So what is money management? Money management represents a set of investment rules or discipline. And it is absolutely essential that money management becomes an important aspect of any of your binary options trading strategies. Advanced money management skills allow you to properly decide on the level of conviction and amount you are ready to allocate to a trade. If you don’t follow strict money management rules, chances are that you will lose all the funds in your trading account without learning anything.
Money management is a trading discipline
As we repeated it multiple times on the website, you cannot win on every trade. Even the best traders on the planet don’t make money on every trade. They just have a bulletproof money management discipline. It means that they will likely lose a little amount of money on many trades but compensate with huge profits on few trades. Unexperienced traders are always tempted to let their losing position worsen in the hope that the market will bounce, and to cut their winning position too early to cash in the achieved (albeit lower) profit made. This is because trading involves both money and emotions. The financial markets world is a stressful environment and money management rules are designed to deter you from following your emotions blindly. It is the discipline that will prevent you from trying to go all in to make up for your losses after a string of losing trades.
Practical rules of Money Management for binary options
There exist no fixed Money Management rules. These rules will depend on your trading profile, your risk aversion, your available capital, the financial instrument you use… Nevertheless, it is possible to draw general guidelines to improve your money management when trading binary options.
For example, you should have a fixed number of trades a day you are willing to execute. Be it 1, 2, 5 or ten, you need to have a number in mind that you must not exceed. Most of the time, traders are tempted to reopen a new trade after a loss. A fixed number of trades can help you avoid bigger losses through trades that are only driven by emotions.
Number of trades and trade sizes
As explained below, you should set yourself a limit of trades per day to avoid over-trading. You also need to set yourself a maximum amount per trade that you should not exceed. This maximum trade size can be determined nominally ($10, $25…) or as a percentage of your capital (10% of your capital, 15% of your capital…). We personally prefer to determine it terms of your available capital as the limit remains proportionally the same whatever the amount you have on your trading account. Another risk with trading is to disproportionately increase your maximum trade size if you start to make money. A fixed percentage of your capital will help you keep the same risk exposure compared to your available capital. You should thus look for the binary options brokers that are proposing the lowest minimum trade size to be able to split your transactions if you only have as small available capital.
Another technique a binary option trader can use is to alter the bet size based on the payout and volatility. For example, short term binary options (30 or 60 seconds) would require a smaller bet size as the payout is smaller and the volatility is greater than a longer term option.
Combined money management rules
Once you have determined your money management rules, you can combine them to follow your own discipline. You will then be able to focus on other important aspects of trading such as asset specific trends or advanced strategies. Your money management only determines the path you should follow and help you keep a cold hearted relationship with your trading. Find below two examples of combined money management rules:
- Example rule 1:
Risk 5% per trade – $200 account, risk $10 per trade
Only 2 trades per day
- Example rule 2:
Risk 2% of account per trade – $1000 account, risk $20 per trade
Stop trading once 5 losses made on same day (10% loss)
Stop trading once 3 wins made on the same day
Eventually, don’t worry too much about the losses you incur, especially in the beginning. That’s when you’re still learning the ropes and making mistakes. Remember, you don’t need to be correct with your price predictions to be a profitable trader. The key is to learn from your mistakes. This is how you will build your own money management discipline.