Money Management On Trading Of Binary Options
Any trader with some experience knows that productive work in financial markets is being done only by three components: the trading system of adequate reliability, strict personal discipline and efficient money management.
While the first two factors seem to be all clear, then the third causes some difficulties.
So, today we will review it. In this situation, we would notice that the optimal organization of money management and complete awareness of work will be useful not only for beginners, but also by many traders who consider themselves as quite experienced.
What is the money management?
At first, we need to realize that a little strange term as “money management” implies just an optimal and balanced strategy in financial organization, giving the most possible profit.
It is interesting, that despite the necessity of the access to the funds, and that it is a fundamental factor in successful trading, focusing on money management is often ommitted, most of traders perceive it as something already understood.
It often happens when even experienced traders make a few successful,yet low-profit deals, and then go for larger, risky ones, loosing all the previously gained profits.
Only then, they begin rather chaotic search of information about proper management of assets.
Upon this situation, the understanding comes and they realize that success is not determined by quick gamble earnings, it requires a long-term discipline for any steady income.
If to put all the information together, it becomes very clear that the money management is a science, teaching the effective management of investments for future profitable trading in the long term.
The rules of money management
The successful trades are ensured by the implementation of only one recommendation, that it is not necessary to trade transactions in excess of five percent of your deposit.
This means, that if, for example, on your deposit of five hundred dollars, the transactions should be not exceeding twenty-five dollars, the interest rate is fixed between ten and twenty-five dollars even, regardless of profitability or unprofitability of a single operation.
You shouldn’t ignore this recommendation in any way, especially the beginners.
Of course, with your life experience as you go, the interest rate can be gradually increased, first to 6, and later, to 10 percents, however, even with such restrictions expanding the range is strongly not recommended, it is the way to protect yourself from losses caused by your emotions.
In some cases, it will be very difficult to follow, because there are deals that are so attractive in their apparent obviousness, but it is necessary to overcome yourself, even under extremely tempting conditions. As one old saying tells, when you move slower, you will get farer.
The basic principles of money management
You must not only know, but also observe a few specific features, it can help you to create your personal effective money management policy. We can show the key principles and you should try to focus on those:
1) Sober trader.
Probably the main thing that distinguishes an experienced trader from the beginners, is the ability to assess the risk and prospect soberly, without undue fervor. Of course, sometimes emotional decisions can bring good dividends, but most of the transactions carried out spontaneously are tend to fail.
Trading is not a lottery, it is a serious matter, that requires, for success, exploring many nuances of the market, a very deep analysis of its specificity and continuous strategy improvement. You should work in clear mind and you will be able to ensure profitability.
2) Calculate the volume of the deposit.
Only the correct calculation of funds to be used in the transactions, thus allowing the trader to correctly implement each particular deal.
It is extremely important not to go beyond your personal set up range.
In addition, it is not a good idea to make a deposit with your last savings. Every experienced player in the options market must have a certain amount of preserved money, giving a chance even after the absolute loss of the initial deposit to to return back to the market.
3) Trade with the trend.
Every successful trader knows that trend is the direction of the price change for a certain period of time.
All trends are divided into three groups, it is descending (decreasing prices), the ascending (respectively the increase) and flat (side shift).
If you want to open the transaction in accordance with the trend, the probability of profit high enough and far exceeds the potential risk.
4) The correct balance of risk and profit.
Your understanding of the importance of the ratio between the benefit and risk in the transaction comes with life experience. An experienced trader often intuitively regulates this ratio with the risk limit and the amount that the trader can lose without pain.
5) Planning for profitability.
When you start the business of binary options, you need to choose a right broker, to give you more reliability and better profit margins.
That is, the percent is charged to the trader upon positive completion of the transaction, it is better to consider the largest.
6) Minimization of losses.
To explain this factor is quite simple. There are several rules, known as the Stop Trade. We can list just three of them, the most basic ones :
- On every trading day, it is recommended to start with the definition of the maximum number of deals that are planned to be opened on each trading session.
- You should clearly define within the limit number of loss-making operations before entering the market and after this, you can leave the auction.
- You should set a specific amount of profit, which is needed to close the session.
7) Diversification of risks.
This rule can be seen as a step involving the spread of a large volume into several transactions.
For example, if you have three hundred dollars, allocated to work for one session, much more effective and safer is to make six deals for the fifty dollars than for the entire amount.
Additionally, it will be much safer if every contract would be placed at different times or will be used with different tools.
8) Trade their system.
The organized, systematic work is more efficient in any type of business.
So, the trader gradually develops its own strategy, based on personal experience and preferences, observing actions of other traders, trend indicators and many other data.
Of course, there are commonly accepted strategies developed by recognized experts of the market.
However, many strategies mostly used by the beginners, more experienced traders gradually supplement these strategies, and sometimes they can completely transform it.
9) Is there a difference between money management and capital management?
Both of these concepts are recognized on the Russian-speaking Internet, so many people perceive them as two different terms for the same process.
Despite the fact that these concepts are very similar, it should be noted that money management is a concept that is better attributed to the management of risk in open deals. To definition of the concept of money management can be quite short. The main rule of this concept is the recommendation to diversify and hedge risks, and also you “shouldn’t put all your eggs in one basket.”
The money management is the art, which serves as an excellent tool to the effective trading strategies and helps to raise the level of personal discipline and financial culture.
It is better to learn to manage risks than to allow risks to manage yourself !
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