Binary Options are the favorite instrument of many traders due to the speed with which the deals are executed. Unlike other trading instruments, on Binary Options the result of the trade is known within minutes or even seconds. It can be quite exciting and profitable, but it can also be very risky and even addictive. How to protect your capital when trading on short expirations? Here are 5 Binary Options risk management tips to help manage the risks and potential losses when you trade.
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- Determine the investment size based on your risk tolerance
- Set a realistic daily goal to reach
- Set a daily loss limit
- Stick to your trading strategy
- Utilize the practice account
1. Determine the position size
How do you decide on the amount of the investment? If this decision is not carefully considered and you simply wing it, it means that you let your emotions take over. This approach is harmful and dangerous, because it increases the chances of losing your entire capital without even noticing.
Instead, decide how much you are willing to risk in each trade and stick to it. For example, if your total portfolio is $300, and you are willing to risk no more than 2%, it means that your investment in one trade should not exceed $6. As your capital increases or diminishes, don’t forget to recalculate the investment amount. Do not deviate from the decided amount, even if it’s tempting. It is far easier to not lose your funds than to try to regain them back.
2. Set realistic daily goals
When beginning your daily trading session, decide on your profit goal for the day. Make it realistic and achievable. Reaching a smaller goal will give you more satisfaction than setting an unrealistic target and failing to get even close to it.
What is a realistic profit goal? This will depend on each individual trader, their approach and skills. However, trying to double your capital in one day is definitely not a realistic target. Make sure to set a goal that feels appropriate to you and stick to it.
3. Establish clear limits
Once you have a profit target in mind, you can trade non-stop all day until you reach it… Right? Nope, wrong! Set a clear limit of how much you are willing to lose within a day and don’t go over that threshold even if your daily profit goal is not reached. Once again: it is easier to not lose the money you have than try to regain it. If you reached the acceptable daily loss limit, do not attempt to revenge trade and don’t deviate from the rational approach you have been exercising. Return to trading the next day with a clear head instead.
4. Choose a strategy and stick to it
If you are trying to juggle several strategies and none of them is working for you, perhaps the reason is that you are not really following any of them. When picking a strategy, give it a real chance. Learn how it works, try it out on different assets, various timeframes and experiment to tailor it to your needs.
If you are not sure which strategy is best for you, try several different ones, but not at the same time. Some of the most popular strategies that traders execute are scalping, day trading, and swing trading. You can read about them in more detail here.
5. Practice, practice, practice
Among the described Binary Options risk management tips, this one is perhaps the most important. Use the practice account as much as possible, treat it like your draft where you can make mistakes, try different combinations, approaches, investment amounts, etc. Test out your strategy on the practice balance before you move on to trading with real funds. This will allow you to be sure of your trading plan and potentially avoid some mistakes and losses.
Are these tips new to you or do you already consistently exercise them? Let us know in the comments below!
