When trading, as in any activity that involves risk, you need to have a clear and coherent Money Management plan. Without it you would be trying to build a house without laying the foundation first. Many traders miss out on this important aspect of trading, as there is more to consider than just counting your money. Then as important as executing the plan attached to it, Discipline is the golden rule here. The construction of a coherent plan begins by asking the following 3 questions;
- How much do I want to risk in total?
- How much do I want to risk each day?
- How much can I risk per trade?
Risk Management Trading System
Answering the first question can be quite simple, for example, I have £ 5000 and I want to put my trading skills to the test so the amount I can afford to risk. But from the £5000 you start with, you might limit your maximum loss to say £2500, which is reasonable.
If your trade only causes losses, and you find yourself losing 50% of your capital, it may be best to stop. Take a step back and try and figure out what went wrong. It seems clear for this reason that there is something wrong with your trading plan and it needs to be reconsidered. The second question is a little more complicated and takes a little more thought.
How often do you think about trading ? Given the example above, how quickly are you willing to risk going through £2500 before you have to stop? My feeling is that you should not want to risk burning your capital in less than 2 to 4 weeks, which means 10 to 20 trading days. Therefore, you need to think about 1 / 10th to 1 / 20th of your capital every day. This means you will be risking between £250 and £125 a day.
Are you an ‘active’ trader?
This assumes you will be trading actively, or trading at least once a day. What if you only plan to trade occasionally? Maybe behind an idea you have, or a recent news line. Let’s say you can trade every 2 or 3 days.
In this case, it may be very tempting to think that you can the amount of cash that you do not risk on days where you do not place trades. So ” I don’t trade for 2 days, I can risk £ 750 or £ 375 today on one trade “. This in reality only increases the risk you take, and you could find yourself £2250 with just three bad trades.
Yes, it can still take you two weeks to accumulate these losses, but it only takes 3 wrong trades, and that can happen easily. So again in this case it is best to stick with 1/10th or 1/20th per trading day or something closer to 1/20th if it all happens in one trade. This brings us to the final question, how much risk is acceptable per trade?
This depends on how many times you want to trade a day and if you are willing to spend a lot of time in front of your screen. Maybe you only have enough time to use 1 trade a day, and in this case I would recommend that your single trade (and daily risk) both of you, at most, 1/1 of your risk capital, in above case £125. Let’s say you have decided to risk trading binary options of £200 a day and you plan to trade every day. You can put all of that on one trade and see if you succeed. This will end up being the riskiest route.
It depends on how much time you can expose to trade but I would divide the daily number you have decided between 2 to 4 trades. You don’t have to make them all, but it’s better to give yourself several chances a day, not just one. If you have the time, breaking down the daily risk size across multiple trades may be more beneficial.
Broker with Minimum Minimum Trade Size
Apply Money Management With Binary
What I like most about trading Binary options is the controlled risk. You know what the maximum risk of each trade is when you place it, and that’s just the cost of the option. However, human emotions can come into play, especially on bad days.
As we saw above if you lose your daily risk amount you should basically turn off your screen and wait for tomorrow. This is probably the most difficult task to follow. As a trader you will feel you can do it right, just one more try is all you need.
But we should look at it this way, let’s say you have a £210 daily risk limit, for which you split 3 trades of £70 each. If you get three mistakes, you might not get the fourth right, just because of fatigue or trading based on emotion.
At this point, you may be upset or out of emotional balance, this can lead to poor judgment and more likely make you choose another losing trade. From a money point of view you are down £210 and placing another trade will give you a chance to make a best bid of 90% or £63, which will not profit you for the day, but losing that trade now will take you down another £70 to total loss of £280 for the day.
That can only degenerate, and more dangerously can start a very risky spiral where you have no more limits on how much you can lose per day or in total. Limits are a good way to encourage discipline in trading.
You can also add more rules or limits. Taking the example above (£210 per day split into 3 trades), you can add rules; 2 straight losses and I’m out for the day. For example, let’s say that you start the day with 3 straight wins, there is no reason to stop on a winning streak. But now let’s say you lose the next two.
Now you still have profit for today, and can go. This rule, of 2 losses and an exit, will protect your profit for the day and limit the loss of not only what you have won but also your daily risk limit.
If you continue to trade, you can make two more successful trades but you can make two more losing trades, where from £210 for the day you now find yourself at £70 for the day. The rule ” 2 straight losing trades = exit ” can help in protecting your winnings. Remember in trading one of the most important concepts is capital preservation, and being able to trade again tomorrow.
Methods like these may suit some investors and not others – but all three basic questions remain. One thing that every single broker can agree on, is that money management is very important when it comes to trading success.
Percentage Rule
Another popular strategy for money management is to only risk a certain percentage of the total investment fund. One of the benefits of this system, is that the trade size increases after a series of winning trades, and also scales back in case of losses.
The percent rule represents a very simple system. With any single trade, only a certain percentage of funds is at risk. This will rarely exceed 5%. A sustainable and low-risk strategy may yield only 1% of the total fund. This rule is not strict as percentages do not need to be calculated before each trade – just “baselined” every so often. Therefore, someone with a trading fund of £1000, might decide to open a trade of £20 per trade – representing 2% of the funds at risk per trade. That trade size of £20 may remain in place until the fund reaches £1200 (or may suffer some setback and reach £900). At this point, the trade size can be adjusted.
Therefore the calculation is not continuous, but more gauges for the next trading period. Some traders may reset the baseline once a month, others at the end of each trading day. The mechanism is not the key to the system – the main point is to risk only a small percentage of the total balance per trade.
Calculator table
To help use the percentage rule trade size system, below is a quick table to show ‘snap size’ trades, with varying amounts of investment funds, and percentages. Those looking to take less risk per trade will want to use a smaller percentage, and higher risk takers will use a larger percentage. The fund size can be multiplied to suit, as can the percentage.
| Cost | 1% | 2% | 5% |
| £100 | £1 | £2 | £5 |
| £250 | 2.5 pounds | £5 | 12.5 pounds |
| £500 | £5 | £10 | £25 |
| £1000 | £10 | £20 | £50 |
The calculator above shows the importance of checking the minimum trade size at any potential broker if the investment fund is on the low side. Traders can easily find themselves taking on more risk per trade than they like because minimum trades force them to risk a larger than desired percentage of their entire bankroll.