If you are an advanced binary options trader, you already are aware of the need for limiting your risk. We’ve discussed a few different ways to do this in the past, and some of these are better than others. However, one thing remains constant no matter which risk management strategy you decide to use: you should never risk too much on a single trade. The spreading the risk strategy plays on this concept, allowing you to manage risk even more effectively.
Applying Solid Risk Strategies
The first step in this method is to calculate how much risk you should take on for a given trade. Let’s say you’ve identified a trade where your risk management is telling you that you can risk as much as 3 percent of your account. That’s a pretty sizeable amount for a single trade, indicating that you have a very good chance of being correct. If you have an account that’s $10,000 in size, you should be risking $300, according to this math. However, putting that all into a single trade where you only have a 75 percent chance of winning might still seem too risky for you. By spreading the risk here, you can break the one trade down into two or more in order to further alleviate this risk.
Let’s look at an example. If you’re supposed to risk $300, instead of doing this, risk $150 on your first attempt at the trade. This brings your risk level down from 3 percent to 1.5 percent. Depending on the length of the expiry, you should be able to take out another position on the asset. This really works best when the original expiry is set at 15 minutes or longer. When you take out your next trade, be sure that the strike price is more advantageous. So, if you took out a call option on the USD/JPY at 114.350, and then the price drops to 114.340, you can now take out another call option. This can be done at $150 again, or you can do a lesser amount, say $75. The goal is to still use your 3 percent limit up to maximize profitability, but this method gives you an out if you determine that the market has turned against you. If after your $75 trade, you realize that there’s no way that either trade will work, you’ve saved yourself $75 in losses. And, if for some reason one trade hits and the first does not, you’ve limited your losses by spreading that risk out. It’s still one asset and for the original risk management purpose it’s still one trade, but by breaking it up into chunks, you’ve given yourself a safety net just in case.
There are Always Drawbacks
This is a great strategy for risk adverse traders that still want to trade binary options, but there is a very obvious drawback if you think about it. Your original risk management strategy pointed to the 3 percent number in the above example for a reason; hopefully because 3 percent not only limits your risk, but maximizes your long term earnings. If you scale back the numbers here you are limiting risk, but you are also limiting your profitability.
Also, you will only be as successful with this strategy as your original risk management strategy allows. If you are coming up with a profitability percentage of 75 percent, but the actual number is 45 percent, no matter who much you spread your risk, you will still lose over time. This strategy will slow the steady bleeding out from your account, though, allowing you to stay in the market for longer and hopefully correct this problem.
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