Money management when trading Binary Options is no less critical as it is for any other style of trading. Due to the nature of Binary Options it is possible to use various style of money management. Having no need for stop, limits or contracts this style of trading is a lot more predictable as you as these expire within the hour. Risk management for Binary Options requires simple money management strategy to consistently define your working capital based on your account balance.
The two types of money management are:
The Martingale System
The Martingale system which is dependent on the likelihood that the trade will eventually go in the direction you have identified. The way it works is that you double every losing trade and start at you original trade size after a win. So if you are trading $ 10 and lose your next trade size will by $ 20 then $ 40, $ 80 and so forth until you win. The main thing is that you need to be able to allow for at least 7 losses. You run out of funds if you only have a $ 1000 account balance.
Personally I find this style of money management a little risky for the amount of money that you are investing. For example, if you are trading $ 10 and doubling it each time you lose, you could be trading say $ 640 after 6 losing trades and only make $ 10 if you finally win the next trade.
A recent popular strategy that also uses the Martingale method has been recently popularized by Binary Options traders where they utilize other traders insights in the market to see what they predict the direction will be. It may take up to 4 trades before the market closes in the original predicted direction but each time a trade is lost the increment is slightly higher than double so that you make a more reasonable return.
For example: If you're opening an initial position of say: $ 10, followed by $ 26 after a loss, then $ 65 and finally $ 150, after 4 losing trades you finally win - fingers crossed - you are making $ 49 instead of the $ 10 profit if you were simply doubling.
The Non Martingale System
The Non Martingale system is a fixed risk ratio where you decide what the maximum working capital you are willing to trade based on your account balance. For example a 10% risk ratio would allow you to trade up to 10 times if you lost each time. This may sound like fun if you were shooting rings at the carnival but as you are trading your account balance you would like to have a chance at growing your account rather than blowing your account on a losing streak.
The Five Considerations of Money Management in Binary Options:
1. Account Size
Account size is the amount of your trading account balance which is the value that we base our maximum working capital for each trade.
2. Maximum Risk
The maximum risk for each trade is based on a percentage of the account size that will ensure the longevity of your trading career. The maximum risk is established in order to nominate the working capital.
In trading Binary Options, it is best to use a risk ratio of 1% to 5% depending on your experience and strategy. So for a $ 10,000 account for example you can trade anywhere from $ 100 to $ 500 working capital or trade size. Once your account grows to critical mass of say $ 60,000 to $ 120,000 where your maximum trades based on 5% can be $ 2,500 to $ 3,000 for each trade you will no longer be able to compound.
3. Rate of Return
The Rate of Return in Binary Options variants from 69% up to 95% depending on your nominated Binary Options Broker platform. In some instances some platforms allow for a return of up to 15% for a losing trade which would minimize your losses.
Every Binary Options trader should sit down and work out what the payout and return are for their trading platform. Use your Trading Journal to visibly represent what your return would be if you won one trade per day at 85% per win and so forth using different scenarios to map out your strategy.
4. Working Capital
Working Capital is based on your maximum risk ratio which ensures your account can sustain multiple consecutive losses. If you are using a 5% ratio say $ 500 trade size for a $ 10,000 account balance you create a buffer until you get a winning streak. The working capital may grow as your account size grows to allow for compounding until you hit critical mass.
So by the time your account gets to $ 15,000 account balance you working capital will be $ 750 per trade.
5. Trading Journal
Every professional trader uses a trading journal to keep track of their trades and monitor their performance. Without taking stock of their performance and progress they would not be in the right frame of mind required to sustain draw down periods or to develop the correct discipline required to succeed as a trader.
A trading journal can assist you by eliminating your working capital using your maximum risk based on your account balance. Once these are automated you can focus on your strategy. A trading journal will help you view your progress over a period of time and allow you to focus, monitor and course adjust your strategy.