There is a school of thought that if one gives the same amount to 100 novice traders (provided that they are supposed to apply the same strategy), so, at its best, only ten of them will be able to save their deposit, while just the one will make some money. What’s the reason of such difference in results? Working with financial investments is not only about trading strategies, but also risk control. Money management (or risk control) is the factor that affects finance market trading outcomes. This article is to describe all details on how to manage the capital correctly, and what mistakes are commonly made by traders in their money management patterns.
1. Most common beginner’s mistakes! First things first!
2. Money management: capital control basics
3. What is the key money management rule?
4. Extra rules to save the capital!
5. One more thing: what is the most important money management rule? CRUCIAL CONCLUSION!
Most common beginner’s mistakes: why do we need risk control system?
Before talking about money management itself, one should recognize the reasons for emergence of such a problem. Binary options trading is similar to medicine here: we fight reasons, not symptoms. Let’s look into key problems of binary options trading that will lead to realization of necessity in controlling risks someday:
- Delusively easy money. It’s an open secret that the majority of unsophisticated perceive binary options as the mixture of soft money and scam. Most people coming to the finance market, even don’t try to get on with all principles of this instrument, just trying to make money with the Fortune. It must be noted that some do succeed in it, and easy-money rumors fly across the Net again. People who know the finance market in-and-out, clearly see the opposite side. Find the full description of what binary options are here (the link to the first article “What is Trading and Binary Options As They Are”). If you make you very first steps on this market, you must learn it to conceive principalities.
- No-system trading. Even having studied the basics of binary options, most beginners start working with no system, trying hit-or-miss to make money. Such an approach is the good way to waste the deposit. To avoid it, one has to follow the chosen system. There are numerous strategies – find out more about them in the article TOP 5 Trading Strategies! Bintrader-Proven Efficiency! Expert’s Tips on Using!
- The one big deal. This issue was brought to finance markets from sport bets. Having flicked through forums, a trader may feel like they are to hit the jackpot someday and leave all the stuff still young, and enjoy the life. It’s not all that simple. Usually, the life is to blow you out with the one big loss, when you get too excited and waste the bulk of the deposit into the one deal that turns out to be a huge fail.
- Excessive emotionality. Another essential point. Do all skillful traders have the cold mind? No, they don’t. Can they handle their feelings and impulses? Yes, they do. Money management cultivates discipline and helps deal with excitement, making hard math the corner stone.
- Choosing a bad broker. It is the wrong belief that a broker is just an intermediary. That is not so, absolutely. A fair broker is interested in success of their trader. Such brokers do their best to assist traders through providing instruments, services, and learning materials.
They were the main reasons why 90% traders get back to square one in the binary options market. Money management system is capable of healing these issues.
Money management: capital control basics
Here’s another simple example to realize importance of money management. Let’s imagine two professional traders instructed to trade in opposite directions. The outcome is to surprise both: two of they will make money. It can sound queer, but here’s the money management thing – proper deposit and risk control.
The key money management misstep of traders is ignoring this instrument until problems do occur. In order to realize the mechanism, just draw an analogy with healthy nutrition. Does the majority of us think of an apple a day because they really need it? Most people perceive it as the needless burdening stuff. We start thinking about good food only when our health sends us first bad signals. The same is the money management issue: they break into risk control only when deposit problems do happen. The difference is that one can take to eating well whenever they like, while they can be late to start controlling the capital, which is likely to be wasted because of negligence.
Some simple math to describe the importance of money management. If 90% of your initial deposit remain, you have to replenish it by 11% to recover the situation. But let’s get to the root. If the capital falls down to 75%, you have to top it up by 33% in order to get back. As you could guess, 100% replenishment will be needed to cover 50% loss. 75% damage will require 400% recovering, and if just 10% are left of your capital, the amount of good 1000% will be the only way to remedy the problem.
Here is the business day screenshot of one of our traders who follows money management rules.
And now we have to make things clear. Doubling the deposit is the true trader’s heroic act. We don’t even talk about increasing it by 4 and 10 times. This is just simple math, ignored by most beginners. But it is math what helps recognize the significance of money management.
Key money management rule
Speaking of money management in the binary options system, there is the headstone. Amount of each deal must not exceed 5% of the current deposit stack. Such a trading strategy will enable any trader to preserve the appropriate level of their deposit for a long period of time. Even the bulk of failed deals in a row will not waste trader’s assets. This very purpose is followed by money management through minimization of financial losses and accidental risks.
For instance, the deal amount shall not exceed 50 dollars if you have $1,000 in total. With the laps of time, the amount may vary upwards or downwards, as usually, the percentage falls with increase of the deposit. Ideally, each deal amount shall not exceed 1% of overall current assets.
Another money management aspect is the deposit amount. Most brokers allow trading from very little stashes. However, considering this issue, one must realize that money management has nothing to do with, to say, a dozen dollars. It’s widely thought that money management displays the highest efficiency on $200+ deposit.
And here’s the place to make another mistake. Binary options themselves provide for fast gaining. In case of lucky events, 6-7 consequent successful deals may turn your $10 into good $200. Though, the possibility of feasibility of such a situation goes to 100%. Just a mistake, and you will have to start from the scratch again. Apply to math, probability theory says that a positive outcome is possible only in 3% cases. One can repeat it over and over again, and eventually, a beginner trader will spend way more than 200 bucks, albeit in the longer term.
Extra money management rules – saving our capital!
The core rule is the ultimate standard for everyone, but there are lots of money management nuances to keep in mind. Let’s look into them:
- Cold mind. Trade in the adequate state only. Surely, there can be some drunk-state moments when one “feels like connecting to the universe”, but be sure that it always breaks the discipline and violates the first money management rule. Nobody argues that one could gain well in such state, but sooner or later, such behavior may result in the wasted deposit. This point must also include the sleeping issue. Sleep when you need it. Binary options market is 24/7 operating, but it doesn’t mean you need to trade the whole day after day. Lack of sleep will eventually lead to sudden mistakes.
- Trade with the system. Any skilled trader works with a certain long-time-elaborate system. A novice should take a one from working methods and trade with it. Some adjustments may be made to it in course of time, in order to modify it for specifics of trader’s nature. Money management system will successfully operate even in the no-system trading, but you must realize that prosperous capital control in chaotic trading will not be capable of saving your deposit from critical depletion. Actually, each and every job requires a systematic approach, but it is binary options what may make you suffer from the lack of discipline. For example, take the Reversal Moment Trading Strategy. Find more details about it in the video tutorial.
- Minimizing losses. This aspect is also associated with the discipline and self-control. It’s quite difficult to follow it strictly, especially for hazardous people. The loss minimization principle in binary options trading resembles the stop-losses system on Forex and looks like in the following manner: At the beginning, one has to determine the maximum possible number of deals. Five or thirty – each trader decides themselves, but please be geared by your possibilities. A novice should start with the minimum in order to trade and then analyze reasons of their fails. Further, the number of deals executed may be increased.
You should determine the maximum tolerable number of failed deals that can be executed within the framework of a one trading day. This number is usually variable and calculated based on the current deposit state, as well as some other factors. A trader should determine a certain amount to stop at on this or that very business day. The principle is way too simple: when coming beyond a threshold, risks on a certain day become very high in relation to possible profits.
- Follow the trend. There is no difference for a skilled trader in trading with or against the trend – they are too experienced to handle it. Statistics depicts that deals made with the trend, show by far higher possibility to turn into the income. Money management system is rooted not only from capital control, but also from risk handling. Trend trading is one of the simplest ways to mitigate risks, particularly for a beginner trader.
They were the most significant points related to proper capital control. Sticking to them, you will be able to handle the state of your assets, eliminating the possibility of crucial fails. This all will lead to success and huge profits in future – just see the example below.
Having learned all money management rules, we may confidently state that the mass of success possibility is based on personal discipline and professional behavior. Forgetting about it, one will never ever achieve a top – no matter how big the luck will be.
But please be advise that money management will be forceless if you choose an unfair broker. So choose your intermediary carefully and thoroughly.
Trading with Bintrader guarantees not only preservation but also boosting of your fortune.