Binary Options Money Management
Binary options money management systems can help produce more consistent results with less risk. Of course, it’s always important to have a plan in place that mirrors your risk tolerance.
This guide explains how to manage money when trading binary options, and includes a list of popular money management methods for beginners.
Download a free copy of DayTrading.com’s Binary Options Money Management Sheet
Money Management In Binary Options Trading
Money management systems balance growth with risk. The best strategies essentially help you manage your financial capital while reducing anxiety and greed. And importantly, the right approach will ensure multiple losses don’t wipe you out of the market.
Binary options are notoriously risky. Whilst payouts can top 95%, the binary nature of positions means that traders can lose significant capital if trades go against them. As a result, it’s important to have a plan to limit losses and keep you in the trading game.
The Best Money Management Strategies
The Percent Rule
Many career investors consider the percent rule the best strategy to limit losses. The approach is also simple, making it a good option for beginners.
Essentially, binary options traders limit the capital they invest in each trade to a percentage of their total account balance, for example, 1%. Experienced traders might go up to 5%, but the proportion is always small.
Let’s look at an example: if you have $10,000 in your account and want to open a high-low binary contract, you would only invest 1% of your balance, i.e. $100. Similarly, if you took the 5% approach, your maximum position size would be $500.
This technique is effective for several reasons:
- You won’t lose all of your trading capital even in a run of losses
- It eliminates the need for guessing when determining transaction size
- It reduces greed and fear, allowing you to concentrate on market signals and research
- The size of your transaction will expand or decrease in proportion to the size of your account
The Martingale Strategy
Another popular yet controversial binary options money management strategy is the Martingale system. Essentially after each loss, you increase your trade size to recoup the deficit.
For example, if you start with a $50 trade and lose, you would place $100 on the next position. If this trade also fails, you would double the size again to $200.
Of course, this strategy is risky and can lead to significant losses. As a result, we wouldn’t recommend this approach to binary options traders with a low risk appetite.
The Fibonacci System
This money management strategy is based on the famous Fibonacci numbers:
- 1
- 1
- 2
- 3
- 5
- 8
- 13
- 21
- etc
The number in the sequence determines the trade size – a loss means to move to the next number while a profitable trade moves back 2 positions. For example – if there were 5 unsuccessful trades before a profitable one, and the basic trade size is $10 (times the Fibonacci multiplier):
- Trade $10 – loss
- Trade $10 – loss
- Trade $20 – loss
- Trade $30 – loss
- Trade $50 – loss
- Trade $80 – profit, move back 2 positions
- Trade $30 – etc
This system guarantees a profit in the long-run, if the necessary conditions are met – that trades return close to 100% about 50% of the time. This is not necessarily true for binary options, and the system was originally designed for games of chance rather than financial markets.
Traders who want to try this system are advised to test it with smaller amounts.
Risk & Reward Ratio
This binary options money management method centres around identifying how much capital you’re prepared to lose on a single transaction and then looking for investments with a comparable potential return.
For example, suppose you’re ready to risk $50 on a trade. In this case, you would look for opportunities with a $50 or higher possible return. This ensures that you profit from winning transactions while minimizing losses.
Kelly’s Criterion
The Kelly criterion was named after its creator, John Kelly.
He developed a simple formula for non-correlated trading, which can help binary options investors maximize gains: F+ (bp-q)/b
- F = fraction of the current portfolio
- b = the net odds received on the trade
- p = probability of winning
- q = probability of loosing
- q can also be determined by 1-p
Essentially, you only proceed with larger transactions if the maths adds up.
Retrospective Analysis
This method can be employed as an add-on regardless of your strategy.
Keep a trading journal to document your choices and thoughts. Note which signals you utilized, when, what asset, your mood, trading device, location, and anything else that stands out. After each trade, write down the results. Essentially, you keep a track of your wins and losses so you can identify mistakes and areas for improvement.
Note, you can track trading results in DayTrading.com’s Binary Options Money Management Excel Spreadsheet.
Strategy Pitfalls
Some of the most common binary options money management faults include:
- Unrealistic goals – Setting tight objectives over a short timeframe can cause more harm than good. You can’t forecast accurately in the short term. Give yourself a longer time interval for better analysis and to ride out erratic market movements.
- Trade size – Even 5% of your total account balance may be too high for beginners. If you had $1,000 in starting capital, the percentage strategy dictates opting for $50 positions at the beginning. But by doing this, even several losing trades can quickly deplete trading capital.
- Brokers – Some brokers charge high binary options trading fees and also require a significant minimum deposit. For beginners, in particular, it’s worth opening an account with one of the best binary options brokers.
Money Management Tips
We’ve compiled a list of our top binary options money management tips for new traders:
- Keep a trading journal
- Follow the percentage rule
- Leave emotions at the door
- Only invest what you can afford to lose
- Leverage free risk and reward calculators online
- Use a binary options demo account to refine strategies before risking real funds
Final Thoughts
Binary options trading is a fast-paced, straightforward way to speculate on popular financial markets, from stocks and forex to commodities and cryptocurrencies.
However, if not approached with caution, investors can experience significant losses. As a result, it’s important to adopt a careful approach to money management and to focus on long-term success instead of short-term results.
FAQs
Is Binary Options Gambling?
Some market commentators consider binary options gambling due to the speculative nature of contracts. However, investors that approach binaries with a careful plan and an effective money management system can yield profits.
Can You Lose Money In Binary Options?
As with any investment, you can lose money trading binary options. This makes it even more important to find a suitable money management system. Use our guide to find an approach that works for you.
How Do You Stay Disciplined When Trading Binary Options?
Be consistent with your strategy and keep a log of all your investments to see what influenced your trading decisions. See some of our tips above to keep a handle on risks.
What Is The Best Binary Options Money Management Strategy For Beginners?
Many experienced investors recommend the percentage rule, where you only invest 1-5% of your capital per trade. This amount changes with the increase or decrease of your portfolio.
Can I Make Money Trading Binary Options?
Yes, but you need a good money management strategy and discipline. In addition, you have to break past the learning curve and continuously look for self-improvement.