Money Management
So, you have read up on the basics of binary options trading and now you are ready to become a binary options trader. You can get started with some of our favorite brokers with as little as $100. If you have found $100 you can set aside for trading, you can certainly get started, but it is best to learn a little more about money management first. Money management is one of the three key ingredients to successful binary options trading, the other two being discipline and strategy.
What is money management? Simply put, it is exactly what it sounds like. Money management refers to the techniques you use to consistently and profitably manage your trade sizes. It also may take into account the actions you choose to take while you are in a trading, like closing out early, doubling up, or rolling over. There are other aspects involved as well, such as when you add to your account and when you withdraw, and also how much you deposit to begin with.
Why Start With More Than $100?
Starting with $100 will be alright but we suggest $250-$500
Before you get discouraged here, do not think I am saying that you need to be rich to trade; you don’t. The low entry barriers are one of the great things about binary options trading online. But $100 is not the best amount to start with. I would recommend investing $250-$500 to get started with, at a minimum. If you have more to trade with than that, excellent. Get started with more, if you feel comfortable with that.
Here is why I think you want to get started with a little more than the minimum. Look carefully at the deposit and withdrawal terms and conditions at the broker you are signing up with. What is the minimum withdrawal limit? It is often set at $100, which is identical to the $100 you were planning on depositing to get started with. Unless you want to make it difficult to get your money out of your account, it is best to start with more in your account to begin with. If you invest $100 into your account and lose even a single tiny trade, you cannot withdraw your money if you want to. If however you invest $250 into your trading account and then you lose a small, conservative trade, it is no big deal. You can still withdraw everything you have left at any time you want since it is higher than the withdrawal limit. Of course, hopefully you will go onto a profitable trading career, but this is all about your comfort level.
Trade Sizes
The main reason I suggest you invest $250-$500 at a minimum has to do with trade sizes. There is one binary options broker which allows you to trade with as little as $1, and that is Banc De Binary. As you might imagine, trading $1 has some benefits and drawbacks. The benefit is that it is like an extended testing period with minimal risk. The drawback of course is that you are not going to make a lot of money trading $1, just as you are not going to lose a lot.
Most binary options brokers have a minimum trade size closer to $10-$25. For 60 Second trades, this numbers may be closer to $5. These are relatively low amounts, and you still will not make (or lose) money very quickly if you trade the minimum, but even these low minimum constrain you somewhat when it comes to percentages.
What percentage of your bankroll are you planning to invest on each of your trades? This is a key money management question. Were you planning to just play it by ear, and spend whatever feels “right” for each trade? Are you going to invest more on the trades you feel more confident about and less on those you do not? What percentage of your account seems reasonable? 10%? 20%? 50%, on a trade that looks well worth it?
What if I told you all of those percentages are too high? Even 10% is pretty high. Think about it: it would take a losing streak of just 10 trades in a row to wipe out your account, regardless of starting size. Five percent is a much more reasonable percentage. It would take 20 losing trades in a row to wipe out your account in that case. Two-and-a-half percent is an even better investment amount, though if you are starting out with just a couple hundred dollars, you would be unable to trade this little, except at Banc De Binary. Plus, you would not be making money at a reasonable rate.
Because of all these factors and drawbacks, my main recommendation is to start out with $500, and invest 2.5-5% of your account. That would translate to $12.50-$25 on each trade. The latter works out pretty nicely. If you invest $500, and aim to trade 5% of your account on your trades, that means you can actually trade the minimum if it is set to $25, and you are still following sound money management principles. You will not be profiting all that fast, but at least you are giving yourself plenty of buffer space for losing trades, and moreover, the money still isn’t bad if you are trading relatively often (and winning most of the time, of course). And if you do lose a few trades and you decide you want to withdraw all your money, there is no problem, even if a broker sets a minimum withdrawal limit of $100-$200.
Why You Should Always Invest The Same Percentage
Why should you always invest the same percentage of your account on your binary options trades? Why not invest more on some trades and less on others? After all, if you’ve found a really good trade setup, why wouldn’t you want to invest more on it than you would on the others?
In a way, this is a bit of a trick question. The reason being that if you do not have a less than excellent setup, you do not want to take it in the first place. So you would always want to invest the same amount of money on all of your trades because you should only be taking setups you are highly confident in. And even then, you should still only be investing 2.5-5% of your account on your trades. The nice thing about becoming a profitable trader however is that as your account grows, that small percentage starts to represent a larger and larger amount of money. And using conservative money management techniques will ultimately help you to get there faster!
Keep Your Accounts Separate
It can be tempting to withdraw from your trading account to pay your bills each month, or to withdraw from the money you should be using to pay your bills and other important expenses to fund your trading account. Both of these behaviors are ultimately detrimental. If you are doing the first one, it implies that you have too much money invested in trading to begin with, and that you are already investing more than you can afford to. Get your financial house in order first, and then trade, or just trade with less money to begin with. Practicing with smaller trades or a demo account never hurts. You will be that much more capable when you do start trading with more money.
Details on demo trading can be found here
If you are doing the latter and spending money trading you should be spending on important bills, you are engaged in addictive gambling behavior. That kind of behavior will ultimately harm you, your family, and others in your life. Always play responsibly, even if you are trading for fun. Money management will help you to get more out of your bankroll, so even if you are not too serious about your trading, you will find it benefits you. And if you do want to trade for a living, money management is an essential part of your trading plan. Without it you will not get far, but with it, you can pave the road to financial success.