Traders have the ability to prevent huge losses through the use of risk management strategies such as stop losses or hedging strategies. Some of these strategies have been around for a while and have been proven to work well with traditional securities like stocks, currencies or commodities.
Some of these risk management strategies have also been adapted by some traders for options trading. Although these methods do work well with all the traditional securities that we are accustomed to, they do not necessarily be applicable for binary trading.
With binaries, traders do not own the underlying asset but in essence “renting” it for a short period of time. It is one of the simplest forms of financial investing with the potential of high returns.
When the complexity and dynamics of ownership for an underlying asset changes, it goes without saying that the risk management aspect for the instrument also changes.
Binary Options Risk Management Tools
Comparatively, trading with binary options involve less risks than trading with futures or . As such, there is a tendency among most binary brokers to ignore the provision of risk management tools for their clients.
However, some binary brokers do incorporate risk management tools as an integral part of their trading platform. So what are the tools that binary traders can expect their brokers to provide? Essentially, there are two tools that a trader should look out for when choosing their brokers. These two main tools are “Rollover” and “Buy Me Out”.
Bearing in mind that a binary trader is essentially “renting” an underlying asset for a certain timeframe, he can only make a profit during this particular timeframe.
So in the prices moves in the investor’s favour during this timeframe, he gets to make a profit. However, if prices move in the opposite direction of what the investor anticipated, he would end up out of the money losing all his investment.
Regardless of how experienced or knowledgeable a trader is, there is always the risk of the market not moving according to what is anticipated. This is an undeniably fact which all traders must learn to accept first.
Once a trader has learnt to accept this, he will be able to objectively decide if he should or not extend his initial losing trade.
With the “Rollover” feature on the trading platform, a trader can choose or not to extend the expiry time of his trade. This feature essentially allows a trader another chance to close in the money if he thinks that it is worth it to extend the expiry of his current trade.
Buy Me Out Feature
This is another tool which trader can utilize to reduce the losses that they are facing when trading binaries.
As we all know, binaries have a fixed expiry time. Between the time a trade enter into a trade and the expiry time, the trader faces two possible outcomes, in the money or out of the money.
There is no problem if a trader ended up in the money. However, with the out of the money scenario, a trader is faced with complete losses. With the “Buy Me Out” feature, a trader can avoid this situation by closing his trade early before its expiry time.
Even though the trader ended up with some losses, he will still manage to get the bulk of his investment back.
As mentioned earlier, risk is an integral part of financial investing. Risk management is about the use of tools to help traders can reduce the risk that they face.