Hey everyone, thanks for joining me for today’s Binary Options Corner trading tips post! As I mentioned in the last trading tips post, trading binary options can be a bit risky. Just like with any other form of investment, you run the risk of losing money every time you trade. That’s why in the world of investing we’ve got the term risk management. Managing your loss exposure when trading binary options is one of the best ways to bring your risk down. So, today I’m going to share the 2 most common loss exposure techniques, how to gauge your comfort level with risk, what loss exposure is, and why it’s so important to keep it mind when trading binary options. So, let’s get right to it…
Defining Your Comfort Level With Risk
Before we get into managing your loss exposure, you’re going to have to figure out just how comfortable you are with risk. The way I look at it, there are 3 different comfort levels. Those include…
- Not At All Comfortable With Risk – If you’re one of those investors in the later years of your life with most of your money sitting in bonds because you think stocks may be too risky, chances are, you’re not at all comfortable with risk. That’s OK too. However, if you’re not at all comfortable with risk, binary options trading just isn’t for you. Speak with your financial adviser to find out about other, less risky forms of investments.
- Moderately Comfortable With Risk – If you’re an investor with a decent amount of money in stocks because you’d rather earn the high reward, but still balance your portfolio evenly with bonds and other forms of low-risk investments, chances are, you’re moderately comfortable with risk. In this case, it’s definitely possible for you to be comfortable in the binary options trading arena. You’ll just want to follow a loss exposure strategy that is designed for people who are comfortable with moderate risk. I’ll give you a great strategy in a minute.
- Extremely Comfortable With Risk – If you’re an investor that’s willing to try anything once no matter how risky it is as long as it has the potential for a high return, you’re most likely extremely comfortable with risk. Your main goal in investing is to allow your dollars to work as fast and as hard as possible for you. Even in this case, it’s important to manage your loss exposure. I’ve got a great, aggressive strategy for you below.
What Is Loss Exposure?
Loss exposure is a term that describes a very simple concept. If you have something that can possibly be lost in any way, it’s a display of loss exposure. For instance, if you leave your french fries on the table outside, it’s exposed to birds flying by. By bringing your french fries inside, you’re managing your loss exposure. In the binary options arena, every time you make a trade, you’re exposing your portfolio to losses. So, it’s incredibly important to manage your exposure in order to insure that you don’t lose too much!
2 Great Loss Exposure Strategies
Although there are tons of strategies out there designed to help you manage your loss exposure, there are two that I think are incredibly important to put in place from the very first day you start trading. One is designed for traders that are moderately comfortable with risk and the other is designed for those who are extremely comfortable with risk.
Moderate Risk – 5/15 Strategy
If you’re comfortable with moderate risk, the 5/15 strategy is going to be the perfect binary options trading risk management strategy for you. The strategy is simple. The first number is the percent of your investing dollars you should feel comfortable using for any given trade at any given time. The second number is the percent of your investing dollars that you should feel comfortable using in active trades at any given time. So, here’s an example of the rule…
Total Investing Dollars – $500 (What I would suggest as the minimum to start an account with)
Max Spend On A Single Trade – $25
Max Spend On All Active Trades – $75
Based on this strategy, and the numbers above, you could have 3 active trades at $25 a piece at any given time. Or, you can split the numbers up. For instance, you could have 7 $10 and 1 $5 trade going at any given time. As long as no more than 15% of your entire investing dollars is exposed to risk in active trades at any given time, you should be OK.
Aggressive – 10/30 Strategy
If you’re an aggressive trader, you’re going to want to see returns as quickly as possible. In order for this to happen you’re going to need to employ a more aggressive loss exposure strategy. Nonetheless, it’s still important to keep your exposure at a manageable rate. The 10/30 strategy is perfect for this. Here’s an example of the 10/30 strategy…
Total Investing Dollars – $500
Max Spend On A Single Trade – $50
Max Spend On All Active Trades – $150
Based on this strategy, and the numbers above, you could have 3 active trades at $50 a piece at any given time. You also have the opportunity to split your active trade budget of $150 up over as many trades as you’d like. As long as you don’t spend more than $50 on a single trade and more than $150 on all active trades at any given time, you should do just fine.
Risk management is important in any type of investment. Loss exposure management is a great way to manage your risk. When trading binary options, it’s easy to get emotional about earnings on a previous trade and want to throw a good bit of your money into the next. However doing so can open your portfolio to losses that no one wants to take. With that said, by managing your loss exposure, you’ll never be a victim to emotion fueled over trading!
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