Risks of binary options — the first thing that every beginner trader should foresee. Building your own system of risk management in binary options by its importance is not inferior to the correct choice of broker or trading system. In case of improper assessment of the risks, the deposit is lost in just a few minutes and the blame for this lies solely on the trader. What risks may await novice traders, how to minimize them and how to build your own system of risk management, read more.
Types of risks in binary options
The use of risky strategies (example — “Ladder”) is one of the most common causes of the “drain” of the deposit. In an effort to earn more and in a short time, novice traders don’t care about testing, use of risk indicators, and after the first failure become disappointed and hang labels on binary trade. Binary options trading is a profession that you need to master more than one month. Though we can not calculate all the risks in binary options trading, but to minimize them. It is the search for an optimal balance between potential risks and earnings and is one of the main tasks.
These are the risks of binary options that accompany the trader throughout his trading:
- discrepancy of forecast according to the news the fact. Even positive news may be perceived by the market negatively, if the result was worse than expected. Often the market at a time of fundamental bursts shows a greater volatility and only professionals are able to make profit on it;
- informational force majeure. Strike, act of terrorism, the discovery of new deposits — all this can instantly raise or bring down the trend;
- wrong interpretation of the signal. Error indicator or lack of clarity of the figure can cause a premature entrance. You may reduce the likelihood of inaccurate signal by the supporting tools, but then the number of entry signals into the market will also be reduced.
To avoid fundamental mistakes is possible only by constant analysis of the market situation, quick response and decisiveness, experience.
These are the risks that arise in the application of technical analysis tools, strategies, platforms:
- slippage and re-quotes. Entry into the market doesn’t happens at the price at which the trader expects. There are many reasons: problems with the trading platform or the Internet, no company interested in the price level, the delay in processing the order, etc. All these interferes with making money, so the likelihood of slippage should be taken into account when preparing the strategy;
- price noise. Occurs in short time frames which like to use turbooptions for quick money. Due to the price noise, the signals to enter the market appear inaccurate;
- failure of the platform. There are no perfect programs. The MT4 should be cleaned periodically with a script or manually from the temporary file, which lead to the braking of the platform. The percentage of profit you can lose only because the platform didn’t work in time;
- fraud on the part of the broker. Problem with money withdrawal, cancellation of orders, artificially controlling prices etc.
Management of technical risks is an effective way to increase profit. But understanding how to do it correctly, only comes with experience.
The task of brokers is to increase their profits, and this can be done by honest obtaining trader’s deposit or by increasing its trading volumes. The first way choose “kitchen”, which percentage is large enough:
- bonuses. A welcome addition to the deposit, but very risky. Free money push to increase the position size, but in case of loss the real money is lost first. And at a time when the trader wants to withdraw the balance of the deposit, he learns that the rest are bonuses that cannot be withdrawn because the conditions of the rendering is not done;
- leverage. It is more important for Forex, but it is worth mentioning: leverage in several times increases the risk of loss of deposit;
- opinions of other traders.
It is possible exclude these issues with one simple rule: you replenish a deposit – and earn with it. Do not participate in any promotions and reward programs, do not listen to other traders. The opinion of professionals is important, but there are not many of them, You yourself are a professional, learn from your mistakes and just listen to yourself.
I have identified these risks in a separate group because psychological errors can be done by everyone, and behavioral are dependent on psycho-type of a person. There are people for whom making of deals are contraindicated because of their moral and emotional state. Examples:
- inability to stop in time. The desire to win after a series of losses or Vice versa, the desire to earn more and more after the success, increasing rates — all the way to loss of money. No wonder many brokers impose new traders martingale, but professionals avoid this strategy;
- excessive emotionality. The perception of lesions close to the heart or the euphoria of victory change the focus of the thinking process. That moment when you need to analyze the market, look for points of entry into the market, think how to earn, the trader is engaged in self-flagellation or relaxes from success. Loss of concentration leads to the reduction of the capital.
To minimize these problems is possible only through self-control. Obviously not worth it to tune in to victory or defeat, you need to try to find the positive side and be approached philosophically. If you do not belong to level-headed people, you have a sense of excitement, you are emotional, trade binary options needs to be very careful. More detailed the behavioral factors I described in an article about gambling.
How to minimize risks in binary options trading
Trade without creating of your own system of risk management is strictly prohibited.
Rules of personal risk management:
- diversification of assets and strategies. Trade must be conducted on the opposite tools and multiple strategies. The loss of a single asset or strategy will be covered by profits from another. Professional traders work with several brokers, to avoid problems due to differences in quotes or slippage;
- the rate should be no more than 2% of the deposit. Beginners are recommended one percent, professionals — up to 3-5%;
- the amount of open trades should not exceed 15-20% of the deposit;
- before starting the system on a real account test it on a large time interval. If on a real account a series of losing trades exceed the statistical, change the strategy, asset, or take a break;
- follow economic calendar. At the time of the release of important news the market becomes volatile;
And finally, a few tips on how to make trading less risky:
- start trading with a demo account. As long as on at least 50 transactions you will not achieve at least 80% of profitable trades, go to real account;
- it is difficult to warn the fraud on the part of the broker, but possible. Go through the verification immediately before making a deposit, after the first success, try to withdraw your profit, take the time to use bonus programs;
- do not try to earn more. The profitable binary option — ladder, but the probability of success is minimal. Perform steady trading with simple options minimizing risks. The yield of 20% per annum is a good income. And only then, when you feel like a professional, you can go to the option “Touch” “Pairs” and “Stairs”;
- any outcome must be analyzed. Profit does not mean the effectiveness of the strategy, you could just get lucky. And remember that in real account the profit will be less than in the “hothouse” conditions for the demo;
- avoid the trade “for good luck”. Intuition in trading is important, but strategy should be based on more powerful tools;
- use the hedging strategy, it will help to reduce losses in case of sudden trend reversal;
- invest in binary options the only money that you can part with virtually no problems. In any case, do not work with borrowed money.
Summary. Risk management — the first thing you need to focus, making the first step in binary options trading. Risk minimization should consist of the following stages:
- choose a reliable broker and the platform. In long-term strategies VPS server will not be superfluous;
- create a personalized system of money and risk management;
- development of methods of testing of a trading system;
- working on yourself: education composure, judgment, self-confidence, inner peace and comfort;
- constant self-education and the control over the trade situation.
If you know other options how to reduce risk in binary options, I propose to discuss them in the comments after the article!