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Risk management in binary options trading

As a risk management rule adopted by professional traders, there should be no more than 5% of your account size on the market at any given time. It means quite simply that if you have a $1,000 binary options account, you shouldn’t have more than $50 in the market at any given time.

Trading anything more than this amount is extremely risky, especially because binary options is an “all-or-nothing” market.

The binary options market is not like forex, where you can reduce your losses at an early phase if you see that you probably have a poor trade. When it comes to binary options, if your broker is not the type to return 15% of your invested capital in trading, or if you don’t have the option to sell the contract before expiration (variable options), then you are out of luck if the trading goes wrong.

Thus, you have to make sure that you use the only risk controls available to you properly.

So, how do you calculate risk in binary options trading?

 

Calculating your risk in binary options is very easy. For every $1,000 in your account, you can only afford to put up $50 at a time. So, your first step is to find and register with a broker that will allow you to place trades within your acceptable risk appetite.

Binary options brokers have made this very easy. The reason is that a trader presses the button to buy a contract, that trader gets to see the purchase price of that contract right away.

He cannot lose more than he spent by buying a binary options contract, so for each purchased contract and the potential profit amount of risk is known. It allows the trader to do everything necessary to keep the risk within acceptable limits.

This whole point is to protect your account from the devastating consequences of losing too much capital in a single trade. Imagine a situation where a trader with a $5,000 account tries to get a $2,000 payout and invests $1,000 in trading. If that trade fails, he has lost 20% of his balance in one trading!

You may think this is too much, but you would be surprised at how often retail traders give in to the destructive emotion of greed and try to enrich themselves in this way. Don’t fall prey to your immediate desires.

 

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