Strategies to Mitigate Risk as a Binary Options Trader

Like every other online financial venture, binary trading is risky. There are also a lot of illegal and unregulated online binary options brokers who seek to defraud unsuspecting traders.

That is why it’s essential to verify the validity of an online broker before trusting them with your hard-earned money. One of the best ways to ensure an online broker is legit is by checking out independent online reviews.

Because binary trading is risky, it’s crucial to have a strategy to minimize losses. This is known as risk management.

Risk management also involves weighing potential gains and losses before placing a trade. There are different risk management strategies in binary options trading, and the one used depends on the type of trade.

What are binary options trading?

Binary options are a financial instrument that allows traders to predict the prices of financial assets with a yes or no preposition within a specific period.

Simply put, it means betting on whether the price of an asset will increase or decrease at a particular time.

For example, you can bet on the stock price of Microsoft, the price of cryptocurrencies such as Bitcoin, and the price of Gold or silver. Some people bet on both cryptocurrencies and stocks in different trades.

The time span of binary options contracts can last for 60 seconds or more. You can stake from $0 to $100 on any asset you choose.

They are called binary because there are only two possible outcomes on the contract’s expiration— you either win if your prediction is right, or you lose the amount you used to make the trade if your prediction is wrong.

That’s why practicing with a demo account is always advisable before you stake real money.

Are binary options regulated?

Binary options are regulated in many countries, including the USA, UK, Australia, and Japan.

Different regions have different laws regarding binary options. Some regions regard them as legitimate financial instruments. It’s important to look up regulations in your region before indulging in them.

Before choosing a binary options broker, ensure it is licensed and complies with the regulatory laws in your region to avoid falling prey to binary options frauds or getting in trouble with the law.

Strategies to reduce risk in binary options trading

Some of the most effective strategies to minimize the risk in binary options include:

Diversification

Diversification is undoubtedly an essential risk management strategy because putting all your eggs in one basket is never good. Diversification means spreading your capital across several assets and markets to minimize the impact of losses.

For example, a trader who invested solely in silver may find himself in a precarious financial situation if the market crashes. On the other hand, another trader who invested in silver, cocoa, and oil won’t lose all their capital if one or two markets crash.

Evaluate risks

Risk evaluation is a critical aspect of curtailing losses when trading binary options. Because binary options are fixed-outcome investments, you know how much you stand to gain or lose up front.

The maximum loss is usually the amount you wager on the trade. In some cases, brokers offer rebates on losing trades, so check this before entering a trade.

To reduce potential losses as much as possible, you should always imagine the worst-case scenario when trading, as this will help you stay on track.  

Do not involve emotions

Emotions are a barrier to sound logic, and successful trading is built on sound logic. If you involve emotions when trading, you will likely make reckless decisions.

Traders who get excited after a winning streak may deviate from tested and trusted strategies and place trades without careful analysis and consideration. Likewise, traders desperately trying to recoup losses are less likely to think straight.

Whether you’re winning or losing, it’s always in a trader’s best interest to stick to the original plan or strategy.

Position size

Position size determines how much money you stake in a single trade. This should not be chosen at random.

It should be a formula applied to every trade, depending on your capital. The 1% rule is a widely used formula that states you shouldn’t use more than 1% of your total capital on a trade.

For example, if you have $2,000 in your trading account, you should not place more than $20 on a single trade. This ensures you’ll still have enough money to continue trading if things go south.

Stay Up to Date

Markets are constantly changing. Civil unrest, political crises, and economic problems are some factors that can significantly affect the market.

It would help if you stayed up to date with current events relevant to the underlying asset you trade. This will help you analyze their impact and make the right decisions early.

For example, if an asset is scarce for any reason, it can lead to an increase in price which will directly affect the risk of trading that asset.

Be Realistic

Many people enter binary options trading with the misconception that it’s a get-rich-quick scheme.

Binary options may be a bit easier than other forms of trading, but it’s still risky and requires consistent effort over some time to be profitable. If you start binary trading with the mindset of getting rich overnight, you’re in for a rude awakening.

Final Thoughts

Binary options trading isn’t for everyone because of its high-risk nature. But for those who understand how to mitigate the risks, it can be a viable option to generate significant income over time.

The ultimate rule of trading is to never trade with money you cannot afford to lose. Also, it’s always a good idea to use trading strategies appropriate for your level of expertise.