The difference between trading Binary Options successfully and losing all your money is not so much the trading strategy you follow but your money management. This article will explain you what money management is, and how you can find a good money management strategy for you.
Why use a money management strategy?
Depending on which strategy you apply to Binary Options and how well you apply it, you will win a certain percentage of your trades. For example, let’s assume that you have traded a strategy for some time, and have won 70% percent of your trades with it. This means, if you apply this strategy for 100 trades, you can expect to win 70 trades with it. On the other hand, though, this means you will also lose 30 of your trades. Some of these losses will come in a row. It is only a matter of time until you will lose as much as 10, 15, or 20 trades in row, even if you apply your trading strategy perfectly.
Long droughts like this are the main reason many traders fail. They don’t use a money management system, and either invest a random or a fixed amount for each trade. For example, let’s imagine a trader that opened an account with $1,000. He invests $100 per trade since this seems him a secure enough amount to allow a few losing trades.
What happens, however, if this trader hits a losing streak after a few winning trades? His balance will soon shrink to $500 or less. He will get scared and reduce the fixed amount he invests. The process will repeat itself until he has lost all his money.
What is a good money management strategy?
A good money management strategy helps you to survive a losing streak. To do that, it needs to be flexible. In other words, you shouldn’t invest a random or a fixed amount per trade, but a fixed percentage of your starting balance.
The exact percentage should depend on the risk your trading strategy holds. The riskier your strategy, the less you should invest per trade. A good rule of thumb is to divide 100 by the lost trades your strategy will create for 100 trades. For example, when you’re strategy wins you 70% of your trades, it will generate 30 losing trades for 100 trades. This means you should not bet more than 3% per trade (100% / 30 = 3.33%). If you want to be safe, you can bet even less. Of course, you can adapt the exact amount to your preferences, but this will give you a good place to start.
Now, you might think that you will never have 30 losing trades in a row. You will, however, have 10 losing trades in a row eventually, and 20 losing trades with only a few winning trades in between. By investing only 3 percent of your money you make sure that you still have enough money left to not only survive these drawbacks, but make a quick comeback once your luck starts to turn.
If you manage your money badly, even the best Binary Options strategy won’t help you survive these drawbacks. A good money management system is essential to secure your success.
How to know what to expect
To manage your money well, you need to anticipate which risks your strategy holds. As a new trader, or as a seasoned trader that is trying a new strategy, you cannot know what to expect, and therefore cannot make quality predictions. To avoid this trap, it is absolutely essential that you try new strategies and trading in general with a demo account before you invest real money. We have generated a list with the best brokers that offer a demo account.
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