Written by: Sophie May
Understanding how to properly and sensibly manage your capital is a vital step in learning to become a successful binary options trader. Whether you are experienced or not, whether you have hundreds or millions of dollars in your account, there are always going to be trades that you lose.
While you can’t control the financial markets, you can control your response.
Loses present no difficulty if you are expecting them and remain calm, but they can be detrimental to traders who risk too much on a single trade, panic, then open other trades without thinking clearly in an attempt to compensate. Instead, by being forward thinking, you can limit any losing streaks, and so maximize your successes and profits.
A good money management strategy is therefore essential for effective, long-term, capital growth.
1. Passive Money Management Plan
This strategy is the lower risk of the two, although in the short-term your returns may also be lower. Passive traders follow the 5/15 rule. This means that you can invest up to 5% of your account on any single trade and up to 15% of your account in a whole trading session.
For example, trader Joe has $5,000 in his account. He should invest a maximum of $250 (5% of 5,000) in any one trade and a maximum of $750 (15% of 5,000) in an entire trading session.
This is the preferred strategy of most traders. It offers guidelines and upper limits so that you can remain in control of your trading and insure against loses. This is the best way to preserve and grow your capital over time.
2. Aggressive Money Management Plan
This is a higher risk strategy, with the advantage of offering high returns more quickly. Aggressive traders follow the 10/30 rule. This means that you can invest up to 10% of your account on any single trade and up to 30% of your account in a whole trading session.
For example, trader Joe has $20,000 in his account. He should invest a maximum of $2,000 (10% of 20,000) in any one trade and a maximum of $6,000 (30% of 20,000) in an entire trading session.
This strategy is not recommended for the inexperienced or those with small accounts. It offers increased maneuvering room for the professionals with large account balances, and suggests the absolute maximum amount that you should ever be willing to invest.