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When to trade binary options - Risk Management
Many people refer to binary options as gambling. Even though theres heavy risk involved in trading binary options, it’s nothing like gambling even if its similarities can easily be perceived as so. The truth of the matter is that options are asset trading instruments used for people who follow market trends. As an example, if you''re someone who followed the 2008 housing market crash, you might have foreseen that many companies, who offered mortgage backed securities like AIG, would have been drastically effected by the crash, and therefore trading options based on the price of AIG stock lowering would have enabled you to capitalize on that trend. Market predictions can however, end up incorrect resulting in a trader losing large amounts of capitol in a short period of time. That is why following a risk management strategy is very important when trading binary options. Here are some tips that can help you develop the right strategy for you:
Choosing your investment capital
First, decide the dollar amount for your investment capital. Decide on an amount that you are comfortable investing regardless of any other views other might have regarding starting capital. A good rule to follow regarding investment capital is, the dollar amount should be an amount that you are comfortable losing if hypothetically speaking the worst case scenario happens, and you make nothing but wrong predictions for every investment you apply your investment capital to. A professional investor always separates the investment capital from the rest of his or her money regardless of the amount. This should be a positive habit to develop.
The amount per trade
There''s always a rule that we recommend for traders when deciding the dollar amount per trade. We call it the 5 percent rule. Every trade should be 5 percent of your investment capital when trying to identify a per-trade dollar amount. During moments where your predictions are correct, emotions will lead you to say ''if I would have invested more, I would have greater returns''. A good investor never trades according to emotion. The 5 percent rule will protect you from sustaining big losses, and will help you focus on the research and data of assets and not the dollar amount invested in the trade. Over time practices like this will develop good habits in your trading and make you consistent. Consistency in trades will not only develop your ability to forecast market trends accurately, but will make you a better, more successful trader.
Test your trades
A very useful method of a risk management strategy that will strengthen your accuracy of trade forecasting is to test your trades before actually investing. First, choose a small group of assets that you’re interested in investing in, and research them thoroughly. When you feel motivated to make a forecast on the price direction you think the asset will go, do so without actually making the trade. Instead, make up a contract that includes a dollar amount for the trade, an expiry time the prediction must be within, and try to calculate a profit if your prediction is correct. Now, watch your assets, and see how you do. This might seem unexciting but is very healthy, and will help you get in the habit of watching the markets, and learning what determines price movement within assets.
The 3 loss principle
Here is a simple rule you can follow to help prevent the emotional stress that can come along with back to back losses. If you incur three consecutive losses in a one day period, stop trading for that day. Try trading the following day, and always put a stronger emphasis on research and analysis, because ultimately, its identifying market trends that makes trading binary options very lucrative. If your comfort level in trading binary options becomes high, adjust the three loss rule to a number that better suites you. Its very important to stick to the number you set as your rule, even if higher than three. The idea is to practice good trading habits, which will lead to long term success.
Maximum trade allowance
Another very useful practice is to set a maximum number of trades per day or per month that you are going to trade. Limiting the number of trades you allow yourself should help you choose your trades wisely, basing your trades on information or market identifiers that has a deeper conviction within. Trading according to this practice will give you a higher success rate.