One of the most important lessons you have to learn when trading Forex Binaries is how to manage your risk. This is also known as ‘money management’ and it is a essential that you have a good strategy if you want to make money from Forex.
“Rule number one of investing is never to lose money. Rule number two is to never forget rule number one”. This is a quote from Warren Buffet. I reflects the sentiment that it is important to keep hold of the money that you have rather than simply focus on trying to make it. This is the essence of trading that most successful traders base their strategies on.
So what is money management in Forex? Well it is a of predefined rules which are aligned with your trading strategy to manage your risk. The aim of a good risk strategy is to help maximize your profits while at the same time minimizing any loss when the market markets move unexpectedly against you.
New traders are particularly prone to making mistakes in this areas of their trading. It is easy to get caught up in the emotions of winning. It is common for new traders to risk too great a proportion of their account on the outcome of a single trade. This can make them high profits if the market moves in their favor. However when the market moves against them it can quickly cause problems. While it is often new traders who make this mistake even more experienced traders can too.
This first rule of creating a good risk management strategy is to ensure that you don’t trade with money that you cannot afford to lose. Any form of trading on Forex carries risks. While with Binary Options you can limit this risk at the outset, this doesn’t meant that you can’t lose money. You should be realistic about your chances of making money and always be more concerned with what you can lose, rather than focusing on what you might win.
The next thing to consider is how you are going to divide up your trading capital. You should have a clear picture of how much you plan to risk on each trade. Even though when trading with Forex Binaries your risk is fixed, you should not be tempted to deviate from your plan. It is generally recommended that you don’t risk more than 2-3% of your available account capital on any single trade. In this way you can still make good profits but limit your loss. So for an account of say, $1000 , you shouldn’t be risking any more than $30 per trade.
Many traders assess their trading capital weekly or at the end of each month. This allows them to work out the percentage allow action that they can make on any upcoming opportunities that you want to take. By risking a fixed percentage , it is possible to increase your gains over time as your account size grows. Your staking remains the same in relative terms. However the actual amount that you risk (and potentially profit) will increase over time.
Every trading strategy will go through periods of under performance. You may even see successive losses. This is to be expected and is an inherent part of trading. However the important thing is how well the strategy can stand up to these losses. You don’t want to be in a position where a loss ends up wiping out your account. Therefore you need to be able to weather any storms so that you have sufficient capital left in place to capitalize on the next winning streak.