Binary options trading, while relatively simplistic in nature, can also be a bit difficult to understand for the beginner. One of the biggest problems that beginner binary options traders face when getting started is learning how to manage their investment dollars to avoid large losses and ensure that money is available for trading on highly profitable days. Today, we'll talk about two money management strategies that binary options traders often employ and how they can help you while you trade.
Are You Modest Or Aggressive When Trading
Before we get into the money management strategies, it's important that you figure out just what type of trader you are. If you are a modest trader, your goal is to make money in the market. However, in the process, you are always keeping an eye on risk. After all, you're not necessarily comfortable with overwhelming amounts of risk. If you're an aggressive trader, you want to make as much money as possible regardless of the amount of risk you have to take on in order to do it. Here are a couple of ways to manage your money when trading depending on whether you are modest or aggressive.
Modest Traders Should Use The 5/15 Rule
If you are a more passive trader, the best way to manage your money while trading is by taking advantage of the 5/15 rule. This rule allows you to take full advantage of the market without exposing yourself to too much risk in the process. Under this rule, the idea is to use no more than 5% of your total investment funds on a single trade and no more than 15% of your total investment funds on all trades combined.
5/15 Rule Example
Let's say that you have $2,500 in total investment funds. Under the 5/15 rule, you would use no more than 5% of the total on a single trade. So, in this case, your max spend on a single trade would be $125. Also, under this rule, you would want to have no more than 15% of your total funds in active trades at any given time. So, given the $2,500 in total investment funds, you would want to make sure that you have no more than $375 in total active trades at any given time. However, it is OK to spread the $375 total over more than 3 trades. Let's say you wanted to make 10 total investments, you could do all of them at $37.50 per trade.
Aggressive Traders Should Use The 10/30 Rule
If you are a more aggressive trader and you would rather make more money, even if it meant taking on more risk, the 10/30 rule is just for you. The 10/30 rule works just like the 5/15 rule. Instead of having only 5% of your total investment funds as the maximum for any given trade, you would increase the total to 10%. Also, under the 10/30 rule, you would never use more than 30% of your total investment funds among all active trades.
10/30 Rule Example
Given the rule above, let's say that you have $2,500 in total trading funds. Under the 10/30 rule, you would never use more than $250 on a single trade. Also, you would never have more than $750 tied up in trades at any given time.
The 5/15 and 10/30 rules are the most commonly used ways to manage money by binary options traders. While in a way, it may feel like these rules limit your gains, the reality is that they guarantee that even if you have an absolutely horrible day in the market, you will have money to make trades the next day!