To properly make money trading any financial product, a proper strategy will need to be formulated. Without proper strategy usage, a trader will likely simply lose his funds before any real traction is made in either understanding the market or long term growth of the bank roll. Trading is tricky because it requires the trader to actually develop skills in two distinct and not always congruent areas of interest; money management and market predictive skills. The problem is, most traders invest most of their time into the latter by poring over huge numbers of charts and graphs and this instead of learning how to properly maintain control over one’s balance.
Understanding both is obviously key but understanding the math behind the market will help any trader better utilize his bank roll. When trading binary options, this is likely to be a similar strategy to those trading forex pairs. Problem is, in forex, the trade is leveraged and it’s possible to lose an entire bank roll in 1 simple trade without the trader knowing it. With binary options, this task is thus simplified by virtue of the fact that the trade size is the total investment. In forex, trading even a $50 trade can lead to thousands in losses. In binary options, investing $100 on one trade can only lead to a loss of this amount and not any more.
As such, knowing that each trade can lose only the invested amount, then implementing a simple strategy should keep you out of trouble. Best practices demand a trader use no more than 2-4% of his entire bank roll on any one single trade. This makes sense for many reason. For starters, 2%, for example, will allow the trader to lose 50 straight trades before losing the entire amount. Now if we think about the math of the markets and assume that our trading will likely center on 50:50 between winning and losing trades, then that’s a little like tossing a coin 50 times and it landing on heads each time.
However, most traders opt for a different strategy and it often gets the in trouble. Many traders simply choose an account size of a very low amount relative to the trade size. So if the minimum trade size is say $25, then having a $100 would make no sense for the above strategy cause in just 4 trades, things can go wrong. And tossing a coin 4 times, can conceivably hit heads 4 straight times. You wouldn’t be that surprised. So in other words, choosing a strategy that isn’t funded smartly can lead to you losing when trading binary options or any financial instrument for that matter.
With binary options, this isn’t very difficult to follow. Just keep it simple and close to a 2% ratio. This will give you time to recover from bad runs and give you time to also learn from your mistakes