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Home Binary options Useful articles Money Management in Binary Options

Money Management in Binary Options

Money management or capital management

Many successful traders recognize that successful trading on financial markets requires three components: trading system, self-discipline and proper money management. We can argue long and hard what of these three factors is the basic one, but we believe that the correct answer is a symbiosis of all the factors. As a tricycle if there is no wheel, the trip does not succeed, so do not even try. Today we will focus on the money management, or as it is called, the management of capital.

In this article we will try to understand what money management should be so that the trader always remains in a positive territory, and will try to give you some practical tips for profitable trading.

Money Management in Binary Options

What is money management?

Today on all financial markets money management is one of the most important factors and at the same time, one of those that is paid very little attention to. Why is this happening? Most likely the reason should be sought in the abundance of information about trading systems and strategies, methods of earnings. Arriving in the market a newcomer swallows the bait that the most important thing is a strategy and tries to earn millions. As a result he loses his money. Only then, if he has not lost the desire to trade, he begins to search for information about how to properly manage the capital to preserve what is and get even more.

In fact, money management is the science of how to manage your deposit in order to trade profitably for a long time. In fact, it is not enough to make one or two profitable trades, the success of the trade is determined for a long period of profit. And it is better to make two or three profitable transactions, profits from which will cover the seven-five unprofitable deals, than to make ten profitable and 1 losing trade. It will cover the loss of income previously received and it will take a few months to make up for the loss. The financial risk management is what many beginners neglect; as a result, of course, they lose their money.

Let us look at the basic rules of money management which, if not exclude all the possible risks, at least help to reduce them.

Money management rules

The first thing that experienced trader advices is to pick up the correct amount of the deposit. Frequently, especially novices want to make a lot of money at once, so with a relatively small deposit of $ 200-500 they start trading large lots to earn much immediately. It is possible to earn until a certain time. Then, you can lose everything. If you want to trade large amounts, then the deposit must be adequate. But to work with such a deposit the trader must have a baggage of experience, so for the beginners it is better to open a small deposit and trade on small amounts. Start learning with small sums of money!

In practice, the acceptable risk for the transactions is recognized in the 5% of the deposit amount. For beginners it is desirable at least for the first time to establish the risk of 2% of the deposit. That is, if you deposit $ 100, you can afford to risk losing only $ 5. Applicable to the binary options market, where in the case of an unsuccessful transaction you lose 85-90% of the transaction, you will be able to calculate the amount of the bet. Yeah, maybe one earning will not be the same as you would like. But on the other hand, you can keep your deposit.

Money Management in Binary Options
The second rule is directly related to the first. Do not open more than one transaction, especially for beginners. This error is also inherent to the young traders who want to earn a lot at once. They are trying to trade on different instruments, trying different currency pairs, raw materials, equity indices or shares. Most often such trader opens several transactions. Now imagine that the trader, even following the rule of limiting the risk, opens a few trades and all of them were closed at a loss. This happens in the financial markets, and you should be ready. What percentage of the deposit will he lose? Will he be able to return these losses? These are rhetorical questions. Remember the rule of limiting the risk and try never to deviate from it. If you open multiple transactions at the same time, the risk for all of them should not exceed the value.

And finally, let's talk about leverage. The less is the leverage, the less are the chances of actual damages. Professionals advise not to trade with a leverage of more than 1: 100. The profit, of course, with a large leverage is high, but the risks are growing. And how to control the risk, I hope we have learned.

Money management and capital management - is there a difference?

In our opinion, these two definitions are slightly different. If you read the literature of modern traders in financial markets, we can see that the concept of money management includes the degree of risk in the management of separately open transaction. Hence, the main rule of money management: do not enter into a transaction if the take-profit does not exceed two to three times the amount of potential loss, where there will be a stop-loss. Of course, the market of binary options is of little importance, as the possible value of the profit and loss potential is approximately equal.

Money Management in Binary Options
In the concept of a "capital management" the modern American merchants put the concept of managing his or her deposit. That is, how much money to make a deal, what lot is used, what the optimal amount of leverage is and other things that are calculated according to the amount of the deposit. But nothing bad will happen if you use these definitions in an interchangeable manner. Your fellow traders will always understand, but we want to convey to you not only the truth known to everyone, but also some new developments appeared in the financial markets. And finally ...

Whether you have the best and most profitable strategy in the world, and self-discipline at a very high level, without the use of money management you do not achieve success in the financial markets, you are doomed to merge a deposit after a deposit until you realize this truth. Just like you, tens of thousands of traders around the world did before. However, it is always better to learn from the mistakes of others than on your own.

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