When trading online, having an effective Binary Options Money Management strategy is essential to generating long term sustainable returns. It requires a trader to place just as much emphasis on how much they invest as which assets they choose to trade.
What is important to understand about a money management strategy is that it does not involve predictions of market movements but more a reliance on some solid statistical principles. Predicting where an asset will go is down to some uncertainty as it is not always an exact science. However, when deciding how much to invest on each trade and the expected profit in the long term, there is certainty around possible outcomes.
Why do I need Money Management?
Too many traders fall into the trap of thinking that successful trading is only about what trades are placed. They neglect the large part that money management strategies play in the long term for their profitability. They also easily forget how common and how damaging losing streaks are. They are in fact statistically quite likely at some stage or another.
For example, for a trader that starts off with $1,000, he may decide that $100 is a reasonable starting trade size. However, if the trader hits a losing streak of 5 trades he could already be down to $500 or 50%. At this stage it is also quite difficult to recover as most traders will tell you. This is because you will naturally have to reduce your trade size to reflect reduced capital. This will require more than 5 winning trades to recover.
A successful money management strategy relies on two key disciplines. Firstly, a trader has to be comfortable with taking a certain degree of risk. This is because reward mostly comes with risk and there are no “risk free” returns in anything. Secondly, the trader has to be well disciplined and not allow emotion to cloud his or her thinking.
Find the Optimal Trade Size
Before you can start trading and trying particular binary options money management strategies, you have to be decide on the right trade size. This should be closely related to the capital that you have in your account.
Most respectable traders will say that the trade size should be within the range of 1-4% of the capital in the account. Trade size is also closely linked to your win rate on the binary options. More particularly, the higher your win rate the larger the trade sizes that you can take on.
Taking a look at a rough example, if you have a win rate of 65% that means that you will win on average 60 trades out of 100 and lose 40 on average. Therefore, a prudent trader would not bet more than 2.5% on each trade which is 100%/40. Naturally, this is something that the trader can tweak according to your criteria.
Top Binary Money Management Strategies
If you are going to be using some of these strategies it is important emphasise the discipline point. No matter your level of funds available, it is important to stick to a strategy religiously.
There is no “one size fits all” strategy when it comes to money management. You need to take a look at the below and make certain that they are well suited to your individual preferences. These strategies take a look at a number of winning and losing limits. Once either one of these is breached, trading should be stopped until another day.
Total Number of Trades
With this binary options money management strategy, the trader will set a maximum number of trades that they are willing to execute in a day. This limit is set irrespective of whether the trades have been successful or not.
This can be a good initial strategy as it trains the trader to keep to dedicated limits and to reduce account churn. Some traders are of the view that trading profits are a function of how many trades are placed in a day. However, trading for the sake of trading can dilute your returns unfortunately.
This strategy relies on the trader setting a total number of wins / losses that you are willing to have in a day. This should also be carefully placed in the context of the size of the trades that you are taking on. Once this limit has been breached, you should stop the trading immediately.
This is not just a loss minimization strategy but it also allows the trader to realise any gains that have been made over the trading day. It would require the trader to stop trading even when things are going well and the market is in his / her favour. Although this can be quite tough, this is where the emotion point comes in.
Similarly, on the down side a trader has to know when to call it quits. Nothing can be more detrimental to a trader than chasing losses. We at the trading club have seen a number of different clients who have emptied their accounts merely by chasing their losses and not setting a max number of losing trades. Hence, if you have traded past your maximum loss limit you should stop trading for the day. This will allow you to re consolidate the next day and possibly tweak your strategy to make certain that it is adapted for the current situation.
Like the above strategy, loss percentage takes a look at number of wins and losses during the day. However, unlike the number of wins/losses, this strategy takes a look at the losses as a percentage of total trades. This can be a good strategy for the trader who does not want to cap their upside but still wants a risk controlled downside.
The trader will set a percentage such that winning trades are always more than losing trades and hence the trader is always in the profit. A good percentage to target is about 20-30%. This means that the moment your losing trades are above 30% of your winning trades, you should stop trading.
Of course, this strategy could be slightly hard to implement if your first few trades are losses. Hence it could be wise to use a combination of the absolute number and the percentage. When first starting, the trader should set a limit on the number of losing trades and then once there is a record of winning trades they could move the strategy to a loss percentage.
On the flip side, the trader can look at the winning ratio. This is merely the inverse statistical number of the loss ratio. It is the winning trade as a percentage of the total trades placed. Once the trading record falls below the winning ratio then the trader should stop trading. This would then limit the chances of breaching a certain losing percentage.
Value of Winning/Losing Trades
This is also a strategy that incorporates winning/losing trades but looks at it from the perspective of the amount won or lost on the trades. This is a useful strategy if the trader is constantly adjusting the trade size for the various trades.
This could either be an absolute number such as that provided above or it could be a loss percentage. If you are changing the size of the trades that you are entering, then it should at least be kept in a range of acceptable option entry sizes as out sized trades could completely warp your return / loss profile.
Risk Adjusted Strategies
Of course, knowing the strategies above is only one part of your binary options money management undertakings. You need to know what percentage, value or number you should settle for. This can be difficult for traders to establish when they are first starting out. This is because it usually comes down to their individual risk preferences.
However, we have below decided to give approximate numbers that traders should target based on different trader risk levels.
|Strategy||Low Risk||Medium Risk||High Risk|
|Total Trades||10-15||50-70||No Limit|
|Value of Trades||50% Profits / 25% Losses||150% Profits / 50% Losses||No Limit / 75% Losses|
The Best Strategy
When deciding on the risk limits that you are setting for yourself, you should also consider your experience as a measure. Although you may generally be quite a “risk loving” person, your strategy should take into account how much you know about trading.
Similarly, these risk limits are merely a guideline for establishing your binary options money management strategy. You could also choose to combine more than one of the above limits into your strategy. For example, you could set a limit on the number of winning / losing trades as well as setting a limit on the number of trades in total.
There are some strategies that have been touted by Binary Options traders as “money management” but are generally far from it. These are strategies that come from gambling and betting. They include a number of regressive betting strategies which require a trader to increase the size of the trade in when a trade is lost. These include strategies such as the martingale strategy.
The idea behind this strategy is that in the long run the trader will end up with an expected profit. This theory, however, is based on the underlying assumption that the trader has unlimited capital in order to fund the strategy. This is unrealistic and could lead to a trader losing their entire deposit with an extended losing streak. We have heard of a number of our members losing a large amount of money employing this strategy so avoid it at all costs.
There are also a number of other money management strategies that are touted by so called “experts” which can also lead to account depletion pretty quickly. Sign up the the Trading Club below and take part in our forums.