When managed with adequate tactical acumen and strategy, the profit margins that binary options promise are truly lucrative. Neither is there any significant gestation/lock-in period before traders can start earning profits, provided that market movements do actually match their speculations. However, just like any other financial trading activity, dealing in binary options also has its fair share of risks. As such, efficient management and minimization of such risks also assumes paramount significance.
Managing Binary Option Trading Risks
At the very start, investors need to be aware of the amount of risk that they are exposing themselves to via their trading activities. Ideally, a trader should ensure that not more than 5 per cent of the total portfolio value is involved in risky ventures. They should also be adept at interpreting market symbols and indicators, in order to estimate the direction in which the price of the underlying asset would move over time. This is important because profits would be generated only if the binary option remains ‘in-the-money’ at its time of maturity.
Placement of orders should also be done with maximum prudence, in order to prevent being exposed to an inordinate degree of financial risks. For this purpose, investors should work in collaboration with such brokers who would take decisions that would ideally suit the risk-appetite of the former. Different traders have different risk-acceptance levels and hence, customized order-placement and execution is necessary.
High profit figures appeal to every trader, but they must also keep in mind that bigger payoffs are also generally associated with more risks. Investors need to have a realistic target payoff figure in mind and they should adopt a systematic, careful approach towards attaining the same. Taking up offsetting positions can also prove to be beneficial in this regard.
Financial markets are, by nature, volatile and relatively uncertain. Hence, there are hardly any guarantees that the traders’ market speculations would prove to be correct all the time. Thus, they should also have a back-up plan to guard against potentially damaging losses, in case the binary option does become ‘out-of-the-money’ on maturity. Investors should get into such agreements which allow them to sell their option contracts before the expiry date, if price-changes are deemed to be unfavourable. There are certain brokers who have a policy of returning a certain amount on the capital that has been invested, even if the option is not executed. Trading via such brokers is also helpful in bringing down risk levels.
In order to be proficient in evaluating and managing risks, traders also need to be totally familiar with all the features of the binary option trading platform. The upfront amount that has to be paid while purchasing an option (also known as the option premium) indicates the monetary valuation of the maximum amount of risk related to any particular transaction. It is easy for investors to select such binary options or contracts whose premium figures are in accordance with their acceptable risk levels. Of course, when multiple binary options are held by an investor, accounts have to be managed accordingly.
Learning From Experience As A Binary Option Trader
No risk-management measure is completely full-proof. Losses can occur in spite of the best efforts of the investors. The focus should be on minimizing the amount and value of such bad trades. Investors should also try to analyze the causes behind such losses, so that mistakes are not repeated in future.
Ensuring decent profits with binary options is not the toughest task in the world. Traders, however, have to be good risk managers as well to make sure of the profitability of trade ventures.