Good money management is the key to long-term success with binary options. While a trading strategy can help you to win a high percentage of your trades, money management will make sure that the trades that you lose do not ruin you. Without good money management, even the best trading strategy is useless.
Binary options are a numbers game, and a money management strategy helps you to be on the right side of this game.
To understand this statement, consider that a good trading strategy helps you to win about 70 percent of your trades. This means, that you will lose about 30 percent of your trades. Assuming an average of 5 trades a day and 20 trading days a month, you would make about 100 trades a months, of which you will lose about 30 trades.
By the sheer force of the odds, some of these losses will come in a row. Over time, you will eventually encounter longer loosing streaks of sometimes 5, 10, or even 15 trades. While you will also encounter much longer winning streaks that more than make up for the losing streak, you need a plan to survive the losing streaks.
Many traders fail because they manage their money too careless to survive inevitable losing streaks. They get carried away during winning streaks, investing such a big part of their overall account balance per trade that even losing 5 trades in a row will ruin them.
Other traders invest a fixed amount on every single trade. Sooner or later, these traders, too, will encounter a losing streak that costs them most of their money. Left with a reduced bankroll, they reduce their fixed investment until they hit the next losing streak and are forced to reduce their investment again. Step by step, they ruin themselves.
A good money management can help you to avoid these disasters.
A good money management strategy is designed to help you do two things:
Gradually grow your money when you are winning trades.
Survive losing trades without going broker.
To accomplish both goals, a good money management needs to be flexible. Instead of investing a fixed amount, good money management means to always invest a certain percentage per trade. Which percentage exactly depends on the risk your strategy involves.
Riskier strategies will create longer losing streaks, which is why you should invest a smaller percentage per trade.
Strategies with low risk will create shorter losing streaks, which is why you can afford to invest a higher percentage per trade.
To get a good estimate, you can use a rule of thumb: Divide 100 by the number of losing trades your strategy will create over 100 trades. If you will on average lose 30 of 100 trades, the result would be 3.3, which means that you should invest about 3 to 4 percent of your overall account balance per trade. You can adjust this amount over time, but it will be a good place to start.
This might seem like a small value, and you might think that you will never lose 30 trades in a row, but even with the best strategy, you will eventually lose 10 trades in a row or 20 trades in a row with just 2 or 3 winning trades in between. To survive such streaks, you need to adjust your investment according to your bankroll. Good money management will help you to survive losing streaks and make a quick comeback once your luck starts to turn.
With bad money management, however, even the best trading strategy can’t save you. A good money management system is essential to secure your success.
New traders or experienced traders who try a new strategy might be unable to predict how much trades they will lose with their trading strategy. There are two options to deal with this problem:
If you do not know how much of your trades you will win with your strategy, start with an investment of 2 percent per trade. With this amount, you are on the safe side and can increase your investment once you have gathered data on your strategy.
Try your strategy with a demo account first. This is the safest option, as it allows you to get solid data on your strategy before investing real money. To find a binary options broker that offers a demo account, check our broker reviews or our list of the best brokers that offer a demo account.