Risk Management – 8% Rule » Day Trader Guide

Risk Management – 8% Rule

risk

 

Risk may be defined as the potential outcome from an action taken or lack of action taken, which will lead to a loss or unwanted outcome. Management can be defined in economic terms as the ability to identify strategies and the capability of maximizing the net value with the proper usage of scarce capital resources, as well as the implementation and oversight of any trading strategy in order to minimize losses.

Many different ways are available to limit your risk and to use risk management techniques to reduce or even prevent losses. There are options for Stop Losses as well as hedging strategies. Exit points can be used and Straddle Trading Systems can be used to not only limit loss, but to maximize profits. All are useful techniques when working with acquiring underlying assets such as stocks, commodities, currency pairs, and indices.

These types of strategies DO NOT WORK with Binary Options. In Binary Options Trading you do not own the asset, you are merely renting and/or wagering a possibility, betting — view Gambling and Binary Options, — on what an asset will do.

With Binary Options you do not own anything. You only possess the ability to purchase/sell an option at a future date and price.

This is great! Don’t view this as a negative, but more as a positive. Binary Options Brokers provide a much simpler, less risky, and more profitable way of trading by avoiding taking full possession and cost of any asset. When you remove the intricacy and associated risks of actually taking ownership of an asset, you have to reconsider the trading methods and tools used to create a different form of risk management, one that is built specifically for Binary Options Trading. Because Binary Options Trading is much simpler than traditional market trading the risk management efforts are too.

Binary Options offer a reduced risk level. Many brokers who provide these trading platforms also provide their own distinct forms of risk management tools in order to close the gap between the loss/reward ratio. Even the most experienced investors need tools to minimize their losses; and the lower risk a trader is subject to, the higher are the potential gains. This will eventually lead to a longer lifespan as an e-trader.

One of the greatest problems most entry traders have, even those who convert from Forex to Binary Options, is that after the first set of losses they become disgruntled and never return to the trading platform. The problem is that you’ve just experienced a costly lesson; but chances are you are now much more prepared for the next time. So don’t quit– there’s still hope for you! In fact, you may well be on your way to success.

Let me introduce you to the 8 % rule, a basic trading principle.

The rule is that each investment should be no higher than 8% of the total funds in your account.

Even if you are completely certain about a potential trade, make sure you have plenty left in your account should you suffer a loss.

It’s impossible to be 100% accurate when trading short-term outcomes, on which a majority of Binary Options are based, such as 60 Second Trading. Ideally, you’ll need to be accurate over 50% of the time, with the right payout rates, to be a successful trader.

See our Broker Comparison page to view which brokers offer the highest payout rates.

 

 

 
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