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Binary Options Risk Management And Position Sizing

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Risk Management

Risk management is the name of the game when it comes to trading. I don't care if you are trading stocks, indices, options, forex or binary. It doesn't matter. You have to have good, sound money management rules, and you have to stick to them.

Position Sizing

I, for one, am a dedicated disciple of the money management school of thought and can say that there are benefits above and beyond simply trying to protect your account.

For one, it will bring peace of mind; you will not worry about how much you should trade on any given signal, you won't be concerned about losing any one trade or have your hopes pinned on any one win, and in the end, it will help you attain a level of calm that will allow you to view the market as you should: Objectively.

Managing risk in your trading account comes down to position sizing. If you are not familiar with this term, or come to binary from the forex world, position sizing is similar to your draw down. Forex and other spot traders determine a max loss they are prepared to take; this is their account draw down per trade.

Anytime a trade loses the set amount, they get out and go on to the next trade. Because you can't generally sell binary options before expiration, you have to limit the amount of loss you will suffer before you buy your position. This is position sizing.

Trading Binary Options With The Percent Rule

Typical money management is based on the percent rule. The percent rule simply states that each and every trade will be a set percent of your total account size. The percent used is completely up to the trader but is typically within the 3-5% range.

Binary traders can use slightly higher settings, provided they are willing to have losers draw down their accounts a little more. The reason you would want to use a percent, rather than a set dollar amount, is because the percent will grow and shrink with your account.

This ensures that your trade size grows as your balance grows so that your profits grow in tandem with them. Otherwise, when using a set dollar amount, as your account grows, your trade size and returns stay the same size.

I personally use the 3% rule. This means that all my trades are 3% of my account. At $5,000, my trade size is $150. This may sound like a very small trade, but think about this: It’s only one trade, so if I allow myself to have as much as 50% of my entire account invested at one time, I can have up to 16 trades open at any one time. That is a lot.

The key is not to make the same trade twice; that would be the same as trading double your risk. You can trade more than one signal on a given asset. Provided the signals are all valid and your trading system is producing a sufficient win rate, you will make money over time.

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