The risk neutral strategy looks at trading opportunities that fall into a lower amount of risk for your binary options trading. It doesn’t just confine you to these trades though. By definition, a risk neutral strategy is one where risks can be taken from time to time, but the overall balance leads to much safer trades in general. This is a complicated trading strategy, actually. Before you begin to implement it, be sure that you know the proper way to incorporate it into your routine, and you know what to look out for.
How Should You Apply the Risk Neutral Strategy
A risk neutral strategy focuses on the safety of your overall trading routine. It doesn’t look at just one or two trades, but everything that you do. You should not be adverse to taking a risk here and there, but you should also be able to balance that risk if you decide to take it.
There are three types of trades that you will find yourself making here. The first is the high risk trade. These are the ones that have low chances of being correct, but have high payouts. These include high yield trades, mostly, but they do fall onto a spectrum, and normal call and put options can be used once in a while, depending on the payout. 60 second trades also fall into this category, but thanks to their lower rate of return, they are not worth using in this strategy.
Risk adverse trades are those that are most likely to be correct. These should have a success rate of 80 percent or higher (when dealing with binary options), and as a result they typically have pretty low payouts.
A risk neutral trade is your average trade. It has an average rate of return and an average rate of success. Even though the strategy is named after this type of trade, it is not necessarily your focus here.
The risk neutral approach looks at all of your trades summarily, and averages them together. You should be focusing on the total amount of money that you risk, categorize each dollar, euro, or whatever other currency you trade with, by the risk class it falls into, and then average them. Your goal is to have everything average down into the neutral class.
An example would sum this up the best. Let’s say you trade $1,000 over the course of a month. You have $300 in high risk trades, $300 in risk adverse trades, and $400 in risk neutral trades. You can immediately delete the $400 because they are already neutral. Then, look at the balance between high risk and risk neutral. You can see that these are equal, so you have accomplished a neutral spread of your money. This is exactly what you should be aiming for with this strategy. The trades don’t all need to be for the same amount; you could have two $150 risk adverse trades and 30 $10 high risk trades. Notice how you have more high risk trades than risk adverse trades. The difference should be very noticeable here.
Drawbacks Do Occur
One of the biggest drawbacks to this trading strategy is the fact that your success rate will be lower than with other strategies. Your high risk trades will drag down your success rate per trade because they will not be as accurate as your other trades. However, by taking out more high risk trades, your chances of a successful trade go up. You will still have a higher than normal incorrect trade rate, but your earnings should go up.
The real drawback here is if you are not able to identify your risk adverse trades correctly. These trades need to be as easy to predict as possible, and if you are incorrectly identifying these, then your odds of success here go down quite a bit.
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