How to Mitigate Risk Trading Binary Options

By Charlotte Walker posted 02-18-2014 05:20 AM


Binary, By Definition, Means Only Two Possible Outcomes: Win it All or Lose it All

It's like flipping a coin, heads or tails or the one in a billion "edge" landing. There isn't much you can do to manage your risk in this situation except to limit the amount at stake, know that your opponent can't or won't cheat or refrain from taking the chance in the first place. Trading binary options is a similar endeavor. Once you buy or sell your options, you can't back out, you're in it till the end (expiration date and time). The time to manage your risk is Before you lay your money down.

There Are Ways to Reduce Risk, But it Takes Discipline

If you intend to try trading binaries a couple of times just for the fun of it, put down the minimum amount of money required by the trading platform. If, after a few trades, you're out of money in your account, simply walk away and consider the money lost as the cost of entertainment for the evening. Alternately, if you're doing okay, you're a few bucks ahead and you want to keep going, use common sense money management plans to limit your risk.

4 Ways to Lower Your Binary Options Trading Risk

  1. Don't bite off more than you can chew. You know how much money you can afford to lose if things go the wrong way for you. When you're caught up in the frenetic atmosphere of fast trading, it's easy to let things get out of hand, and before you know it, you're broke.

  2. Set a firm percentage limit on how much of your account you put at risk on any single trade or combination of trades. Say you can afford to lose $1000 this Year trading binary options and you're willing to risk it all for the chance of making what could be substantial profits. Set yourself a limit of 5 percent per trade or $50.00 based on your account balance. If your account grows to $2000, you can risk $100 per trade or if your account drops to $800, your limit is $40.

  3. Research. Research. Research. Before you just arbitrarily throw your money on a guess or gut feeling, find out as much as you can about the market you're in, the trends of the overall market and the specific instrument, the price movement characteristics of the underlying asset. Look at as much history as you can find on patterns in price fluctuations, if the asset has a history of rising or falling at certain times of day or days of the week. Check news reports to see how the underlying reacts to certain types of news events, any recent reports that could affect the price, etc.

  4. Know your broker. Before you sign up with a Binary Broker, do your due diligence in checking out the broker's business practices. Google up as many reviews as you can find and get in on forums that discuss binary brokers. Check with the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) about any complaints or lawsuits against the broker.