Have you ever heard of a job from which you cannot get sacked? Or are you aware of a small business that is absolutely safeguarded from bankrupting? Although it might not perfectly correlate, alike the above mentioned risky examples life presents us with, i.e. being in danger of losing one’s job or having a business that fails, when trading binary options your capital is at risk and there's no point in denying it.
However, to mitigate the associated dangers, at the time of choosing your line of profession or in the early stages of your entrepreneurship, you'll do anything and everything in your power to reduce the risk of getting fired or failing to accomplish your business goals. The same applies to binary options trading, only here to reduce the risk and improve you success chances you need to apply what is termed as optimized capital management.
Capital Management Principles
The objective of capital management is to keep your losses low and your profit potential high. The theory of this management approach is simple: if you manage your investment wisely, you'll preserve your capital. Therefore, binary options traders who follow the management principles thrive on its most prominent feature – decreased risk in favor of increased chances.
Capital Management Rules of Investment
Capital management is a strategy based upon two forms of investments; passive and aggressive. Strategically speaking, as a trader you have two options when venturing to invest in binary option without losing the whole of your portfolio; you either trade with full throttle (aggressively) to incur high profits while potentially risking your capital, or take the turtle (passive) approach with which little and consistent investment earns you slight yet steady profits.
The passive approach is founded on the strict 5/15 rule of risk management. The rule dictates the trader to limit his/her investment to only 5% in a single trade and 15% out of his entire portfolio.
For instance, let's say that you have an account on a binary options trading platform and in it you have deposited $10,000 of funds. You can risk $500 (5%) on a single trade and concurrently open another $1,000 (10%) on other trade, reaching a total investment of 15% of your entire portfolio.
Accompanying the low risk rule is the more permissive and aggressive approach - the 10/30 rule of risk management. When applying the 10/30 rule the investor is allowed to invest 10% in a single trade and 30% out of their entire portfolio.
For example, again, you deposited $10,000 of funds in your account on a binary options trading platform. According to the rule, you then invest $1,000 (10%) of your portfolio in a single trade and can concurrently trade on two other trades worth $20,000 (20%). Select your trades unreservedly so long that your entire investment does not exceed $30,000 (30%).
Always when trading in binary options try to remember that greed is your worst enemy! Attempting to earn a large sum of money in a very short period of time might often lead you to invest falsely. As it was explained above, it is possible to minimize the associated risk, but those traders opting to invest 25% of their entire portfolio on a single trade will be quickly left with no funds.
Risk management techniques in binary option trading will lead to proper exposure to risk just like they would when starting a new job. In addition, a correct blending of the aggressive and passive rules is a plausible approach to minimize risk and maximize your chances to invest successfully and profit from binary options trading.
George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.