Trading on the financial market involves factors that go beyond technical factors such as graphical analysis. One of the main factors that a trader should take into consideration is risk management in binary options, as it allows you to manage your capital efficiently, helping you to have consistency and longevity in the market.
If you’re new to a broker like IQ Option, the term risk management in binary options is something you’ve probably already heard, and if you haven’t, know that it’s one of the fundamental aspects of being a successful trader.
Professional traders stay in the market for a long time and make money because they study and have a method for trading. One of the main pillars that allows them to do this is to ALWAYS manage risk in binary options!
If you’ve already made a few trades, how, for example, did you set the entry values for each trade?
This is one of the important questions for you to ask yourself and begin to understand the importance of risk management in binary options. Below, we’ll explain its importance, how it works and how you can adopt it to be a consistent and profitable trader.
Define your initial bankroll/capital
The first step to risk management in binary trading is to define your bankroll or initial capital, whichever you prefer to call it. If you don’t already have an account with a broker like IQ Option, make an initial deposit.
As with binary options the fees are low or almost non-existent, you don’t have to worry about making a large initial deposit.
Taking into account your current capital or initial deposit, we recommend making your entries using a fixed amount, equivalent to 1 to 5% of the total amount.
If you still don’t feel very confident, prefer to make trades with the minimum amount allowed by the platform, until you gain confidence in your strategies, and thus start to increase the value of your trades, also boosting your earnings.
Set take profit and take loss targets
Another difference between professional and amateur traders is that they enter a trading day knowing exactly how much they can win and how much they can lose.
Trading is not just about technique, it also has a lot to do with psychological and behavioral aspects of the trader, and risk management in binary options helps the trader with these issues.
Take profit is the act of setting a profit target, at which point you close your trades and also the day.
In binary options risk management, take loss is the opposite of take profit. It consists precisely of setting a loss limit and ending the trading day if it is reached.
What is Take Profit?
Take profit is the act of setting a profit target, at which point you end your trading and also the day.
You may be asking yourself: “But why should I stop just when I’m winning?”
A day of many gains often indicates that you are trading well and that things are going in your favor. However, with this, your self-confidence also tends to grow, and why not take advantage of this good moment to gain even more?
That’s where the problem lies… exaggerated self-confidence can encourage you to make more and more trades and for larger amounts. As a result, you can lose focus on your strategy and start taking losses.
The situation can become very frustrating, which can cause you to lose confidence and time. That’s why professional traders set a take profit and end their trading day when they reach it. Do as they do and go enjoy the day when you hit your target.
What is Stop Loss?
And why should you close a trading day with a loss?
For the same reason we gave for the take profit, again psychological issues, although this time for different reasons.
Having a high proportion of losses in a trading day certainly undermines a trader’s self-confidence and patience. Even more so if they are convinced that their strategy is adequate and that they are following it to the letter.
As the market is not an exact science, losses can happen. With a shaken mentality, there is a tendency to want to recover losses, and this is one of the biggest mistakes a trader can make.
By trying to recover capital while nervous, the chances of making mistakes increase, as does the loss generated by making unsubstantiated trades with larger entry values. So if you’ve reached your daily limit, call it a day and cool off, it will be much easier to recover tomorrow.
Control the number of daily operations
Another important tip for good risk management in binary options is to define and control your daily trades. Trading well is not synonymous with trading a lot; in fact, many successful traders aim to trade less and less.
There are thousands of opportunities on the market every day, so you shouldn’t rush in and try to take advantage of them all, especially if you’re still learning.
At this early stage, taking care of your capital and learning is fundamental. As with Take Profit and Stop Loss, also set a total number of trades per day.
This practice will help you avoid what is known as “overtrading”, which is the act of trading excessively and can also be dangerous for the trader.
Trading in the market requires a great deal of attention and concentration and being overly alert consumes the trader, slowing him down.
Create a risk management spreadsheet for binary options
Finally, although you can also do this in a notebook, do as 99.9% of professional traders do and have a risk management spreadsheet for binary options.
Having this control is essential so that you can visualize your trades and results as a whole. You can also use it to make adjustments as you progress in the market.
Start your risk management spreadsheet for binary options by implementing the tips in this article: start it by defining your initial capital, how much you are going to use for each trade, as well as defining your Take Profit and Stop Loss.
Use the formulas in the program you are using to update this information as you trade and feed it in. If you don’t know anything about spreadsheets, don’t worry, it’s not hard to find a free binary options risk management spreadsheet on the internet.
After reading this article, you can get used to risk management by opening a demo account on the IQ Option platform and getting to know the most interesting trading strategies.
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