Money management is extremely crucial to succeed in any form of investment in the financial markets and binary option trading is not an exception to that rule. Successful traders are leaders in money management. A trader with a well-tested strategy can perform in a poor manner because of lack of money management skills. On the other hand, a trader with an average strategy can perform in a splendid manner with good money management skills. The following money management techniques are crucial to succeed in trading:
- Deciding the investment amount per trade:
It is quite normal for a beginner to get excited after a streak of successful trades. However, the problem would begin when the trader gets carried away by the explosive returns made in a short span of time in binary options trading. The trader would no longer remain prudent and start increasing his stakes in each and every trade from then on.
In such circumstances, a single loss making trade can wipe off the entire profit (generated so far) or even the entire capital, in the worst case. Thus, it should be remembered that at no point of time, a trader should risk more than 5% of his investment in binary options trading. So, for example, if a trader begins with a capital of $1000, then at any time, the investments put together in all the trades should not exceed $50. Only then, a trader will be able to keep his morale high, in a case where he faces a series of losses.
- When to go for early exit or double up:
Before entering a trade, a binary options trader should double check whether a buy or sell signal perfectly conforms to the trading rules. After entering a trade, an early exit (if the broker offers such a facility) should be made if there are clear indications of deviation from the forecast. However, the trader should not rush towards an exit decision. It would be better to check for the economic and political news related to the traded asset. If there is any kind of unexpected news, then the early exit facility should be made use of immediately.
Similarly, if the price action is much better or stronger in the direction of the trade and as per the forecast, then the trader should again check for any unexpected economic or political news. If there is any such positive news, then the trader should utilize the double up facility to increase the stake in the trade and receive maximum possible returns.
- When trades should be avoided:
It is always better for a binary options trader to avoid trades before any major economic or geopolitical news announcements. Since trade entries should be backed by rationale rather than luck, it is always better to wait for the announcements before assessing the situation and deciding the trend.
- When to withdraw:
A successful trader should also know to enjoy his profits. Only then trading will be interesting. After all, the primary motive of any trader is to raise the standard of living. Thus, profit withdrawals are a must to keep the confidence high. Professionals always advise a trader to divide the trading profits into three equal parts. The first part should be withdrawn and used for personal pleasures, while the second part should be re-invested. The third part should be kept aside for managing unexpected risks.
A trader who follows the above discussed strategy would be able to take decisions with a balanced state of mind and remain free of stress.