One area that is often overlooked when it comes to building a solid trading strategy is the area of money management. This area while often neglected, is critical to success. For any trader, including those using binary options devising a suitable money management plan is the cornerstone to both consistency and profits.
With the advent of simpler forms of trading , such as binary options, traders often make the mistake of neglecting their money management. As risk is somewhat predefined on digital contracts, this area often receives scant attention. However it is vital that some form of strategy is put together prior to trading. Not only will it help to control risk, it will actually help to increase long term profitability.
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Binary Options have proved to be popular as they make the process of trading on financial markets much simpler. There is no need to work out profit targets or to identify levels to place a stop loss. Instead all the trader has to think about is when to enter the market and what direction they believe it will move. The term ‘binary’ in the name highlights the two way trade that these contracts offer. The market can either finish higher or lower by the point of expiry.
Fixed Profits and Risks
Contracts in binary options work by paying out a fixed sum at the designated point of expiry. They offer a simple and surprisingly effective way to wager on future price movements with the broker. The fixed profit and loss on each contract makes trading easy. It also means that new traders are able to quickly get themselves set up and ready for trading.
The Lure Of Simple Trading
This simplicity however often lures the trader into undisciplined and risky trading. This is actually contrary to what is needed however, which is a strict discipline and a risk plan by which to trade. The very fact the profit and loss is fixed, means that following a strict and balanced money management plan for binary options is perhaps the most important of your trading. Moreover setting up a plan is actually relatively simple.
Where most traders fail is not in devising a plan. That is the easy part. Allotting a set amount of say, 2-5% of available capital per trade is commonly acknowledged as a sensible amount to place on an individual trading outcome. Even traders who have been in the game a while will be quick to acknowledge this. However the reason that most people while fail when trading is that they won’t stick to this plan.
Why Traders Fail
There are number of reasons why traders are unable to stick to a solid money management plan and manage their risk. Most commonly this is not down to the plan itself. Instead they are influenced by any number of distractions, often the result of emotions that are triggered through trading. Both fear and greed can see an otherwise disciplined trader ignore their strategy.
For these reasons it is critically important to devise a money management plan. Even though binary options may look simple on the surface, you won’t get very far without a means of managing your risk. You need to observe it and most importantly, stick to.