake of buying it. There must be a reason for that, a strategy.This can be a technical approach (like buying put or call options when price diverges from the Relative Strength Index) or a fundamental one. But you need a trading strategy. Assuming you have one, money management comes into play. Here are the steps to follow.
1. Decide What to Trade
Over the weekend, look at the economic calendar for the week ahead. You don’t have to trade all the currency pairs, indices, commodities and other products a broker offers. Focus only on some you think your strategy works that week. For example, if you see a bullish divergence on the EURUSD pair on the four-hour chart, you’ll want to trade next week call options on the pair. And so on.
Choose a few pairs to trade. If the economic calendar shows important events, marked with the red color, try avoiding them by trading other currencies or financial product, or adjust the expiration date.
2. Avoid Short-Term Expiration Dates
To the disappointment of many binary options traders, these must be avoided at all costs. You need to be here in the long run to make some serious money. Sixty-second and five-minute expiration dates will not solve the problem.
Trade realistically: end of day, week and month. Believe it or not, markets spend most of the time in consolidation. Brokers know that too! You’ll want to make sure you a avoid short-term expirations.
3. Chose the Amount to Invest
The next step is to choose the amount to trade that week. On a $1000 account, split it intoten parts. This will result in $100 to trade every week for the next ten weeks. Just like that, you’ve split the risk you take. This is money management. Remember? First, you’ll make sure you’re not getting wiped out, then you focus on making some money.
4. Split the Amount
Now that you have both the amount to trade with and the financial product, split the amount into equal parts. Assuming you decided for next week to trade four financial products, split the hundred dollars into four equal parts of $25 each. You just reduced the risk of losing some more.
5. Further, Split for Multiple Entries
You don’t want to trade only one $25 option on a product. Split it into five or more equal parts. This way, the risk diminishes further. Because the outcome of a binary option is percentage wise, the split won’t affect profitability. However, it increases the chances you’ll make some serious money.
Mondays and Tuesdays trade with end of day expiration dates. Starting with Wednesday, look for end of week and end of the month. While it seems like a long time to wait, if anyone gives you 80% or more rate of return, it is worth the trouble. Plus, think of it. If you trade a binary option in the second half of the day and have end of day expiry for it, you will end up waiting for a few hours.
The same with end of week and month trading, if you take the trade in the second half of the week or month. Following the steps above will end up in having the risk dispersed across various asset classes and across various expiration dates. Hence, it will be very difficult for all your twenty options or more to expire out of the money.
Even if this happens, you’ll only risk one tenth of your capital. If you follow this system for all ten weeks, it is virtually impossible to lose all the options each week. If anything, at the end of the ten weeks, you’ll end up knowing about trading more than you thought and you’ll still have plenty in your trading account to trade with.