However, everyone can reduce the risk of loss and even control it. All you have to do is apply the basic rules of risk management in binary options trading.
Do you know what these rules are? Find out now.
Predictable risk in binary options
One of the main advantages of binary trading is that the trader knows how much they stand to lose in the event of an unsuccessful trade. That’s the predictable risk in binary options.
And this is a really useful feature. But don’t think that you already know all the risks of this type of trading. Yes, you know how much you stand to lose if you make a mistake, but you can’t be sure whether the next trade will be successful or incur a loss.
You therefore need to take into account both the predictable risk in binary options and the unpredictable one. In the former, everything is simple and clear, while in the latter it is more difficult. So it’s important to be patient.
Why are risk-free operations a myth?
The price of a particular asset changes constantly. The order book hardly ever stands still. And even if you learn how to analyze it, you won’t be able to avoid eventually making unsuccessful trades, because there is no single method of analysis that predicts price behavior with 100% accuracy.
Technical and fundamental analysis are based on assumptions. In the first case, the trader relies on the past performance of the asset, i.e. he trades on hunches, while almost the same happens with fundamental analysis. Yes, we can try to predict how the news will affect the market, but these are also guesses, albeit based on logical arguments and serious analytical work.
And another reason why achieving totally predictable risk in binary options is impossible is the constant occurrence of unforeseen fundamental data. For example, if you trade shares, at any moment news may come out that could increase or decrease their value. No matter how accurate your technical analysis is, it’s impossible to predict all unforeseen events and news in advance.
In currency trading, the same situation can happen. We’ve already given a similar example in one of our previous articles, but let’s recap because it will prove once and for all that there is no risk-free way of trading.
Let’s say that a natural disaster strikes the country and the result is critical destruction, where the damage amounts to millions or even billions of dollars. Is it possible to predict this event using technical analysis? Could the economic calendar have indicated this event in advance?
The answer is: no! This cannot be predicted.
It is also possible to assess such a situation in different ways. At first glance, it may seem that the disaster will have a negative impact on the country’s economy, as the damage is simply enormous. But there is another possibility, as the incident could stimulate the economy, where new jobs are created to repair the damage.
So, in binary options, risks are normal, although many would like them not to be, but it’s impossible. So don’t create illusions about break-even trading. The best thing you can do is control your trades. To do this, read the next section of the article carefully and don’t forget it.
How not to go broke? Basic rules of risk management
Let’s take a look at which risk management methods can be applied to binary options, as well as finding out what they mean:
- Avoid risky operations. Forget about very risky investments. The value of a trade should not exceed 5% of the balance, better still within the 1-3% range. This is the main rule of risk management in binary options, which you should write down on a sheet of paper and hang on your wall;
- Cut out mistakes. That’s diversification and trade prevention. How is your trading method being applied? Review it and give up strategies that don’t bring decent results;
- Reserve formation. We’ve just explained that the maximum investment in an option should be up to 5% of the deposit. But if you want to further reduce the chances of losing your investment, make a larger deposit and only use 1% of the amount invested per trade;
- Transfer of responsibility. This trading method can be implemented in several ways. The first is to copy the trades of other traders. The second is to entrust your money to a robot. However, neither the first nor the second option reduces the risks of binary options, in some cases even increasing them.
Above we have described the basic rules of risk management. But there is one more factor that creates a lot of difficulty. When trading, you can’t give in to your emotions. Otherwise, everything we’ve said will be for nothing.
After all, what do we mean when we talk about the need to control emotions? Roughly speaking, you should react coolly to moments of successful or unsuccessful trading. And if you’re overwhelmed by emotions, it’s best to step away from the trading floor to save money.
If you feel you can’t cope with your emotions and your trading results are deteriorating, do the following:
- After a series of several unsuccessful trades, close the platform. Don’t try to recover losses. Just close it;
- Find the cause of the failures and then eliminate it. Perhaps the strategy didn’t work or the operation was carried out during a press conference. Don’t think that this is trivial bad luck. There is always a reason;
- Once you’ve corrected your mistakes, make a few trades on a demo account. If you manage to change the situation for the better, you can resume real trading.
The rules of risk management in binary options are easy to understand. But following them is always harder than it looks, especially if you’re a beginner, a gambler or an emotional player. If you are, be strict with yourself.
Understand that the risks in binary options are high and, if you don’t keep them on a tight leash, the result may not be what you expected.
