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The Importance of Money Management /

How to properly Manage your Investments


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An efficient winning strategy in binary options also contains money management. The
money management part in binary options is not a strategy that will help you predict the
movement of certain assets. Its a strategy that will help you manage your assets well in
order to achieve your desired profitability ratio.

Money management is generally ignored by most binary options traders. This is


because they believe that its enough to be able to predict the movement of the assets
and everything else will follow automatically after this. However, if you dont have the
necessary discipline in order to manage your finances you might actually end up losing
money rather than winning.

A good binary options money management strategy basically has two main parts, which
are taking some risks as well as having the discipline to abide to the rules that you
have proposed in your money management strategy.

There are a lot of binary options money management strategies available. Below in this
article we tried to outline most of these strategies. Based on your trading style and goals
you may decide yourself which strategy youd like to use.

Most Efficient Money Management Strategies


First of all wed like to reiterate the issue about discipline. Sure, you will be trading with
your own money and as such you can do whatever you want, however if youre really
committed towards making money in binary options then you will have to have discipline
and follow the proposed strategies to the letter.

Below we tried to compile a list of the best binary options money management
strategies. We wont tell you which strategy to use, however after reading the below
descriptions you will be easily able to find the strategy that best fits your needs.
The below strategies focus on establishing various minimum winning or maximum losing
requirements and limits. The idea is that once you reach the proposed limits you will
have to stop trading no matter how much money you have won or how much money you
have lost.

Number of wins & number of losses


This is one of the most common money management strategies in binary options. If you
use this strategy, you will have to propose yourself a daily total number of wins or loses
limit. Once you reach one of these limits you will immediately stop trading.

For example, you may propose to win a maximum of 10 times per day. Once you have
reached this limit you will stop trading. This is because it may happen that you may get
caught up in the heat and enthusiasm and may become reckless in the process of
purchasing new contracts.

This is a common psychological reaction among financial traders and you should not
underestimate it.

Likewise, you should also propose a maximum loss requirement. If, for example, you
have lost 10 trades today you decide to stop no matter what. This is because if you just
propose a maximum winning requirement you may as well lose 100 trades before you
win 10 (usually never happens but we overdramatized it for the sake of the example).

This way if you have lost 10 times during the day, you will stop trading no matter what.
This will prevent you from running after your money, something thats also a common
psychological phenomenon observed among financial traders.

Percentage of losses
This is basically the same as the above-mentioned example only in percentages.
However, this money management strategy is more permissive because it wont limit
you according to the number of trades won.

Instead, this strategy calls for you to stop immediately in case a certain percentage of
your trades are unsuccessful. For example, you may propose a percentage of 20%. If
youre good, you may only reach this percentage after 100 trades or never at all.
However, you may as well reach this percentage after 10 trades after which you should
stop for the day.
Amount of wins & amount of losses
This strategy is also very similar to the first one with the only difference being that you
propose to win a maximum of $X per day and not lose more than $Y per day. If you
reach one of these limits, you should stop immediately.

For example, you may propose to win a maximum of $100 per day and not to lose a
maximum of $50 per day. Once one of these limits is reached, you should stop trading
immediately.

We know its hard to stop when you have unfortunately lost but please do not run after
your money, it will make things worse since most people are very emotional in these
situations. Trading online is about being rational and objective.

Number of trades
This strategy requires you to stop trading after you have executed a certain number of
trades regardless of the outcome of those trades. You can also combine this strategy
with any of the above.

Winning ratio
And the last binary options money management tip is to watch your winning ratio. If this
winning ratio drops below a certain level, such as 80%, you should stop trading. You will
have to calculate your winning ratio after each trade you execute. The best thing to do is
to use an excel file for this purpose.

Risk Level Strategies


Now you might be asking what the best percentages and ratios are in the case of the
above-mentioned strategies. Like, whats the best minimum winning ratio, for example.
This will depend on the risk you are willing to take.

Below we have established the recommended rates and percentages for the above-
mentioned strategies taking in consideration the risk level you are willing to take.

Low risk strategy


A low risk binary options money management strategy is for those who do not wish to
take high risks. This will result in fewer profits but generally few or no losses at all.

Number of wins & number of losses


Stop trading after 10 wins

Stop trading after 4 losses

Percentage of losses
Stop trading after 8% losses

Amount of wins & amount of losses


Stop trading after $50 profits

Stop trading after $25 losses

Winning ratio
Stop trading if the winning ratio becomes lower than 80%

Number of trades
Stop after 10 trades

Medium risk strategy


The medium risk money management strategy is for those who would like to earn some
extra money but still arent 100% sure if they want to go all in.

Number of wins & number of losses


Stop after 30 wins

Stop after 10 losses

Percentage of losses
Stop after losing 15% of your contracts

Amount of wins & amount of losses


Stop after winning $150 in a session

Stop after losing $50

Winning ratio
Stop if your winning ratio becomes less than 75%

Number of trades
Stop after 50 trades

High risk strategy


The high risk strategy is for those who are not afraid to lose large sums of money with
the prospect of making huge profits fast. This risk assessment binary options strategy is
only recommended to experts.

In this case, well be allowing for a bit more flexibility and have defined the limits a bit
loose (defined by the + sign).

Number of wins & number of losses


Stop after 100+ wins

Stop after 30 losses

Percentage of losses
Stop if you lose 25% of your trades

Amount of wins & amount of losses


You are already an expert, so you do not need a maximum win amount limit.

However, stop if you lose more than $100 in a session

Winning ratio
Stop if your winning ratio drops below 65%.

Number of trades
You can trade as much as you want, however in this case choose another limit from
the ones mentioned above.

General Tips and Guidelines


There are also some general tips and guidelines when it comes to the money
management strategies mentioned above. The first is that you may also naturally use
different numbers and percentages than the ones listed above (but still in the range of
the ones mentioned by us.)

In the beginning and if you are a newcomer you should still strongly consider using the
limits written above in the case of the low risk strategy though. Later on you may
establish your own limits by slightly modifying the ones mentioned by us.
However, no matter what kinds of limits you use you should ALWAYS have the discipline
to stick to those limits no matter what happens. This is one of the most important things
to keep in mind.

Another suggestion is that you may combine two or more of the above-mentioned limits.
For example, you may propose to not lose more than 10 trades per day and not trade
more than a total of 50 trades.

The rule in this case is that you should stop trading whenever one of these conditions is
met. For example, if you have lost 10 times but you only traded 20 times you should
stop, even though you also proposed to trade a total of 50 trades.

And this is all we have to teach you in this binary options strategy article. Remember, a
proper binary options trading money management strategy is essential in becoming a
winning trader, so this guide is perhaps one of the most important pieces of advice we
can give you. Trading binary options successfully doesnt depends on luck, it depends
on commitment and discipline.

The Role of Psychology While Trading


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Traders require numerous attributes and abilities for them to be successful in the
financial markets. The most troublesome issues we confront as traders are the ones
that we dont even know exist. Certain human inclinations influence our trading, yet we
are often completely unaware that they are affecting us. A major slip-up that newbies
make when first figuring out how to trade is to expect that developing technical or
fundamental analysis skills alone will allow them to become a successful trader. Truth be
told, figuring out how to control emotions is the most critical skill a trader could develop
to become a successful trader. When trading in a technical way, we can see where we
have failed and attempt to fix it for our next trade. When we have a solid trading plan
and are still losing cash, we have to take a gander at ourselves and our psychology for a
solution to the problem.
Trading psychology refers to the aspects of an individuals mental makeup that dictate
whether he or she will be successful in buying and selling securities to make a profit.
Discipline and risk-taking are two of the most critical aspects of trading psychology. A
traders implementation of these aspects is essential to the success of his or her trading
plan. Fear and greed are the two most commonly known emotions associated with
trading psychology; other emotions that drive trading behavior are ego and regret.

Greed is when people have an excessive desire for wealth. Greed is your worst enemy.
When a trader experiences greed, it means that they try to go for too much profit and
deviate from their trading plan. This causes traders to take on larger trade sizes than
what they normally would. Theres an old saying on Wall Street pigs get slaughtered.

Fear is simply a natural reaction to what individuals perceive as threats. Fear causes
traders to refrain from taking on risk because of their concern for losses. This means
that they avoid making trades altogether or use smaller trade sizes than what they
should.

Regret may cause traders to take a trade after initially missing out on the best entry
according to their trading plan. This is a violation of trading discipline and will more often
than not, result in the trader getting in too late. Regret may also cause traders to
revenge trade. Revenge trading is when a trader chases the losses they have made.
They are so focused on winning the money back which they have lost that they fail to
realize they are not trading with a set of rules anymore. Each trade ends up resulting in
another loss.

A trader affected by their ego does not want to admit they are wrong. When traders take
a loss on a perfectly valid trade, they will not go on to search for the following setup per
their trading plan. Instead, they continue making trades based on their original analysis
because they believe that they were right in the first place. Ego can bring about a whole
string of losses if you cant control it.

Successful trading is determined by many trades and not just any one single trade. This
implies that a trader must be disciplined enough to adhere to the rules of their system
without letting emotions get in their way. This is not as easy as it sounds because we, as
human beings, often do not behave in a logical way. There are many times that
emotions will influence us, and we act differently to normal.

Do you recall the last time you were furious about something? Perhaps you did
something and you were surprised by your actions that you took. As much as you
thought twice about it thereafter, at the time you most likely couldnt help it. Besides, you
are likely to act the same way again if you are in a similar situation. This is because the
psychology of an individual is made up of thoughts and feelings that are an incitement to
act. Psychology shapes our behavior in every aspect of our lives trading is no
exception.

Emotions are inescapable particularly for a newbie trader. They can keep you from
making an objective decision. Thus, figuring out how to control emotion becomes
paramount to successful trading over and above everything else.

The importance of discipline when trading


You will need to build discipline that will allow you to think as objectively as possible in
order to avoid emotionally influenced trading. There are a few ways in which you can
achieve this:
Using a proven strategy:
Traders are much more likely to remain calm if they have confidence in their trading
plan. If the strategy has not been tested enough times, it may lead to doubts that could
allow fear to impact the trader.
Demo account trading:
Testing your strategy on a demo account will help you build confidence in your trading
plan. This should allow you to keep calm when you are under pressure.
Decrease your risk:
Using real money will create additional pressure that will likely amplify negative
emotions that are involved when trading. This is why it is a smart idea to start with the
minimal trade size until you can learn to control your emotions.
Accepting the risk:
Traders should be prepared to take losses. A strategy with a 100% winning ratio is
unrealistic. It s okay to hope that all trades should turn out as winners nobody likes
losing. New traders are likely to experience a stronger emotional impact when they take
a loss compared to experienced traders. Professional traders are able to accept losses
as part of trading. They can move on to their next trade without allowing greed or fear to
affect their future trading decisions.

When a trader is thinking clearly without any influence from emotions, they are said to
be in the zone. When you are in the zone, you can control your feelings and are able
to trade in a logical and systematic way. Some traders find it easier than other to get in
the zone, but even those who struggle can learn to control their actions and become
emotionally detached from trading.

The 14 Stages of Trader Emotions


Trading psychology can be a roller coaster ride for most traders. Knowing that we can
never conquer our emotional biases, we must learn to understand the scope of
emotions we may encounter as traders, and how it will influence our interaction with the
financial markets. There is a common market psychology cycle that exists, which
explains how emotions develop and the impact they have on our decisions. Having the
knowledge of this cycle, we can tame the emotional roller coaster. The figure below is a
visual representation of the 14 stages that I will cover below.

1. OPTIMISM It all begins with a positive outlook or a hunch leading us to buy or sell.
2. EXCITEMENT Things start moving our direction, and we begin to envision what our
market success could hold for our future.
3. THRILL We feel smart at this point because the market keeps on being favorable to us.
We will have complete confidence in our trading system.
4. EUPHORIA This is the point of maximum financial risk and financial gain. Our trading
turns our investments into quick and easy profits. We begin to ignore the fundamental concept
of risk and expect every trade to become profitable.
5. ANXIETY The markets starts to turn and takes our hard earned gains back. We tell
ourselves that all our ideas will eventually work so we stick to the plan.
6. DENIAL The markets dont do as we had hoped. There must be something wrong, we
think to ourselves. We deny that we made poor choices and think that things will improve
shortly.
7. FEAR Reality sets in we are not as smart as we once thought. Confidence in our
trading plan starts to fade.
8. DESPERATION All gains have been lost at this point. Not knowing how to act, we
attempt to do anything that will bring our investment back to breakeven.
9. PANIC This is the most emotional period by far. We have exhausted all ideas and are at
a loss for what to do next. It feels like we have no control over what will happen.
10. CAPITULATION We have reached our breaking point, and we settle for what we have
left over.
11. DESPONDENCY After exiting the markets, we feel as if we never want to trade again.
We think that the markets are not for us, and we should avoid it like the plague. However, this
often marks the point of maximum financial opportunity.
12. DEPRESSION Not knowing how we could be so foolish, we are left trying to understand
our actions. Some start to look back and analyze what went wrong. This is where real traders
are born when they learn from their past mistakes.
13. HOPE Eventually we come to the realization that markets move in cycles. We begin
looking for our next opportunity.
14. RELIEF Having made a profitable trade, we regain our faith in our ability to grow our
investments. The cycle starts all over again!
Traders clearly follow this cycle in their decision-making process. That is why we should
expect markets to track this pattern as well. If we can identify the stage of the cycle we
are experiencing, we will have a greater grasp of how our emotions are affecting our
trading decisions. This knowledge will also help us understand how other traders might
be thinking, so we could use it to our advantage.

Conclusion

Now that we know that an individuals psychology plays a huge role in his decision-
making process, it is important for us, as traders, to be able to keep these emotions
under control. In order to overcome these mind matters, you should set yourself some
trading rules, build a trading plan, do lots of research and get all the necessary
experience. There will be times that emotions will have a bigger impact on you than
normal, but the important part is to be disciplined and follow the rules and guidelines
that you have set. Print some of them and stick it on the wall to remind yourself what you
should do.