Binary Options Money Management

Achieving sustainable returns when trading binary options requires a careful approach to money management. This guide explains popular strategies for managing your money when investing in binary options. We also share our planning tips and list the top brokers that offer supporting tools.

Money Management Explained

An effective money management strategy amends trade parameters, such as position size, to minimise risk while growing profits. A considered approach to money management is particularly important when trading binary options, given their all-or-nothing nature.

A losing trade means clients give up their entire stake, so several losing positions can have a significant impact on an investor’s portfolio. A successful money management strategy will ensure that traders don’t lose their entire pot following a bad run. Equally, it will ensure that any profits that have been generated are suitably protected.

Fortunately, there are several beginner-friendly binary options money management strategies available to retail traders. We list the most popular systems in 2023 below.

Best Money Management Strategies

Percent Rule

The percent rule is the most popular money management technique. The concept is simple – a trader does not risk more than a fixed percentage of their total trading pot on a single trade. For example, if you have £1,000 in your account, you could choose not to risk more than 2% of your account balance on a single position, which would limit your exposure in a single trade to £20 (£1,000 x 2%).

Beginners may want to start with a low percentage, such as 1%. Traders can then gradually increase the percentage as their strategy proves successful. With that said, many investors will cap the total risk exposure they ever take on to 5%.

There are several benefits to this approach. For one, it allows you to be objective and consistent with the amount that you risk, rather than allowing emotions to decide. In addition, your investments will increase or decrease alongside the money in your account, meaning that no trade is large enough to wipe out all of your capital. Finally, if you are on a losing run then your future positions will be smaller, while if your account is growing then your position sizes will become bigger, mirroring your trading performance.

Fibonacci System

This strategy works with a similar scaling approach to the percentage strategy, but the investor places larger trades each time they lose, with the opposite being the case for winning trades. This is done according to the following sequence of numbers: 1, 1, 2, 3, 5, 8, 13, 21, and so on. Each new number is arrived at by adding the previous two numbers.

Importantly, binary options traders decide on a single betting unit, for example, £10. Each wager then corresponds to the relevant number in the sequence, with traders moving one step to the right each time they lose a bet and two places to the left each time they win a trade. So, if you lost your first position (1 x £10), you would bet £10 the next time (1 x £10). If you lost again, you would stake £20 (2 x £10).

The benefit of this system is that as long as you have the capital, you should always win your losses back. With that said, this also depends on the payouts provided by your binary options broker.

Kelly’s Criterion

Named after its creator, John Kelly, this system is a means of calculating probability. Kelly designed a formula that gives investors a strategy for non-correlated trading:

F+ (bp-q)/b

Where:

• F = fraction of the current portfolio
• b = the net odds received on the trade
• p = probability of winning
• q = probability of losing

Plotting your binary options trade into this formula allows you to adjust how much money you invest in a position.

The Martingale Strategy

This is a widely used strategy for binary options money management, but it carries more risk. The premise is simple – traders double their position size after each loss. So, if you lose £30 on a trade, you would bet £60 on the next position, and £120 on the one after that.

The benefit is that traders can make up for previous losses. However, the downside is that traders can quickly lose large sums. With this in mind, we wouldn’t recommend this binary options money management strategy for beginners or those with a limited bankroll.

Tips for Success

As well as the money management strategies listed above, also consider the following tips

Goals

Be careful when setting goals. Some investors set unrealistic profit targets which lead to less objective and rash trading decisions. Instead, it’s more important to focus on long-term returns. We’re not saying don’t set financial goals, but focus on longer-term targets. A larger data set can also make it easier to identify trends.

Journals

A trading journal is a great way to plan out your trades and the sizes of your positions. It can also help you identify errors in judgement or trade parameters that should be amended in the future.

Make a note of the type of binary options contract, the payout offered, the profit or loss, the size of the position, the underlying market, plus the entry time and duration of the contract. You can store this information in a straightforward excel spreadsheet.

Calculators

A money management calculator can give you a clear view of potential wins and losses. They can help project profits, assess risk exposure, and plan potential trades. The top binary options brokers offer user-friendly money management calculators for free on their websites.

Start Small

For beginners, in particular, the best tip is to start small. Don’t risk more than you can afford and keep your position sizes a small percentage of your total trading pot. It could also be worth opening an account with a binary options broker that has low minimum deposit and stake requirements.

Bottom Line On Binary Options Money Management

Money management techniques are an important part of trading binary options successfully. While binary options can offer high returns, investing with no clear plan or strategy is essentially gambling. Use the money management systems above to find a strategy that works for you. And head to our list of recommended brokers to get started today.

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