Binary Options Risks

Binary Options Risks and How to Manage Them

Successful trading is all about understanding and managing probability. There isn’t a magic bullet that will guarantee that all of your trades are successful, so in the absence of that, every smart trader needs to think about binary options risks and developing strategies to manage them. You can’t manage binary options risks if you don’t have both an effective trading strategy and money management strategy.

You can base a trading strategy on:

  • indicators (trend indicators, oscillators or both)
  • a theory of trading (Elliott Waves, Gartley, Gann, Point and Figure, Drummond, etc.)
  • anything else that might reasonably be expected to generate a profit.

With binary options you don’t just have to say which way the price is going to go, you also have to say  by what time or date it will do so. While they don’t seem as complicated as some of the more exotic financial instruments, don’t be deceived into thinking that binary options are simple. You still need to manage your binary options risks when you trade.

What Makes a Good Money Management Plan?

Managing risk means managing the variables within your control. These are:

  • how much money you put into each trade
  • the asset you choose
  • the way you think it will move
  • the expiration date

Steer Clear of Short-Term Expiration Dates

It may seem odd, but the direction of price movement is not your greatest concern, the expiration date is. Minute or hourly expiration dates are best avoided because they’re one of your biggest binary options risks. It’s much better to use end of day, week, or month. Let’s face it, you might be looking at greater than 70% return on your investment, so there’s no need to rush into anything! You can afford to take a longer view, no matter how hard a broker tries to appeal to your greedy self with tantalising short-term offers. It’s in a broker’s best interests to influence you with fear and greed. So, to survive as a trader over the long-term and manage your binary options risks, it’s best to only listen to the voice of reason.

Brokers won’t make it easy for you though. You might have been hoping to set your own expiration dates, but they try to limit their own binary options risks by setting them for you. They would much prefer it if you’re expiration time fell just when the market was at its most volatile, like when significant economic news is scheduled to drop.

To manage your binary options risks, set your expiration is well beyond such events and avoid the shorter expiration dates whenever you can.

Trade Only a Few Assets

You need to check the economic calendar for the coming week every week. Look out for important news that affects your underlying asset and consider what it may do to its price. And to start with, consider only trading with one or two assets that you understand. The more assets you dabble with, the more you open yourself up to being blindsided by something that you didn’t expect. Binary options risks are better managed if you stay within your areas of understanding.

For instance, if you know that an event is coming up that may affect the US dollar, such as a non-farm payrolls announcement on the first Friday of the month, it might be prudent to stay away from trading USD pairs until afterwards. It’s been established that the dollar will range before that Friday, so you’d be hard pushed to guess which way the market will go. Better to avoid the dollar during that period and keep your binary options risks to a minimum. If you are hellbent on trading, however, you could look to set your expiration date for some time afterwards, when volatility has died down.

Direction and The Amount to Trade With

The amount you choose to trade is also very important. After you’ve completed your technical and fundamental analyses, you should apply the same diligence to selecting the size of your trades.

If you have $2000 in your trading account, you could split it into 10 equal parts, and trade each lot of $200 in the week ahead, so 10 lots of $200.

You could also divide that $200 between one index, a commodity, and two currency pairs, so you would wind up risking $50 on each one. Do so and you’re now looking at 40 trades over a 10-week period, and what are your chances of losing on every one of them during those 10 weeks?

Given that you will have spent time researching your underlying assets and their price movements within the market, it seems unlikely that such a dismal outcome would befall you. Even if you flipped a coin to decide what to do on every trade, probability would suggest that half of them ought to be successful. So, it should be clear that by combining your research with a high number of well thought out trades, you will not only be reducing your binary options risks but significantly increasing your chances of trading success.

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