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5 Key Considerations to Deciding How Much to Invest in Binary Options

Risk analyses and affordability are key to all investments and trading. Binary Options trading is no exception

by John Adam

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We all, or most of us, want to become wealthy, or at least wealthier. However, that usually means accepting a level of risk most are not willing to take. Trading financial markets is risky and it takes knowledge and dedication to consistently profit from doing so. Long term success is in large part down to both taking risks and successfully hedging those risks and knowing their limits. Binary options is slightly different to other forms of trading in that a position results in either a huge win or no win at all. However, losses are also limited to your initial stake as there is no leverage involved as with CFDs or spread betting.

The underlying principle is that the capital you put at stake, you either end up losing or realising a fixed profit depending on whether the price of the asset is above or below a specific price at a fixed time. It is a trade based on a combination of instinct and technical ability to read likely market movements. If you are right, you will get the agreed payout, in most cases around 80% profit, and if wrong you will end up losing your invested capital. Binary options can be very profitable. However, like any other trade, you need to learn how much to invest in any particular position. Your position size should not be based on gut feel but adhere to a number of criteria and calculations.

Weigh your income

Based on your income and your monthly expenditures, figure out how much money you can spare to invest. You should set aside a budget for investment that will not impact your ability to meet your overheads in the worst case scenario. Never chase losses when they do occur by throwing more money at new trades if you have already exhausted the budget you have set yourself. Accept that you will inevitably face losses on certain trades and that the bigger picture of longer term profits is what is important, not your weekly or monthly balance.

Risk tolerance is important

Invest based on your risk tolerance. Your base position should always be what you are prepared to lose and not what you hope to profit when weighing up a trade. Am I ready to lose this stake in my attempt to hit a profit? You should also segregate your investment capital by risk profile. Whether you are able to invest £10, 000 or £100 every month, every successful investor breaks their capital down by what they will invest in low, medium and higher risk trades. A good rule of thumb is 60% low risk, 30% medium risk and 10% high risk, though this is again based on an average risk tolerance profile, so you need to come to your own personal strategy. Binary options investment should be part of a diversified investment approach involving other asset classes such as equities and bonds and will form part of your higher risk capital allocation.

Risk management

This is where your asset allocation counts. In case of a market drop, you need to have assets that will reduce losses. If you are heavily exposed to healthy equity markets, hedge this exposure with short positions that will profit if markets fall. This will reduce your profit levels if things go as you expect but provide a valuable safety net and reduce losses if things go the other way.

Never put all your eggs in one basket

Binary Options should not be your only investment asset class and, as already mentioned, form part of your higher risk budget, while the majority of your investment capital is invested in lower risk, lower profit assets such as equities in blue chip companies and bonds. When trading Binary Options, you should also never overly expose yourself to any particular position. A good rule of thumb is to never have more than 20% of the capital in your Binary Options trading account employed on open positions and any one time and never risk more than a maximum of 5% of your capital on any one position.

Choose the right broker

There are many binary options brokers out there. Make sure you extensively research a broker before depositing and trading with them. Luckily, there are many online forums these days, and so finding reliable reviews regarding binary brokers has become quite an easy task.

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