A trader should risk only a predefined percentage of his/her overall capital in every trade. This is a basic concept in trading no matter what asset class (forex, stocks, futures or binary options) you prefer.
Especially in the beginning, when you have limited experience on the market and the asset you trade, take into consideration that many trades will be lost. So you must find a simple money/risk management that will prevent your account from high cumulative capital loss even if you lose several trades in a row.
A simple money management rule in binary options trading is to split your capital into 60 equal parts. If you have $5000 then every part will be $83 and this must be the maximum amount that you should risk in every trade (it represents 1.7% of the present capital). Readjust the maximum loss to 1.7% of your cash every time your balance is changing significantly. This is an acceptable loss even if it happens many times in a row and of course you can risk much less than this, especially in the beginning when you are learning how to trade. The optimal way to start trading is with a demo account before risking real money.
By strictly applying the above risk management you have to lose more than 60 times in a row to lose 100% of your capital. It is common sense to stop trading entirely or at least temporarily if you find yourself losing a big amount, say 30%, before the loss becomes irreversible. The least you can do in this case is to stop trading and think what is wrong and try to be a better trader, again on a demo account, before you start risking real money.
Remember also that we are trading only with some of our savings and not all of them and we don’t need this money for our life essentials. Preferably, the best way to start is with a small amount. Add more only if you are profitable. Never add money to a losing account because this will lead to additional and bigger losses as long as you haven’t found the cause of the bad trades.
In order to be profitable in binary options trading you should behave as a real trader and not as a gambler. This means real time charts, technical analysis and good understanding of the market and its fundamentals.
- Start with a demo account
- Start real trading with a small amount
- Risk maximum 1.7% of your present capital in every trade
- Stop trading if you accumulate big losses before you lose 100%
- Be a real trader not a gambler