What is the Forex Risk and Money Management? Simply, is a “set of methods and strategies” aimed at obtaining maximum profits and reducing the possible losses. All the Traders, specially the novice Traders, should be able to know how to manage their money wisely, to avoid unpleasant losses and to improve the revenue side. The Money Management can be applied to any financial instrument, Binary Options included. Unfortunately, very often the money management is underestimated by many Traders and is an aspect that is very important, if you want to have long-term earnings. There are a lot of methods of Money Management, and in the most case they are just “wise advice”, that you should follow.
For example, you should keep a “Trading Diary”; you should mark every day on the Trading Diary: how many trades you have done, how much money you have invested for each Trade and the profit or loss of each Trade. Doing this, you will be able to analyze every day of Trading.
Moreover, you should always consider how much money you have to invest in Trading: usually the initial amount that you should deposit into your account for the Trading, should correspond to an amount of money that you can afford to lose (So it should be an amount of money that, although you would lost it, that would “not change you life”). In the case of Binary Options, the initial deposit is not high: many Brokers have set the minimum deposit to 100 EUR, others have set the minimum deposit around 200 euro. An “ideal” amount of money to deposit into your account for the Trading, should be between 500-1000 euro; but remember, the sum deposited shall be an amount that you can afford to lose. Even if you make a deposit of 100 or 200 euro to start the Trading, it’s okay: it’s up to you (If then you will feel confident with he Binary Options, you could add more money into your account).
Concept related to the previous one, is about the maximum amount of money to invest in each trade: normally it should be a 2-3% of the total amount of your portfolio for each operation that you will do. For example, if you have an account with 1000 EUR, for every single trade that you will do, you should not invest more than 20-30 EUR: this because in the case that you lose one of your trade, it will not be a problem for you (You lose only the 2-3% of the total amount of money available for Trading). Whereas if you had invested the 20% of your account (For example), so 200 euro: in the case that you had lost one of your trade, you had burned in just one Operation, 1/5 of the money available on your account! With all the stress related due to the high loss. Furthermore, other Traders recommend not to invest more than the 5% of your sum available for the Trading, at any time of a day: in the case of a 1000 euro account, you should invest not more than 50 euro at any time; not necessarily in One trade, but also in multiple Trades: the important thing is that the total amount of money invested, does not exceed the 5% (So you can invest 10 euro on a Trade, 20 euro on another trade and other 20 euro on another Trade = total of 50 euro invested). You need to establish a maximum amount of money to be invested for any Trade; amount, that you should always respect to avoid unpleasant “surprises” (As losses).
Other advice related to Money and Risk Management, can be this one: to know the market in which you will operate and to have all tools/knowledge useful to operate with the highest possible security. Moreover, it is very important to consider one Trade at a time, regardless of the previous Trade (No matter if it was a positive one or a negative one) to avoid to be influenced by the Previous one. Finally, it is also important to settle a ‘ Stop ‘ for the earnings and for the losses: If for example we set our daily stop at 100 euro, it means that once we will earn or lost 100 euro, we will stop Trading, taking the gain or loss (Of course this amount of money is purely demonstrative, but you should choose the right amount of money depending on how much money you have on your account and how much money you want to use for each Trade).
There is no Money Management strategy that can be applied “universally” to everyone: there are several factors to consider, from the amount of money available to your emotions. The important thing is to have a proper Strategy, no matter what it is, that you will always respect.