Risk management in binary options trading + tips inside

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Top Binary Options Broker 2020!
    Perfect For Beginners and Middle-Leveled Traders!
    Free Education How To Trade!
    Free Demo Account!
    Big Sign-up Bonus!

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

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What is binary option trading?

What is binary option trading?

Binary option trading is a type of business that offers two options – either the price of a particular asset goes up or down, and you have to estimate which direction the price runs in a given time period.

It is a relatively simple method of betting on whether binary options trading will be a definitive result or not. The name ‘binary’ (meaning ‘two’) indicates the fact that you have to choose from just two scenarios – yes or no

Binary Option Broker

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In financial business, it usually happens whether the price of an asset will be more or less than a certain level at a given time.

The most common type of binary option is a digital option, sometimes breaks into ‘up / down’ or ‘call / put’ options.
With a simple call / put option, if you think the price of the underlying asset will be more or less than the strike price, then you buy a ‘call’ option. If you think that at the time of expiration the price will be less than the strike price, then you buy a ‘put’ option.
If you are right, the option is ‘in money’ and pays a certain amount of compensation.

This compensation is usually money, but some contracts may have the amount of the underlying asset.
If you are wrong, then this is ‘out of money’ and you do not get anything.
Because of this, binary options are sometimes called ‘all-end-nothing options’.

Attractions of Binary Options Trading

Because you have only two possible results to consider, binary options trading is considered to be simpler than many other types of financial trading.

Generally, you need to decide which direction in which direction you think that the value of the underlying asset will increase.

Unlike other forms of financial trading, where your potential profit or loss is also determined by the size of a price movement, it does not matter to the binary options trader, above or above the strike price agreed upon when the option ends. How far have gone . Along with binary options, a winning business always produces a single payment.

Because of this, you have a clear picture of your risk-reward ratio before entering the business.

This is in contrast to traditional options where profits and disadvantages can be infinite.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Top Binary Options Broker 2020!
    Perfect For Beginners and Middle-Leveled Traders!
    Free Education How To Trade!
    Free Demo Account!
    Big Sign-up Bonus!

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

With binary options, therefore, you do not have to sit on your trading terminal, are looking eagerly – once you do your business, you do not need to check until the contract is terminated. You do not even have to worry about applying a complex risk management tool like stop loss.

Binary options are flexible, brokers are usually offered contracts for various types of underlying assets – from foreign currency or commodities to company shares or index like FTSE or S & P 500.

Contracts can last from 30 seconds to several months, depending on your broker’s offer. This means that you can tailor your business to areas of your expertise or trading style.

If you are an experienced trader in other markets, such as foreign currency or shares, then you can apply some of the skills you have already developed.

For example, both fundamental and technical analysis can be used to help you create a view on future value movements.

Binary Option Broker

Risks of binary options trading

Is Binary Trading Gambling?

There has been a vibrant debate over whether a binary option constitutes trading gambling for a long time or not. Binary options brokers argue that this is not a gamble, it suggests that the payment includes third parties (meaning that this is not the only customer against the home), as well as brokers do not take a commission for a business Which ends “attract.”

But these are Fringe arguments. Many still argue that the basic format of making a prediction and losing or making money on it is worthy of the game of chance. The interesting question becomes whether this interpretation extends into all stock and asset trading.

Risks accompanying beginner in binary options trading

Risks of binary options — the first thing that every beginner trader should foresee. Building your own system of risk management in binary options by its importance is not inferior to the correct choice of broker or trading system. In case of improper assessment of the risks, the deposit is lost in just a few minutes and the blame for this lies solely on the trader. What risks may await novice traders, how to minimize them and how to build your own system of risk management, read more.

Types of risks in binary options

The use of risky strategies (example — “Ladder”) is one of the most common causes of the “drain” of the deposit. In an effort to earn more and in a short time, novice traders don’t care about testing, use of risk indicators, and after the first failure become disappointed and hang labels on binary trade. Binary options trading is a profession that you need to master more than one month. Though we can not calculate all the risks in binary options trading, but to minimize them. It is the search for an optimal balance between potential risks and earnings and is one of the main tasks.

Trading risks

These are the risks of binary options that accompany the trader throughout his trading:

  • discrepancy of forecast according to the news the fact. Even positive news may be perceived by the market negatively, if the result was worse than expected. Often the market at a time of fundamental bursts shows a greater volatility and only professionals are able to make profit on it;
  • informational force majeure. Strike, act of terrorism, the discovery of new deposits — all this can instantly raise or bring down the trend;
  • wrong interpretation of the signal. Error indicator or lack of clarity of the figure can cause a premature entrance. You may reduce the likelihood of inaccurate signal by the supporting tools, but then the number of entry signals into the market will also be reduced.

To avoid fundamental mistakes is possible only by constant analysis of the market situation, quick response and decisiveness, experience.

Technical risks

These are the risks that arise in the application of technical analysis tools, strategies, platforms:

  • slippage and re-quotes. Entry into the market doesn’t happens at the price at which the trader expects. There are many reasons: problems with the trading platform or the Internet, no company interested in the price level, the delay in processing the order, etc. All these interferes with making money, so the likelihood of slippage should be taken into account when preparing the strategy;
  • price noise. Occurs in short time frames which like to use turbooptions for quick money. Due to the price noise, the signals to enter the market appear inaccurate;
  • failure of the platform. There are no perfect programs. The MT4 should be cleaned periodically with a script or manually from the temporary file, which lead to the braking of the platform. The percentage of profit you can lose only because the platform didn’t work in time;
  • fraud on the part of the broker. Problem with money withdrawal, cancellation of orders, artificially controlling prices etc.

Management of technical risks is an effective way to increase profit. But understanding how to do it correctly, only comes with experience.

Psychological risks

The task of brokers is to increase their profits, and this can be done by honest obtaining trader’s deposit or by increasing its trading volumes. The first way choose “kitchen”, which percentage is large enough:

  • bonuses. A welcome addition to the deposit, but very risky. Free money push to increase the position size, but in case of loss the real money is lost first. And at a time when the trader wants to withdraw the balance of the deposit, he learns that the rest are bonuses that cannot be withdrawn because the conditions of the rendering is not done;
  • leverage. It is more important for Forex, but it is worth mentioning: leverage in several times increases the risk of loss of deposit;
  • opinions of other traders.

It is possible exclude these issues with one simple rule: you replenish a deposit – and earn with it. Do not participate in any promotions and reward programs, do not listen to other traders. The opinion of professionals is important, but there are not many of them, You yourself are a professional, learn from your mistakes and just listen to yourself.

Behavioural risks

I have identified these risks in a separate group because psychological errors can be done by everyone, and behavioral are dependent on psycho-type of a person. There are people for whom making of deals are contraindicated because of their moral and emotional state. Examples:

  • inability to stop in time. The desire to win after a series of losses or Vice versa, the desire to earn more and more after the success, increasing rates — all the way to loss of money. No wonder many brokers impose new traders martingale, but professionals avoid this strategy;
  • excessive emotionality. The perception of lesions close to the heart or the euphoria of victory change the focus of the thinking process. That moment when you need to analyze the market, look for points of entry into the market, think how to earn, the trader is engaged in self-flagellation or relaxes from success. Loss of concentration leads to the reduction of the capital.

To minimize these problems is possible only through self-control. Obviously not worth it to tune in to victory or defeat, you need to try to find the positive side and be approached philosophically. If you do not belong to level-headed people, you have a sense of excitement, you are emotional, trade binary options needs to be very careful. More detailed the behavioral factors I described in an article about gambling.

How to minimize risks in binary options trading

Trade without creating of your own system of risk management is strictly prohibited.

Rules of personal risk management:

  • diversification of assets and strategies. Trade must be conducted on the opposite tools and multiple strategies. The loss of a single asset or strategy will be covered by profits from another. Professional traders work with several brokers, to avoid problems due to differences in quotes or slippage;
  • the rate should be no more than 2% of the deposit. Beginners are recommended one percent, professionals — up to 3-5%;
  • the amount of open trades should not exceed 15-20% of the deposit;
  • before starting the system on a real account test it on a large time interval. If on a real account a series of losing trades exceed the statistical, change the strategy, asset, or take a break;
  • follow economic calendar. At the time of the release of important news the market becomes volatile;

And finally, a few tips on how to make trading less risky:

  • start trading with a demo account. As long as on at least 50 transactions you will not achieve at least 80% of profitable trades, go to real account;
  • it is difficult to warn the fraud on the part of the broker, but possible. Go through the verification immediately before making a deposit, after the first success, try to withdraw your profit, take the time to use bonus programs;
  • do not try to earn more. The profitable binary option — ladder, but the probability of success is minimal. Perform steady trading with simple options minimizing risks. The yield of 20% per annum is a good income. And only then, when you feel like a professional, you can go to the option “Touch” “Pairs” and “Stairs”;
  • any outcome must be analyzed. Profit does not mean the effectiveness of the strategy, you could just get lucky. And remember that in real account the profit will be less than in the “hothouse” conditions for the demo;
  • avoid the trade “for good luck”. Intuition in trading is important, but strategy should be based on more powerful tools;
  • use the hedging strategy, it will help to reduce losses in case of sudden trend reversal;
  • invest in binary options the only money that you can part with virtually no problems. In any case, do not work with borrowed money.

Summary. Risk management — the first thing you need to focus, making the first step in binary options trading. Risk minimization should consist of the following stages:

  • choose a reliable broker and the platform. In long-term strategies VPS server will not be superfluous;
  • create a personalized system of money and risk management;
  • development of methods of testing of a trading system;
  • working on yourself: education composure, judgment, self-confidence, inner peace and comfort;
  • constant self-education and the control over the trade situation.

If you know other options how to reduce risk in binary options, I propose to discuss them in the comments after the article!

Risks and earnings of binary options trading in 2020

The popularity of binary options as an investment tool is growing every year, largely due to the fact that this type of contracts allows you to control your own risks. However, even though the risks in binary trading are fixed, they still exist and will not go anywhere. In this article, we will review the main risks that a trader, who has chosen binary contracts as a specialization, will eventually encounter.

Binary options are a high-yield contract, when trading them you can receive up to 80% of the profit for each transaction. Some brokers can afford to offer higher returns on certain assets, for example, brokers from our top 5 offer up to 90% return of the invested amount. However, with such a high profitability of the tool, one should not forget that there is always the possibility of losing part of the deposit, and without proper analysis of your capital, you can completely drain the entire deposit. It happens quite often with inexperienced novices who are too self-confident in the market and mindlessly spend their savings.

Possible risks in binary trading

Traders’ forums often describe binary contracts as a fairly simple tool, with a low probability of losing their capital. However, in order for this statement to correspond to reality, it is very important for the trader to develop their own scheme for managing their capital and risks. That is, it is necessary to think in advance which part of the capital you plan to invest in each transaction. If the risk management system is properly designed, the trader should clearly plan how they will distribute their funds between not only transactions and assets, but also between brokers.

Another type of risk while trading binary options is the likelihood of making an incorrect prediction. Even with an ideally thought-out strategy that has repeatedly proved its profitability, there is always the possibility that the signal received on it may prove to be unprofitable. A situation like this is possible for any trader, whether it be a novice or an experienced market participant. In such case, a competent risk management system helps minimize the risk. It is recommended to invest no more than 10% of your deposit in one transaction, and even better to not exceed the 5% mark. Decent brokers are laying this rule of money management at the stage of developing trading conditions for their customers. For example, brokers from our top 5 have a minimum initial deposit of $ 100, while the minimum investment in one transaction is $ 5, which is exactly 5% of the total capital.

With experience, a trader will learn to trust their intuition, and with full confidence in the profitability of the transaction will be able to invest not 5, but 10% of their capital. However, for beginners this risk is unjustified. If the confidence that the transaction will bring profit is very small, it is recommended to reduce investments to 3% of the deposit.

The degree of risk while trading binary options can significantly increase depending on the type of the chosen contract. Less risky is the classic option High / Low. Today, most brokers offer them. Reliable trading platforms however, has one more variation of this type of contract – Above / Below. The riskier types of contracts include One touch, where the yield is promised to be 200, and even 400%. With such a potential profit, the risk of losing your own deposit, respectively, also increases.

Risks increase substantially when traders incorrectly choose the underlying asset, for example, if they trade during the release of important news. Many experienced traders do not recommend trading at all during such periods, since these type of publications can greatly affect market fluctuations.

Another kind of risk can be called “trading without proper preparation”. There are a number of newcomers who want to skip learning and testing their own skills on a demo account. Some want to start earning a profit faster, others think that specialized training is an expensive ambition. In fact, the lower the level of knowledge about trading and the principles of market analysis of a trader, the higher the probability that they will lose their deposit and become disappointed in themselves. As per the cost of training, it’s true that registering for a training course can result in an expensive price, therefore it is important to find yourself a broker that can offer a similar training course for a more reasonable price. Reliable brokers provide such training courses for free. In addition, a free demo account with an initial deposit of 1000 virtual dollars will help consolidate the knowledge acquired in practice.

How to reduce the risks in binary trading and make a profit?

Unfortunately, you can not completely avoid the risks while trading binary contracts. However, it is in the trader’s capabilities to minimize them to zero. For this it is enough to follow simple and effective rules:

1. Do not immediately invest all available capital. Even with 100% confidence in the accuracy of the forecast, you should not do this. In trading, greed is a bad adviser, it is important that no matter the circumstances, to not to risk more than 5-10% per transaction.

2. Carefully select your time for work. For those who like trading according to the news, an economic calendar should be an obligatory tool, where you can find out about the date of the release of important publications, which can substantially affect the strategy used by the trader.

3. Carefully select the underlying asset. All of the financial instruments have their own volatility. Before the final choice of an asset, you must first observe the behavior of some of them to know when their volatility begins to grow, and when it decreases. For example, the Euro’s volatility at decreases during the nighttime, and is activated during the day. On the other hand. The situation in Asian and Pacific currencies is the complete opposite.

4. You have to be prepared for real trading. After all, success is achieved not by someone who constantly “gnaws the granite of science”, but someone who was able to apply the knowledge gained in practice. Therefore, it is crucial to study the strategies and develop your own tactics of behavior.

5. Do not rely on luck. Intuition, of course, can develop with traders over time. It is not a talent someone is born with, but the result of concluding thousands of deals. For beginners, market intuition is not inherent because of the lack of experience. Therefore, they need to pay attention specifically to a thorough analysis of the market situation, and not rely on luck.

6. One of the most important aspects of risk reduction is the correct choice of a broker. With a reliable mediator, you can not only preserve, but also increase your capital. Reliable mediators like this are those, whose activities are monitored by the authoritative regulators. Good brokers have a large selection of training materials and analytical tools that will help beginners learn and improve the quality of their forecasts. The broker allows its clients to trade binary options through a huge list of assets. In order to test developed strategies, they provide a free demo account.

Strictly following the rules provided above, will allow even a novice trader to significantly reduce the risk of losing their own investments and their entire deposit as a whole.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Top Binary Options Broker 2020!
    Perfect For Beginners and Middle-Leveled Traders!
    Free Education How To Trade!
    Free Demo Account!
    Big Sign-up Bonus!

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

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