Why do people lose their money when trading binary options
New traders frequently take a significant financial risk while trading binary options. As a result, they swiftly lose their initial investment and stop trading online.
Most newcomers lose money because they are ill-equipped to adequately manage risk or their resources.
Here’s an example:
Looks familiar, doesn’t it? Let’s see why Sam was wrong:
Sam makes a $200 investment, followed by an additional $20 or $50.
Sam didn’t even consider risk management while doing this, despite the fact that each trade carried a potential loss of 10% to 30% of his account value. Even seasoned traders never take a chance with more than 2% of their account. If you do, it’s simple to lose all of your money. In a moment, I’ll explain why. For now, think of this as the golden rule of money management.
Sam disregarded all of the plans.
He used one method for five deals before switching to another, then perhaps a third. This is also a grave error. To determine whether a strategy is effective for you, you must make at least 50 transactions and preferably 100. The outcome must then be evaluated in order to determine whether it advances your objectives.
Sam increases the already large investment amount in an effort to recover his lost funds.
He became insane after making a few deals that constantly paid off, so he boosted his investment to $50. This will undoubtedly blow your account. Maintain self-control and never flout your personal norms.
Why it is important to keep the risk per trade ratio at 2%
It is crucial to adhere to the money management guidelines when trading binary options. For most novice traders, the 2% risk per trade ratio is ideal, and it should always be adhered to.
You must understand that a trading method is only effective and profitable after you have used it to execute at least 50 or, ideally, 100 trades. Before that, it is too soon to make any judgments.
You will still place trades that succeed and ones that fail, regardless of the method you employ. There is nothing you can do about it. Being successful more often than not is crucial. You must ensure that your plan will succeed at least 65% of the time if you want a 75% return on your investment. In other words, you need to win at least 65 out of every 100 trades. If not, neither your account balance nor your ability to make money will increase.
The financial markets are often volatile and frequently unpredictable. Your approach might not always work, and you might suffer significant losses. A large wager, such as $20 in a $200 account, will result in a loss of 10% of your total capital on each trade. If you’ve experienced a few runs like this, you should add funds to your account right away.
Keep your risks moderate if you want to stay in the black even after many losses.
Find out how much you will need to invest based on the broker’s minimum investment requirement before you begin trading. If a broker requires a $5 minimum investment, you should deposit $5 times $50, or $250. You will be risking 2% of your account balance if you invest $5 in each transaction, and you will be able to test your strategy by engaging in at least 50 trades using real money. This strategy is clever and not too risky.
How To Increase Profits Without Exceeding Risks
By adhering to a few straightforward guidelines and strategies, you can increase your profit while maintaining the same degree of risk per trade. This section will demonstrate how to maximize your trade while keeping risk within acceptable bounds.
You are limited to investing no more than 2% of your account balance if you maintain the risk per trade ratio. How do you earn more money if you can’t multiply what you invest? The solution is straightforward: simply update your investment amount when your balance rises.
Consider that you have $200 in your account and choose to invest $4, or 2%, of that sum. Let’s assume that you were able to raise your balance to $250. You can now invest $5 every trade, improving your chances of success, based on a 2% risk to reward ratio.
On the other hand, it might work the other way around. Let’s assume that your balance falls to $150. Right now, you can only take a $3 risk (2 percent of $150).
It can get tedious to continually calculate your investment amount, especially if you trade quickly (with short-term options), as it takes time.
