Most of all, risk management in options trading can be thought of as the small steps you must take when trading. These steps help you keep track of your finances and keep you from losing a lot of money. Risk management is important whether you are a professional trader, a trader with a retail account, or a day trader. This is because you need to know how much you can afford to lose.
It is a key part of successful active trading but is often overlooked. Even a trader making a lot of money can lose it all with just one or two bad trades if they don’t have a good risk management plan.
Determining Risk on Trade
In a binary option, the amount you risk is always the same. For example, if you put $10 into binary options trading, you can only lose a maximum of $10. But if you win, you could make more money.
Some brokers offer a rebate on trades that don’t work out. This means that if you put in $10, the most you could lose is $9. The following formula can be used to explain it.
Maximum loss + Rebate = Trade Risk
At the moment, losing trades on Nadex Binary Options do not get a rebate, but there is an alternative to losing everything. For example, if you buy an option on Nadex for $70 and it falls to $50, you can sell it for a partial loss. So, even if it drops to 0, you won’t lose it all.
But when the Nadex option runs out, it will be worth either $100 or $0. So, when figuring out your risk, you must consider all the following situations:
Strategies for Risk Management
Compared to other trading methods, binary options trading makes many things easier to handle, which is good if you are just starting out as a trader. But that doesn’t mean you aren’t in danger.
Proper Trade Size
If you talk to brokers about trading binary options, you might notice that the minimum trade size differs from one broker to the next.
However, when this is combined with the amount required to fund the account and the maximum risk that can be taken on each deal, you can get an idea of how much exposure the account can handle to meet acceptable risk management standards. Most experts agree that you shouldn’t put more than 3% of your account at risk at once.
You can increase your investment as you get better at binary options and start to make more money. When you are just starting out, there is no way to use a “minimum loss” strategy. So, it’s best to only risk what you can afford to lose without too much regret. After gaining experience and money, you can take more chances to get better results.
Trade Psychology
Trading is a psychological event because it involves money, which comes from our efforts to make a living. If you lose a trade, you want to get your money back as soon as possible.
But you can’t be sure that you will win. There is always a 50% chance that you will lose. If you lose this trade, you will lose a lot of money. Because of this, there needs to be a link between trading psychology and risk management.
This is how the psychology of binary options trading works. When you see that you lost a certain amount in your last trade, you might want to invest more to compensate for it. However, you should use your head instead of your heart and choose to trade less than you did before.
There are two good things about this. In the first case, if you lose the money, you won’t feel too bad because the amount is so small. In the second case, winning the money will give you the confidence to trade again.
Understand Underlying Risks
If you’re new to trading binary options, you might wonder why you have an equal chance of winning and losing money in each trade. But this is not how things are. If you do your homework, you’ll know there are more ways to lose in binary options than to win. In a traditional up or down trade, the payout is just over 100%. You might get 90% of the amount if you’re very lucky. But most traders only get 70% to 80% of the money they make.
If you lose the trade, on the other hand, you will lose all of your money. There’s no way to make up for it. Even if you use the loss return function, the payout for a successful deal will be less, but you will get some of your money back if the deal fails.
As a result, risk management will involve looking at the data in more detail and knowing how to use it to make the most money.
