Binary options trading can be fun and exciting, and potentially even profitable, depending on how well you trade. For some traders, binary options replaces casino gambling as a form of entertainment, while for others, it’s a serious activity which can lead to a successful online income. Either way, if you want to stay in the game, you have to learn how to manage your money. Successful binary options trading hinges not only on having a great trading system and the discipline to follow through, but also being smart about how much you invest on each trade and how much you are willing to lose. There are several aspects to successful money management. First, though, it’s important for you to understand how your wins and losses are calculated in binary options trading.
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Win/Loss Payout Percentages
Binary options trades are often referred to as “all or nothing” trades, but that is not entirely accurate. Each broker sets their own rules for win and loss payouts, but in general, most brokers will pay you a larger percentage when you win and return a smaller percentage of your investment when you lose. There is always a gap between the two which plays in favor of the broker’s profits and not yours. There may be some variation between the different options the broker offers. For a highly risky 60 Second trade (read more about those here), you might be offered as much as 500% on a winning investment, but the average trade on the same website might pay out closer to 75%.
These percentages are essential to your binary options money management plan. As an example, say that your broker offers you an average payout of 75% on winning trades, and an average out-of-money reward of 10% on trades you lose. This means that for each winning trade you win 75% of the money you invested. So if you invested $10 on a trade and won, you’d receive $7.50 in profits. If you lose that trade, however, your refund would be only 10% of what you invested, so in this case you’d lose $9 and get back $1.
Think for a moment about how that would impact you over time. Your potential losses always are larger than your potential winnings. This sets up an advantage for the broker which works against you. You can think of this like a high house edge. That is why you need to be cautious managing your bankroll in binary options trading, just as you would be at a casino. And that is true even if you have a great trading system; no system works without responsible bankroll rules.
To calculate the risk on any given trade, you need to first know what the out-of-money reward is on that trade. Notice that I said the out-of-money reward, not the payout percentage. That is important too, but not as important as what you can potentially lose. Risk, after all, implies what you may lose, not what you may gain, so when you calculate how much you can afford to risk on a trade, it should be based on your fears and not on your hopes.
How much should you invest on your trades? It is easiest to think in percentages first, and then translate those to dollar amounts. That way you are not as easily tempted to trade more money than you should. Two and a half to five percent is a good range to use. A lot of traders will want to trade more than that, especially those who have small accounts. While risking it big can be exciting, think how disappointed you’d be if you wagered half your account on a trade, lost it, and within a couple more trades, you suddenly found yourself out $200 with no money left for trading.
There is one more dimension to the question, “How much should I invest?” You not only need to consider how much of your trading account to invest on each trade, but also what percentage of your personal bank account you should dedicate to your trading. This is a highly subjective question, but it pays to be responsible. Binary options trading funds should be considered to be money you can afford to lose. In other words, money you would spend on entertainment for example, not on rent or food or other absolute necessities. You should not invest someone else’s money, and if you have others who depend on you, like family members, you should be accountable to those people at all times for your binary trading losses.
Starting Small is part of being responsible.
Extra Features: Double Up, Rollover, and Early Close
Some brokers offer additional trading features which help you to control the amount of money you have invested in a trade once you have already entered into that trade. Using these features can help you to improve your outcomes, but only if you learn to use them effectively. Backtesting and demo testing are helpful in determining whether you should use these features or not. Test.Test.Test again. Learn why it’s important here.
Double Up and Rollover
- Both of these features allow you to increase your potential profits. Doubling up is exactly what you would expect from the name of the feature. When you double up your trade, you double up your investment amount, meaning you can lose or win twice as much. With rollover, you allow a trade to stay in effect for a longer period than the original expiry time. When would you use these two features? If you are in a trade you feel very confident about, and you expect that the market will continue to move in your favor, you might increase your potential winnings using these tools.
- Never lose sight of the fact that these two features can quickly turn against you, however, which is why you should test them. If you always use double up or rollover at the exact wrong times, which is very easy to do if you haven’t tested, you will double your losses but not your gains. If you learn to identify the perfect opportunities, however, you can make more money when you’re already in a good, stable, predictable situation.
- Early close allows you to buy out of a trade you’re in the middle of before it expires. There are a couple of reasons you might want to do this. One is that a trade has turned against you, and you are pretty sure things are only getting worse by the second. In this situation, exiting early will not spare you from a loss, but it can lessen the blow. The other reason you would consider closing out early is because you are winning or breaking even, but have reason to expect your trade will soon against you. In other words, the reason for being in the trade no longer exists. Getting out can spare you from a loss, and may help you lock in a limited profit, which certainly better than no profit.
- You may think that the early closure feature sounds a bit “safer” than doubling up or rolling over. While it is indeed a more conservative tool, used improperly it can still end up costing you a lot of money, and can even make an otherwise profitable trading system unworkable. Consider what would happen if you used the early closure feature at all the wrong times and none of the right times. You would end up cutting yourself out of potential winning trades. Eventually this could even reflect as an overall loss in your account. Testing allows you to learn to use this feature profitably.
Adding or Removing Funds From Your Account
Another thing to think about is how often you will add or remove money from your account and for what purposes. Check out your broker’s rules on withdrawals. Brokers will often limit how many times you can withdraw from your binary options account each month and will set a minimum amount for withdrawals. Certain methods also may incur additional fees. Removing money from your account at the wrong times or in the wrong amounts can end up costing you.
There is another way in which it can cost you as well. Do you find yourself regularly removing money from your trading account to pay your bills? If so, you probably have more money invested in binary options than you can actually afford, and you should be trading with a smaller account. If possible, avoid removing money from your trading account on a regular basis. Every time you withdraw funds, the percentage of your account which you can invest on your trades refers to a smaller amount of money.
You cannot hope to build up your account if you are continuously withdrawing. Don’t feel like you have enough money to trade yet? Binary options trading allows you to start out with $200. While you will not make a lot of money trading 2.5% of that, you can look at it as an extended practice period with minimal risk while you work on pulling together more trading funds.
Find a broker that allows minimum deposit here.