We’ve talked a bit about risk management already, but we haven’t really defined what it means. Risk management is basically the act of minimizing your losses so you can maximize your earnings. Simple enough, right? Risk management is a whole sub-school of thought within the world of finance, but it’s something that is mainly ignored in the field of binary options. It shouldn’t be this way, mainly because binary options are so highly variable. However, the current state of binary trading doesn’t address this issue, and many would-be traders find themselves losing a good deal of money right off the bat because they weren’t prepared for the risk that they would be taking on. Many of these traders could have been extremely successful, too, which makes this an even bigger problem within the industry right now. A type of trading that is being marketed for smaller traders ends up hurting them because they didn’t have the right information to be profitable.
With Forex trading, you can automatically put in stop-loss measures if the price moves against you. You can’t do this in binary options because of very nature of expiration times. You need some other method of protecting yourself, whether it be diversifying the types of assets you trade, taking out various expiries on a single asset, or varying your risked amount per trade depending on the edge that you have calculated for yourself. Any and all of these are excellent risk management tools, and they will greatly benefit you once you start adopting them into your typical trading routine.
Risk management might sound pretty boring. Whether you like it or not, it is an important part of your ability as a trader. A good stock or Forex analyst can still be a losing binary options trader. If you have experience here, you probably already know this. If an asset is moving steadily in a certain direction, you can still take out the appropriately corresponding trade and still be wrong. This happens to even the very best traders out there. You need to know how to handle this, and you need to know how to emerge from a situation like this as a stronger trader, even if you are a slightly poorer one. Losing one trade doesn’t make you a bad trader, after all. Everybody, even the very best professionals out there, have losing trades. They just do their best to minimize them, and then they take steps to maximize their winning trades. Experience will help you to fine tune this skill, but in the meantime, risk management will be your best friend.
With binary options, you automatically have basic math working against you in a very small, but very powerful way. You have a 50/50 shot of being correct, but you are not profiting in a 50/50 manner. When you lose, you lose 100 percent of what you risked. If this were truly a 50/50 venture, then you would expect to double your money on a correct trade. But you don’t, you only will gain about 80 percent, if you’re lucky. Eventually, this discrepancy will catch up to you, and if you don’t have a good strategy in place, you will get nickeled and dimed until your account is gone. So, you need to either be a stellar trade selector, or you need to have a good risk management system in place. Even better is having both on your side. When paired together, you can take a tiny profit rate and make it a great one, or you can even go from being a marginally losing trader to a profitable one. This is why protecting yourself is so important. It increases your profit rate regardless of where you fall on the spectrum when it comes to your trading ability.