Limit, Reduce Or Control Risk In Binary Options

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How Much to Risk on Each Binary Options Trade

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Binary options are an all-or-nothing option type where you risk a certain amount of capital, and you lose it or make a fixed return based on whether the price of the underlying asset is above or below (depending on which you pick) a specific price at a specific time. If you are right, you receive the prescribed payout. If you are wrong, the capital you wagered is lost.

That definition has expanded though. Back in 2009, the US-based Nadex exchange created options that allow traders to buy or sell an option at any time up until expiry. This creates a wide range of scenarios, as a trader can exit for less than the full loss or full profit.

No matter which binary options you trade—Nadex options or traditional binary options—”position size” is important. Your position size is how much you risk on a single trade. How much you risk shouldn’t be random, nor based on how convinced you are a specific trade will work out in your favor. View position size as a formula, and use it for every trade.

How much to risk on each binary options trade

How much you risk on a binary option trade should be a small percentage of your overall trading capital. How much you want to risk is up to you, but risking more 5% of your capital isn’t recommended. Professional traders typically risk 1% or less of their capital.

If you have a $1000 account, keep risk to $10 or $20 (1% or 2%) per binary options trade. Risk 5% ($50 in this case) is the absolute maximum and isn’t recommended. When you start trading you’ll want to make as much money as you can, as quickly as you can. Making some quick cash is why many people attempt trading. Avoid this impulse though. Risking a lot on each trade is more likely to empty your trading account than create a windfall. Most new traders don’t have a trading method they tested and practiced, and therefore have no idea if they are a good trader or not. Better to risk small amounts of capital on each binary options trade, to test your trading methods and hone your skill, and then gradually increase the amount you risk to 2% once consistent.

How to Determine Risk on a Binary Options Trade

Binary options have a maximum fixed risk. This lets you know in advance how much you could lose if the asset (called the “underlying,” which the binary option is based on) doesn’t do what you expect. For binary options, the risk is the amount you wager on each trade.

If wager $10 on a binary option trade, your maximum loss is $10. Some brokers offer a rebate on losing trades; 10% for example. If this is the case, your maximum is only $9, calculated as:

maximum loss + rebate = trade risk

-$10 + ($10 x 10%) = -$10 + $1 = -$9

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Nadex binary options don’t have rebates on losing trades, but if you buy an option at 50, and it drops to 30, you can sell it for a partial loss, instead of waiting for it to drop to 0 (or move above 50, which would produce a profit). Ultimately though, at expiry, the Nadex option will be worth 100 or 0. Therefore, when determining your risk you must assume the worst case scenario.

Nadex binary options trade between 100 and 0. With each digit representing a $1 profit or loss. If you buy one option at 30 and it drops to 0, you have lost $30. If you sell one option at 50 and it goes to 100, you have lost $50. You can trade multiple contracts to increase the amount you make or lose. This is a tutorial on position size, not Nadex options.

Determining Position Size on a Binary Options Trade

You know how much you are will risking risk (percentage of account, converted to a dollar amount) and you know how much money you could lose in a binary options trade. Now, tie the two together to calculate the exact amount of money you can wager on a trade.

If you have a $3500 account, and you’re risking 2% per trade, the maximum you want to lose is $70. If the broker offers no rebate on losing trades (this is the norm), then only risk up to $70 on the trade.

In the “Amount” box on the binary options trading platform, input $70 (in this case). That means you are willing to risk $70 on the trade.

If the broker offers a rebate, for example, 10%, then you can increase your position size by the amount of the rebate. in this case 10%. Because of the rebate, you can risk $77 on a trade ($70 plus 10%). If you lose you will receive a $7 rebate, so your maximum loss is still only $70, which is in line with your 2% risk parameter.

For Nadex binary options you have an extra step because you can purchase an option at any price between 0 and 100, which affects how much you could lose. Assume you have a $5500 account and are willing to risk 2% per trade. That means you can lose up to $110 per trade and still be within your risk parameter. Don’t take a trade where you could lose more than $110.

Assume you want to trade a gold binary options contract, because you believe the price of gold will rise today. You can buy the option at 50. If you are right, and gold is higher than the strike price (price level of gold that determines if you are right or wrong) when the option expires, the option will be valued at 100. You make a $50 profit on each contract you buy. If gold is below the strike price when the option expires, its value is 0, and you lose $50 on each contract.

Therefore, your risk is $50 for each contract you trade. You are allowed to lose up to $110 per trade, so you can buy two contracts at $50. If you lose on the trade you will lose 2 x $50 = $100. This is below the $110 allowed. You can’t buy three contracts though because that exposes you to a $150 loss. A $150 loss is more than your established risk tolerance.

Considerations for Real World Trading

When you’re starting out, calculate your ideal position size for each trade. Even when actively day trading there is time before each trade to quickly determine how much to wager based on your percentage risk tolerance and the trade you are considering. This repetition will serve you well, and when you are losing money the dollar amount you can risk will drop (as the account value drops) and when you are winning the dollar amount you can risk will increase (as the account value increases). Note that your percentage at risk doesn’t change, but as your account value fluctuates the dollar amount that percentage represents does change.

As your account stabilizes you may trade the same amount on every trade, regardless of the fluctuations in your account. For example, the balance in my trading accounts stays the same. I withdraw profits at the end of each month, and any drops in the balance are usually quickly remedied by a few winning trades. Therefore, there isn’t the need to make tiny changes to my position size on every trade. If your account value stays around $5000 (because of profit withdrawals, or profits and losses balance each other out), and you risk 2% per trade, then risk $100 per trade. Don’t reduce or increase this amount by a few dollars every time your account fluctuates slightly above or below $5000.

The point of only risking 1% or 2% of the account is that you can lose 100 or 50 trades in a row before you are cleaned out. That’s a good level of safety. if you are using a researched, tested and practiced strategy.

Not constantly changing your position size for every minor fluctuation in account value also allows you to make quick trading decisions in fast moving market conditions. If you know you can risk $100 on a trade, you can just act, instead of calculating if you can actually risk $105 or only $95. In the long-run, it won’t matter too much.

Once you are creating a good income for yourself, and you are happy with your account size (withdrawing profits over that amount) then it is quite likely you will trade the same position all the time, and it will rarely change.

Final World on How Much to Risk on a Binary Options Trade

First, establish the percentage of your trading capital you are willing to risk on a single trade. Ideally, this should be 1% or 2%, with the absolute maximum being 5% (not recommended). For a normal binary options trade, this dollar amount gives you your maximum position size. For a Nadex option, also consider your maximum risk on the trade, and then calculate how many contracts you can take to stay within your risk limit.

In the beginning, calculate your position size on every trade. It’s a good skill to have. As your account balance stabilizes—as you improve as a trader—you may opt to use the same position size all the time, regardless of the minor fluctuations in account value from day to day.

Is Binary Options Trading Safe?

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The general answer is yes when you consider the following points:

  1. It is a regulated financial instrument in the EU and many parts of the world.
  2. The risks are known and, to some extent, predictable since it’s a zero-sum forecast.
  3. There are demo trials before you put in an investment.
  4. Major binary options offer reliable customer support.
  5. The terms on deposits and withdrawals are spelled out clearly.

Binary options have attracted traders of all experience levels—from beginners to professionals—who are in a quest for diversifying their investments. This type of trading has grown to a respected and credible practice over the years. Despite this, one of the concerns of many, especially when it comes to where they put their money, is the question: is binary options trading safe?

In this article, we’ll be shedding light on the answer to this often-asked question about binary options trading to help you make an informed decision. We’ll also provide some guidelines for choosing the best platform for binary options trading and discuss factors that impact trading risk.

Is Binary Options Trading Safe Table of Contents

Binary options trading: A regulated financial instrument

After its exponential growth since 2008 and its reclassification into a financial instrument in 2020, binary options trading gained mass credibility. During that time, it experienced a surge in people searching for the term “binary options” in Google Trends, which surpassed the frequency of another related famous term “forex trading” according to Futures Mag. One of the reasons behind this increase in interest is the regulations established for this financial vehicle.

Binary options trading is a regulated product by EU jurisdictions such as CySec (Cyprus Securities and Exchange Commission) and MFSA (Malta Financial Services Authority), among others. Furthermore, regulators continue to tighten directives and mandatories. Financial Times reports on the recent actions taken by FCA (Financial Conduct Authority) to protect consumers by examining firms that may be offering binary options illegally.

Hence, if your definition of safety in the question “Is binary options trading safe?” is whether it’s regulated and legal, then yes, it is; as long as you choose the right binary options brokers (which we’ll get into later). If your concern is whether it’s risk-free, then, of course, any trading—not just binary options—entails risk. Every venture, business, and investment accompanies a calculated risk as there’s no guarantee of solid future performance.

Acknowledging risks and trading responsibly are some of the primary ways to safely approach trading. With that in mind, let’s delve deeper into answering whether binary options trading is safe in terms of its methods, platforms, and trading mechanics.

Is Binary Options Trading Safe?

Binary options are generally considered a safe investment. However, as with all money instruments, it pays to do your research to guarantee you are dealing with a legitimate provider. Here are the main reasons why this trading avenue can be one of the safest options for you.

Simple, Easy-to-understand Premise

Probably one of the most desired advantages of binary options trading that attracts many traders is its simplicity. It has a simple premise that gives you only two (thus, the term “binary”) options and outcomes. Based on your informed guess as per various factors and patterns, you’ll choose and predict the asset’s movement if it will be true at a specific point in time. It’s a straightforward “yes or no” proposition, where you’ll get a fixed percentage of your investment if you’re successful or none if you’re unsuccessful. That’s why it’s also called an asset-or-nothing option.

With binary options, traders don’t have to purchase or own an asset. Assets may be commodities (such as crude oil, silver, and gold), currencies, and stock indices, among others. With the unprecedented growth of cryptocurrencies and over 17 million Bitcoins in circulation today, some brokers also allow cryptocurrency trading. IQ Option, for instance, supports not only Bitcoin but also Ethereum, Ripple, and Litecoin.

Getting started is also easy. Traders only have to choose a broker, register an account, and immediately start trading. While being knowledgeable about this type of trade is still vital, you’re not required to have as much extensive knowledge as other types such as forex trading. With that, even beginners can work their way up and choose among different types of binary options.

There’s an option for everyone where they’re comfortable to make investments. They can opt for a simple call and put options or double no-touch binary options and vanilla options or exotic options, among others. In this way, a trader understands, based on level of knowledge and skills, how it works and avoids trading blindly. Meanwhile, more seasoned traders have the opportunity to choose more complex options where they get higher returns with bigger risks and reward paydays.

Known and Limited risk

When you trade binary options, you’re aware right up front how much you are risking and how much your potential profit will be on its outcome. You’re only risking the amount you choose, no matter how large or small it is. Additionally, there’s no risk of leverage, which means you won’t lose more than the amount you risked in the trade, unlike some other types. This way, you’re prepared for incurring potential losses as long as you choose to invest an amount that’s within your means. This prevents you from losing more than what you can afford.

It’s also an affordable way to trade online as you’re not required to trade large amounts. Depending on your chosen broker, you can trade from as low as $1. Some even give you a demo account that you can play around with to help you practice and get the hang of binary options trading before investing your real money. Our top binary options brokers let you trade from $5 to $10 as a minimum amount. It’s safe in a way that you’re not forced to lose any amount right from the get-go.

High and fast returns

When you invest, one of your goals is to get high returns. Due to binary options’ higher risk nature, its returns are also typically higher. It yields a return that amounts to an average of around 60-90%, depending on your broker. Its fast turnover rate also ensures a quick payout. Varying from different assets, the expiry times can range from a few minutes or less than an hour (sometimes even seconds) up to a few weeks. If you opt for daily binary options traders, you can trade multiple times a day for a potentially higher profit.

This gives you access to a variety of assets that are available to trade, which is an excellent way to diversify risks and control the amount of risk at a given time. If you’re successful, you can immediately see the amount added to your account. Depending on your chosen platform, you can also instantly withdraw your money. Meanwhile, if you’re unsuccessful, some brokers offer a small return based on how much you invested. For instance, you won’t lose 100% of your investment, but you’ll still get around 5-15% of it back.

Choosing A Binary Options Broker

Is binary options trading safe? As mentioned in the previous sections, it is safe as long as you’re a responsible trader. After all, there’s a difference between taking risks, which is necessary for any venture, and being risky, which is blindly being too ambitious in your trades. One of the most important and fundamental ways to reduce risks is choosing the right binary options brokers. Since it’s the platform where you’ll be doing your trading, you must check the following:

  1. Regulation. Your broker must, first and foremost, be licensed and regulated. This ensures it adheres to the guidelines of the regulatory authority or financial regulator. Since regulators pay close attention to their business practices and ensure fairness, you can assure the broker is trustworthy and transparent.
  2. Trading software. Ease of use, speed of execution, and a well-designed interface are essential as it plays a vital role in your trading endeavors. Mobile trading is also worth considering so you can trade anywhere, anytime.
  3. Demo/trial account. This is an important feature to test the software and get acquainted with it, especially for novice traders. Also, ensure it’s using real live market data.
  4. Customer support. A broker with reliable customer support that’s available in various languages and support channels, such as live chat, ticket messages, phone, and email, is important as it also shows their credibility. Some broker platforms may also offer features of customer support software for added convenience.
  5. Deposits and withdrawals. Checking a broker whose minimum deposit and withdrawal amounts you are comfortable with is crucial. Also, check if they offer convenient processes and quick timeframes, especially when it comes to the withdrawal process.

A good example of a binary options broker that includes the factors mentioned is IQ Option. It’s licensed and regulated by CySec, which guarantees its compliance with relevant regulations and jurisdictions. It has a top-notch online trading platform that offers both ease-of-use and functionality to veterans and novice traders. Newcomers can make use of a broad range of educational materials such as tutorials, webinars, e-books, and FAQ sections about the platform and binary options trading.

Binary Options Risk: How to Minimize It

“How to manage your binary options risk – Learn how to reduce risks while trading binary options”

Behind every great trading strategy for binary option there is a good risk management plan. In reality, how you manage your binary options risk is one of the most important aspects of trading, nowadays. In fact, it is a common mistake for traders to overlook the risk that they are taking in their pursuit of return. However, such neglect will almost inevitably lead to substantial loss further down the road.

Here are some factors which you should consider when putting together your financial plan.

Diversify Your Trading

In order to increase the profit ratios, you should always look for ways in which you can maximize your profits, and it is equally important to minimize your binary options risk trading. A simple way to that is to diversify trading across different assets. It is a very easy work with binary options as you can trade on a range of different asset indexes from a single broker account.

Split Your Strategies

In addition, in order to diversify your trading across markets, you will reduce your binary options risk by diversifying your trading strategies. The contracts/bonds used in binary options lend themselves to trade in several different approaches and you should make use of this opportunity to lower your risks in binary options trading. One simple approach you could use is to make use of both a short-term and longer-term trading strategy to determine the right asset and strategy for you.

Structure Trading

Any trading that you perform should be well-structured and should rely upon good reasoned analysis and research. You should properly prepare for each position that you can take on your trading account and go through potential binary options risk to limit these as much as possible before you even place your trade. Keep an eye on events that could tip the probability of success against you when trading. Additionally, try making a rule to avoid having open positions when the risks in binary options look high. Because, there is no harm in sitting out of the market once in a while.

Confidence Not Arrogance

There is a fine line between showing self-confidence in your trading decisions and arrogance. Although overconfidence is not a desirable trait in financial matters and is unlikely to get you very far when it comes to trading with binary options. On the other hand you can also suffer from a lack of confidence while trading . The tentative trader may well put themselves at bigger risk as they lack the conviction needed to take the strong decisions. You need to carry out your analysis thoroughly and you will gain the self-confidence to overcome market risks.

Superior money management

This is the technique that separates the newbie traders from the excellent traders. It simply involves covering the spread while trading with currencies in binary options. The trader should try to be profitable each time by ensuring that some money is earned despite the shift in exchange rates. In truth, that is what makes binary options trading different from other traditional form of trading. In this strategy the profits to be made are previously known prior the execution of the trade and whether the prices go up/down, the overall gain should always be the same.

The right trade type

It is the most important fact in reducing the chances of incurring binary options risk, and it involves adopting the right type of trade at all cases. In binary options, certain types of trade are well suited with specific assets. For example, an asset with an alleviated rate of volatility will be more appropriate with range or boundary contracts. In this case, all that the traders needs to do, is to develop some little experience as well as some observation skills, and then they will be able to link every asset with a precise type of trade.

Self-control

It is a very important aspect that every trader should have. In fact, self-control will help traders to manage risks in binary options if they learn to set a target for a day earning, and stop instantly they hit their target without being compelled to trade further. In most circumstances, traders incur losses because they are usually pushed by greed to make more money and that is why traders should exercise a certain degree of self-control to avoid incurring heavy losses.

Education

Binary trading and guesswork are parallel and will never flow together. It is the reason why every Forex/binary trader is encouraged to get the right education when it comes to this form of financial investment. All traders must be well informed on how Forex or binary options trade is carried out, as well as how they can conduct the trade successfully without incurring losses. Education helps traders to make decisions together with avoiding guesswork and being safe from incurring heavy losses.

However, if you want a kick start of your trading life, you need to educate yourself about trading. You need to avoid losses and begin to risk free trading with binary options signals or trading tools. 10trade is a great broker where you will get all of the features to reduce your risks binary options. Not only they will provide you the necessary trading tools and signals, but also they will teach you in their education center. They always dedicated to educate the above mentioned criteria to their clients, so that they can be aware of the risk minimization techniques very well.

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Best Binary Options Brokers 2020:
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  • BINOMO
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    Only For Experienced Traders!

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