Binary Options Money Management

Contributor Image
Written By
Contributor Image
Written By
William Berg
William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.
Contributor Image
Edited By
Contributor Image
Edited By
Tobias Robinson
Tobias is a partner at DayTrading.com, director of a UK limited company and active trader. He has over 25 years of experience in the financial industry and contributed via CySec to the regulatory response to digital options and CFD trading in Europe. Toby’s expertise and dedication to financial education make him a trusted voice in the industry, including a BBC investigation into digital options.
Updated

Binary options money management systems can help produce more consistent results with less risk. Of course, it’s always important to have a plan in place that mirrors your risk tolerance.

This guide explains how to manage money when trading binary options, and includes a list of popular money management methods for beginners.

Download a free copy of DayTrading.com’s Binary Options Money Management Sheet

Money Management In Binary Options Trading

Money management systems balance growth with risk. The best strategies essentially help you manage your financial capital while reducing anxiety and greed. And importantly, the right approach will ensure multiple losses don’t wipe you out of the market.

All Binary Options Brokers

Binary options are notoriously risky. Whilst payouts can top 95%, the binary nature of positions means that traders can lose significant capital if trades go against them. As a result, it’s important to have a plan to limit losses and keep you in the trading game.

The Best Money Management Strategies

The Percent Rule

Many career investors consider the percent rule the best strategy to limit losses. The approach is also simple, making it a good option for beginners.

Essentially, binary options traders limit the capital they invest in each trade to a percentage of their total account balance, for example, 1%. Experienced traders 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 is effective for several reasons:

The Martingale Strategy

Another popular yet controversial binary options money management strategy is the Martingale system. Essentially after each loss, you increase 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.

Of course, this strategy is risky and can lead to significant losses. As a result, we wouldn’t recommend this approach to binary options traders with a low risk appetite.

The Fibonacci System

This money management strategy is based on the famous Fibonacci numbers:

The number in the sequence determines the trade size – a loss means to move to the next number while a profitable trade moves back 2 positions. For example – if there were 5 unsuccessful trades before a profitable one, and the basic trade size is $10 (times the Fibonacci multiplier):

This system guarantees a profit in the long-run, if the necessary conditions are met – that trades return close to 100% about 50% of the time. This is not necessarily true for binary options, and the system was originally designed for games of chance rather than financial markets.

Traders who want to try this system are advised to 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.

For example, suppose you’re ready to risk $50 on a trade. In this case, you would look for opportunities with a $50 or higher possible return. This ensures that you profit from winning transactions while minimizing losses.

Kelly’s Criterion

The Kelly criterion was named after its creator, John Kelly.

He developed a simple formula for non-correlated trading, which can help binary options investors maximize gains: F+ (bp-q)/b

Essentially, you only proceed with larger transactions if the maths adds up.

Retrospective Analysis

This method can be employed as an add-on regardless of your strategy.

Keep a trading journal to document your choices and thoughts. Note which signals you utilized, when, what asset, your mood, trading device, location, and anything else that stands out. After each trade, write down the results. Essentially, you keep a track of your wins and losses so you can identify mistakes and areas for improvement.

Note, you can track trading results in DayTrading.com’s Binary Options Money Management Excel Spreadsheet.

Strategy Pitfalls

Some of the most common binary options money management faults include:

Money Management Tips

We’ve compiled a list of our top binary options money management tips for new traders:

Final Thoughts

Binary options trading is a fast-paced, straightforward way to speculate on popular financial markets, from stocks and forex to commodities and cryptocurrencies.

However, 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 results.

FAQs

Is Binary Options Gambling?

Some market commentators consider binary options gambling due to the speculative nature of contracts. However, investors that approach binaries with a careful plan and an effective money management system can yield profits.

Can You Lose Money In Binary Options?

As with any investment, you can lose money trading binary options. This makes it even more important to find a suitable money management system. 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 keep a handle on risks.

What Is The Best Binary Options Money Management Strategy For Beginners?

Many experienced investors recommend the percentage rule, where you only invest 1-5% of your capital per trade. This amount changes with the increase or decrease of your portfolio.

Can I Make Money Trading Binary Options?

Yes, but 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.