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How does binary options risk management relate to forex draw-downs.

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We know that binary options trading comes to us as an off-shoot of the forex world. It is a simplified method of trading blah blah blah that still comes with a lot of risk. To me there are two kinds of risk; trade risk and money risk. Trade risk is managed through your trading system, money risk is managed by limiting the amount of money you risk on each trade.

For those of you coming to use from the forex world you probably manage your money risk by draw-downs because these are leveraged spot positions that are open to unlimited risk. This means that once open you can lose, or win, an unlimited amount which is why you limit yourself to a draw-down. A draw-down being the amount you let yourself lose on each trade and controlled by stop-losses, usually set to a percentage of the total account.

It's A Little Different For Binary Traders

Risk management is a little different for binary options and one of the reasons why they are so much more attractive as a trading vehicle. There is no “draw-down” per se because the options are a fixed price, the amount you choose to trade. When you make a trade that amount is taken from your account and no more. You limit your risk by setting the “position size” of the option or the amount you are trading.

This relates directly to forex draw-downs and account risk management because of the percent rules. Most pro traders use a percent rule to set their draw-downs or positions sizes. A 1% rule means that each trade can lose up to 1% of your total account value before you close it. 1% is very low and appropriate for those with very large accounts, or very low risk tolerance. A more appropriate position size for binary options would be in the range of 3-8% depending on how good a trader you are and how much risk you like to take on.

Here links to an article and another forum posting here on Binary Options Post relating to money and risk management.

Can you apply money management to Martingale

binary options risk management and position sizing

Comments

Michael Zane's picture

The Purpose Of The Percent Rule

The purpose of the percent rule is to set an amount that your account is able to withstand without a catastrophic loss. This amount is set by percentage of the total account so that the actual dollar amount will shrink and grow with your account. When you lose, the amount you trade gets smaller protects your account, when you win the amount you trade gets bigger so you maximize your profit potential.

Michael Zane
Michael Zane's picture

Why Use Money Management To Control Binary Options Risk?

If you don't know let me spell it out for you.... so you don't lose your ass to the market. If you don't control your money risk it won't matter how good a trader you are because it only takes one trade to lose it all. It is also impossible to predict when you will or won't have a losing streak. Let's face it, every trader has losing streaks, it can't be helped. If you don't control the amount you lose on each trade an unexpected string of losses could wipe you out. Risk management through money management means limiting the amount of expected loss to an amount your account can withstand without preventing you from trading

Michael Zane
jaffa's picture

That makes some sense, risk management and money management are very important at any level, regardless the experienced or newbie trader is.

jaffa