Binary Options Money Management
Binary options money management systems aim to help control account drawdowns while balancing risk. It’s always important to have a plan in place that mirrors your risk tolerance and reduces influences like anxiety and greed. Ultimately, the right approach ensures multiple fast losses don’t blow up your account.
This guide explains how to manage money when trading binary options, and lists popular methods for beginners.
Download a free copy of DayTrading.com’s Binary Options Money Management Sheet
Best Binary Options Trading Brokers
Binary options trading is risky. Whilst advertised payouts on winning trades can top 95% depending on the provider, asset, and market conditions, the binary nature means that traders can lose any capital invested if trades go against them. As a result, it’s important to have a plan to limit losses and keep you in the game.
The Best Money Management Strategies
The Percent Rule
Many career investors consider the percent rule a key strategy to limit losses. The approach is also simple, making it a good option for beginners.
Essentially, binary traders limit the capital they invest in each trade to a percentage of their total account balance, for example, 1%. Experienced traders with a large risk appetite might go up to 5%, but the proportion is always small.
Let’s look at an example: if you have $10,000 in your account and want to open a high-low binary contract, you would only invest 1% of your balance, i.e. $100. Similarly, if you took the 5% approach, your maximum position size would be $500.
This technique can be effective for several reasons:
- You won’t lose all of your trading capital even in a run of losses
- It eliminates the need for guessing when determining transaction size
- It reduces greed and fear, allowing you to concentrate on market triggers and research
- The size of your transaction will expand or decrease in proportion to the size of your account
The Fibonacci System
This money management strategy is based on the famous Fibonacci numbers:
- 1
- 1
- 2
- 3
- 5
- 8
- 13
- 21
- etc
The number in the sequence determines the trade size – a loss means to move to the next number while a profitable trade moves back two positions. For example, if there were five unsuccessful trades before a profitable one, and the basic trade size is $10 (times the Fibonacci multiplier):
- Trade $10 – loss
- Trade $10 – loss
- Trade $20 – loss
- Trade $30 – loss
- Trade $50 – loss
- Trade $80 – profit, move back two positions
- Trade $30 – etc
However, it doesn’t create an edge – it only changes the size of your stakes. This means the technique will only be profitable if your underlying trading strategy already has a positive expected value after payouts and any fees.
If the payout structure gives you a negative edge, which is common in binaries, this system cannot make it profitable on its own and can still lead to large account drawdowns during losing streaks.
Also, this system was originally designed for games of chance rather than financial markets. So traders who want to try this system should test it with smaller amounts.
Risk & Reward Ratio
This binary options money management method centres around identifying how much capital you’re prepared to lose on a single transaction and then looking for investments with a comparable potential return.
However, you need your win rate to exceed the breakeven win rate implied by the payout percentage. For example, if you risk $100 to win $80 on an 80% payout, the breakeven rate is actually 55.6%. As in, you’ll need to win more than 55.6% of trades to be profitable on average, before any costs.
Kelly’s Criterion
The Kelly criterion was named after its creator, John Kelly.
He developed a simple formula for non-correlated trading, which may help binary options traders: f* = (bp − q) / b
- f* = fraction of the current portfolio
- b = the net odds received on the trade
- p = probability of winning
- q = probability of losing
- q can also be determined by 1-p
Essentially, you only proceed with larger transactions if the maths adds up.
However, Kelly can be extremely sensitive to estimating your true win probability (p). If you overestimate p (common), Kelly may tell you to bet too large and you could get crushed. That’s why some professionals use fractional Kelly (e.g., 1/4 Kelly).
Retrospective Analysis
This method can be employed as an add-on regardless of your strategy.
Keep a binary trading journal to document your choices and thoughts. Note which market triggers you utilized, when, what asset, your mood, trading device, and anything else that contributed to the decision and result. After each trade, write down the profit/loss. Essentially, you track your wins and losses so you can identify mistakes and areas for improvement.
You can track trading results in DayTrading.com’s Binary Options Money Management Excel Spreadsheet.
The Worst Money Management Strategy
Another popular yet controversial binary options money management strategy is the Martingale system. Essentially after each loss, you double your trade size to recoup the deficit.
For example, if you start with a $50 trade and lose, you would place $100 on the next position. If this trade also fails, you would double the size again to $200.
However, this strategy is risky and can lead to significant losses. We wouldn’t recommend this approach to traders, especially those with a low risk appetite.
We have included details of this technique for informational purposes and completeness, but we do not believe this is a viable approach and urge aspiring traders to avoid it.
Pitfalls
Some of the most common binary options money management faults we’ve seen amongst traders include:
- Unrealistic goals – Setting tight objectives over a short timeframe can cause more harm than good. You can’t forecast accurately in the short term. Give yourself a longer time interval for better analysis and to ride out erratic market movements.
- Trade size – Even 5% of your total account balance may be too high for beginners. If you had $1,000 in starting capital, the percentage strategy dictates opting for $50 positions at the beginning. But by doing this, even several losing trades can quickly deplete trading capital.
- Brokers – Starting too large. Some brokers require a significant minimum deposit in the hundreds or even thousands of dollars if you opt for a premium account tier available at some firms. For beginners, in particular, it’s worth opening an account with a low minimum deposit binary options broker.
Tips
We’ve compiled a list of our top money management tips for new traders:
- Only invest what you can afford to lose
- Make use of free risk and reward calculators online
- Follow the percentage rule (starting with maximum 0.5-1%)
- Keep a trading journal – it’s boring admin but can be valuable
- Leave emotions at the door as best you can and at least be aware of their influence
- Use a binary options demo account to refine strategies before risking real funds
Final Thoughts
Binary options trading is a fast-paced and high-risk way to speculate on popular financial markets, from stocks and forex to commodities and cryptocurrencies.
If not approached with caution, investors can experience significant losses. As a result, it’s important to adopt a careful approach to money management and to focus on long-term success instead of short-term wins.
Note binary options regulations vary by country. Some bodies have restricted the marketing and sale of binaries by local, authorized providers. Check the latest rules in before trading.
FAQs
Can You Lose Money In Binary Options?
As with any investment, you can lose money trading binary options. The ‘all-or-nothing’ structure means you can lose your entire stake. This makes it important to find a suitable way to manage your money. Use our guide to find an approach that works for you.
How Do You Stay Disciplined When Trading Binary Options?
Be consistent with your strategy and keep a log of all your investments to see what influenced your trading decisions. See some of our tips above to try and keep a handle on risks.
What Is The Best Binary Options Money Management Strategy For Beginners?
Many experienced traders, including some of our team who have traded binaries, recommend the percentage rule, where you only invest 0.5-1% of your capital per trade. This percentage can change with the increase or decrease of your portfolio.
Can I Make Money Trading Binary Options?
It is possible, but it’s difficult. You need a good money management strategy and discipline. In addition, you have to break past the learning curve and continuously look for self-improvement. Remember many binary traders lose money.