The risks of binary options trading can be quite high. While you can never lose more than you have in account, the binary trading risks are that you can lose everything in account quite quickly if you don’t follow proper binary options risk management. It is perhaps this aspect of binary options trading, options trading risk management, which is the most important to success, and one that beginners are the most likely to disregard.
Greed and fear are the two main risks of binary options. These two binary trading risks lead to more people losing their money than anything else. When traders get greedy and try to make too much money too fast, and when they are scared of losing money are the two riskiest times in a trader’s career. Identifying these options trading risks and keeping your emotions under control is one of the pillars of successful trading.
Firstly, you need to practice good binary options risk strategy. Don’t choose to trade assets that you know nothing about, simply because they provide the highest returns. That is giving into greed, and can cause you to lose far more money than you stand to gain. Conversely, don’t avoid making trades just because you are scared that you might not be correct and lose all of the money you put into the trade. This fear of options trading risk will paralyse you, and cause you to make incorrect decisions.
The risk of binary options can be assuaged by following good risk management techniques, the most important of which is that you should never have more than 5% of your total investment portfolio at risk at any one time. While this 5% can be spread across multiple trades, you should never go any higher so that you can afford to absorb the binary options risk of a losing streak.
Secondly, you may want to look at employing the Kelly Criterion as a way of dealing with the risks of options trading. This states that you should multiply the potential profit percentage (let’s say 85% for a particular trade) by the amount of times you make that trade successfully (let’s say 65%). 0.85×0.65 equals 0.55%. So for this trade you should risk no more than half a percentage of your total account balance. So if you adhere to the rule of 5% at risk at once, you can make roughly 10 of those trades per day.
These are of course rough guidelines for how to successfully manage binary options risks. Most importantly you need to keep yourself emotionally detached from trading no matter what happens. Don’t ever succumb to the greed of a ‘sure-thing’ and put all your money down, and if you have proper options trading risk management you should never have the fear of losing too much money.