Three rules for a good money management strategy

Above all, your success as a trader will depend on your money management strategy. Even the best trading strategy cannot save you from the occasional losing streak. Whether you survive these losing streaks, and how well you survive them will depend on your money management. Since many traders have never heard of money management and don’t know how to create a good money management system, this article will provide you with three easy to follow rules for a successful money management.

1. Never invest more than 50 percent of your total capital

After periods of losing streaks you need a cushion to fall back on. Limiting your invested capital to 50 percent of your total capital will you provide with enough money to finance your comeback.

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2. Never invest more than 15 percent of your total capital in one market

Even though you spread your investment over many different assets, as long as these assets are all in the same market, the success of your investment might depend on the same factors. Therefore, you could lose a lot of money if one factor goes wrong.

For example, let us imagine that Mercedes Benz is presenting their annual report today. In anticipation of good numbers, Mercedes Benz’s stock has developed a bullish trend. Most likely, this will influence all other German car makers, too. Since Audi and BMW are in the same market as Mercedes, traders will conclude that if Mercedes is doing well, these companies will soon present good reports themselves. Therefore, the stocks of BMW and Audi are likely to develop bullish trends as well.

Even though Audi and BMW are independent companies, they are in the same market as Mercedes. Therefore, the future price movement of their stock will largely depend on the annual report presented by Mercedes this day. If that report fails to satisfy the market’s lofty expectation, the stocks of Audi and BMW will suffer just as much as the stock of Mercedes.

Therefore, if you bought a High option for Mercedes, you should be careful with investing in BMW and Audi as well. Their fortunes are intertwined. By investing too much of your capital in one market you dramatically increase the risk of losing a big part of your money with one unfortunate development.

3. Never invest more than 5 percent of your total capital in one trade

Trading binary options is a numbers game. You will win a certain percentage of your trades, and you will lose a certain percentage. By this logic, losing trades is inevitable. Eventually, losing many trades in a row is just as inevitable. Therefore, you have to make sure not to lose all your money, before you can start making money.

If you invest too much money in a single trade, surviving a losing streak will be impossible. Depending on your strategy, you could lose as much as 10, 20, or 30 trades in a row or with only a few winning trades between them. To survive such a period of bad luck you need to invest a small, fixed percentage of your total capital per trade. This way, you will automatically reduce your investment after losing trades, and automatically increase your investment after winning trades. Still, the risk will remain the same.

Of course, a strategy like this will limit your winning potential. You should, however, never forget that being a successful trader of binary options over a long period of time requires you to take a systematic approach to trading, far beyond the usual “get rich fast” promises uttered by some advertisers.