How to Manage Money While Trading Binary Options

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How to Manage Money While Trading Binary Options

Trading binary options is simple. And if it’s simple, you should have the energy to focus on managing your money correctly.

If you manage your money correctly while trading binary options, you should increase in value many times over.

Just like in any kind of trading, good money management starts with finding a decent broker with a good track record for paying out.

All your time is wasted if you get stuck with a scammer.

What Is the Next Thing You Should Do To Manage Money While Trading Binary Options?

Look for payouts as close to 80% as possible.

The higher the better, of course. But payouts have gone down across the board over the years. So expect something between 70-80%

Obviously, brokers are in it to make money too. They aren’t machines that crunch numbers and dispense money.

The best trade for them is a 50/50 trade in either direction. So make sure you get a broker who is willing to go in 75% or more on a trade deal.

What Are The Best Strategies To Managing Your Money?

If you’re looking for a simple system, try the “Kelly” system.

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It’s become a preferred money management system over the years among those trading binary options.

The goal of this method is to maximize chances of profiting from the trade while at the same time minimizing the risk.

How do you do that? First access your last 60 or so trades. Calculate the winning probability by dividing the number of positive returned trades by the total number of trades.

Any number above 0.5 is a good number here.

Calculate the win/loss ratio by dividing the average gain of the positive trades by the average loss of the negative trades. This number should be greater than 1 if you average gains are greater than average losses.

Now, take those numbers and plug them into Kelly’s equation.

The number you get is the Kelly percentage.

How Do I Use The Results Of The Kelly Equation?

The results of the Kelley equations should tell you how much you should diversify.

If the Kelly percentage is, say, 0.05 or 5%, then place 5% of each of the equities in your portfolio.

Keep this rule in mind, however. Don’t ever commit more than 20-25% of your full capital to one equity.

You will be risking more than what it’s worth if you put more than that into one equity. Remember, the Kelly system is designed to mitigate risk and balance it against potential profit.

Another thing to remember: this was designed to help you diversify while trading binary options. It’s not designed to help you pick the winning options. There is always a certain amount of “luck” or randomness or unpredictability in markets.

Conclusion:

Learn to use systems like this to know how to diversify. But continue to trade consistently. Randomness and volatility are the cause of many temporary market swings in account value.

The bottom line is that money management will not always guarantee spectacular returns. But it can help you limit loss and maximize gains.

If you like what you read, share it with your friends. And, as always, keep on trading.

7 Binary Options

Currently, there are tone of articles that have been published on various sites and online forums, regarding binary options trading strategies. It is also a known fact that the majority of traders spend about 99 percent of their time searching for the best binary options trading strategy, indicators and the best markets to invest in. While this is important, traders rarely take time to ponder about a most important aspect of trading binary options – money management. Since the trade is about either winning or losing it all, it is important that you exercise money management strategies. If you are to succeed in this trade, you have to explore the current strategies and settle on the one that will maximize your chances of profiting from the trade.

Risk and Money Management

While risk and money management have different meanings, they are closely related when it comes to binary options. This is mainly because the manner in which you manage your trading capital will determine the risk that comes with the investment choice. In this regard, you need to manage your capital in a way that minimizes the risk. For instance, you should avoid staking all your capital on one outcome because the risk is too big.

The Best Strategies to Manage Your Money

To set up an effective money management strategy for binary trading, there are various approaches that you may use. Among the simplest and most effective strategies is the ‘Kelly’ system. Over the years, this method of betting has become a preferred money management strategy among binary option traders. With this method, the objective is to maximize the chances of profiting from the trade while minimizing the risk that comes with the investment. In theory, the system suggests that minimizing the risks associated with your investment will put you in a better position to profit from the trade.

Implementation of Kelly System in Binary Options

When using this strategy to invest in binary options, it is advisable that you invest only five percent of your balance in any particular outcome. With a regular broker, this translates to a 5 percent risk against about 3.5 percent return on the investment. While this may appear to be a small investment, the method focuses on reducing the risk and maximizing the potential to grow in the long term. With this strategy, a string of losses will not put you out of business as you will still have money to invest.

Traders need to understand that there is a slight difference between trading and gambling. With an effective money management strategy in binary options, you increase your chances of profiting from the trade.

Start trading now with our recommended brokers.

How To Make Money Trading Binary Options

Now that we have a basic idea on how binary option trades work, let’s take a look at a simple example.

Let’s say, you decide to trade EUR/USD with the assumption that price will rise.

You then look at your trading platform and see that the broker’s payout is 79% on a one hour option contract with a target strike of 1.3000.

After much deliberation, you finally decide to buy a “call” (or “up”) option and risk a $100.00 premium.

You could say it’s similar to going “long” on EUR/USD on the spot forex market.

Ending Scenarios After Entering a CALL Option Gain/Loss
Expiry price is above the strike price
(in-the-money)
$100.00 x 79% = $79
$100.00 + $79.00 = $179.00
You gain $179.00 on your account.
Expiry price is equal to or below the strike price
(out-of-the-money)
You lose your stake and your account declines by $100.00.

As you can see from the calculations above, the risk you take is limited to the premium paid on the option.

Payouts in Binary Options

Now that we’ve looked at the mechanics of a simple binary trade, we think it’s high time for you to learn how payouts are calculated.

More often than not, the payout will be determined by the size of your capital at risk per trade, whether you’re in- or out-of-the-money when the trade is closed, the type of option trade, and your broker’s commission rate.

In the example given above, you bet $100 that EUR/USD will close above 1.3000 after an hour with your broker offering a 79% payout rate. Let’s say that your analysis was spot on and your trade ends up being in-the-money. You would then get a payout of $179.

$100 (your initial investment) + $79 (79% of your initial capital) = $179

Easy peasy, right? Don’t get too excited just yet! You should know that there’s no one-size-fits-all formula for calculating payouts. There are a few other factors that affect them.

Factors in Payout Calculations

Each broker has its own payout rate. For starters, Forex Ninja’s intel shows that most brokers offer somewhere between 70% and 75% for the most basic option plays while there are those who offer as low at 65%.

Various factors come into play when determining the percentage payout.

The underlying asset traded and the time to expiration are a couple of big components to the equation.

Next, the broker’s “commission” is also factored into the payout rate. After all, brokers are providing a service for you, the trader, to play out your ideas in the market so they should be compensated for it.

The commission rate does vary widely among brokers, but since there are so many binary options brokers out there (and more coming along), the rates should become increasingly competitive over time.

When a Binary Option Trade is Closed

As mentioned before, binary options are typically “all-or-nothing” trading instruments in that the payout or loss is only given at contract expiration, but there are a few brokers that allow you to close a binary option trade ahead of expiration.

This usually depends on the type of option, and usually it’s only available within a certain timeframe (e.g., available 5 minutes after an option trade opens, up until 5 minutes before an option expiration).

When trading with a binary option broker that allows early closure of an option trade, the value of the option tends to move along with the value of the underlying asset.

For example, with a “put” (or “down”) option play, the value of the option contract increases as the market moves below the target (strike) price.

This means that, depending on how far it has moved passed the strike, the closing value of the option may be more than the risk premium paid (but never greater than the agreed maximum payout).

Conversely, if the underlying market moved higher, further out-of-the-money, the value of the option contract decreases and the option buyer would be returned much less than the premium paid if he/she closed early.

Of course, in both cases, the broker commission is factored into the payout of an option trade when closed early.

So before you decide to jump head first into trading binary options, make sure you do your research and find out what your broker’s payout rates and conditions are!

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  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
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  • Binomo
    Binomo

    2nd place! Good choice!

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