One of the general rules of trading is that the more risk you take on with your trades, the higher your potential for returns. However, this does not mean that more risk equals more rewards. In fact, risk often leads to losses. Only when risk is known and managed in an effective manner can high risk trades have any sort of long term benefit to you.
There are several ways that you can address and then use risk to help you increase your profitability. The first and most simple step is to just know what your risk consists of. If you are trading binary options, for example, you know that when you risk $100 on the EUR/USD increasing in price over the next 15 minutes, there’s a chance that you can lose $100 on the trade. If your told that you are going to earn 80 percent on the trade if your prediction is correct, then you know that you need to have a strong likelihood of success—or that there is a greater chance that the EUR/USD will increase in price than decrease—in order to compensate for the gap between what you will earn and what you still to lose.
Once you’ve looked at the actual risk involved on a numerical level, you need to assess your comfort level with that risk. For example, if you know that there is a 40 percent chance that you will get this upcoming trade incorrect, and that means you will lose all of the money that you have risked on it, then is that something that’s okay with you? Each trade should be crafted with this sort of “comfort factor.” If you are not comfortable risking $100 with this likelihood of success, what if that number was changed to $50? $25? Asking yourself questions like this doesn’t change your mathematical odds of success per se, but it does change your own psychology, making you more likely to stick with your trading even if you go through a bad patch. And if you have a strong strategy outside of the risk side of things, then you are more likely to be successful.
You also need to be keeping an eye on your long term goals. Does a high risk method of trading—and that’s what all day trading is, essentially—fit in with your long term view? Younger traders, those under 50, are more likely to thrive under these conditions. It’s not because this age group has a better strategy or has a better handle on technology and how to trade quickly, but because a large loss at age 35 is far easier to compensate for over time than a large loss at age 60. No one wants to lose money, but having the safety net of time on your side will be of big help over the long term.
You might even find that trading of any sort, including binary options trading, is just too risky based upon your current financial situation. This is why evaluating this before you get too involved in your trading is the best idea. Once you’ve lost all of your trading money, it could take months before you have saved up the same amount of cash just to get yourself back to even. That’s a very frustrating prospect, and if you are not yet financially sound or don’t have a large cushion of savings, this could even be a devastating thing for you and your family. Evaluate your tolerance for risk honestly and then act intelligently based upon the information that you find so that your long term goals can more easily be achieved.