What is Money Management?
Money management is a must for everyone looking to be involved in the financial market. But what is money management?
In plain English, it means the ability of administering risk, or, the ability to manage the money in your account for the final goal: making profit. It may seem easier, but being profitable on the long rung is not that easy and this is coming only through solid money management techniques.
There are a lot of them out there, starting with avoiding over trading techniques and going into more complicated stuff, but the most important one is the classical one: don’t put all your eggs in the same basket. This is diversification.
First of all, look at what currency pairs you want to trade binary options on in the next week, and decide the amount you want to invest.
Second, split the amount between the various currency pairs you want to trade.
Third, split the amount further into smaller ones and trade a currency pair multiple times, having the opportunity to actual be wrong for a couple of times but still in the end to make money.
Using Different Expiration Dates
Moreover, choose different expiration dates as markets are known for being extremely volatile and by doing that your strategy is safer.
On the same note, try to do your analysis on the bigger time frames and therefore avoiding spikes.
And finally, divide the whole amount you want to use for trading purposes between different brokers.
Dividing your portfolio or money management represents nothing but protection against unpredictable things that happen when trading as, like we all know, trading is influenced both from a technical and fundamental analysis point of view.
Therefore, the whole idea when talking about money management is to try to diversify everything with the sole purpose of protecting your investment.
Splitting the Risk
The first thing to start from is the broker. There is a saying that one should never put all the eggs in the same basket, and this is very much true when it comes to binary options brokers. It is recommended that, for example, if one is interested in funding a trading account with, let’s say 5000 $, then the logical thing to do is to split the amount into 2-3 equal parts and open 2-3 different trading accounts with 2-3 different brokers.
This way the risk that the broker is going to go bankrupt or fail on its promises is being diminished by 2-3 times.
Moving forward, splitting the investment assets the broker is offering is key as well, and the split should be made based on the different asset classes the binary options broker is offering: FX instruments, indices, stocks, oil, gold, other commodities, etc.
The reason why this step is necessary comes from the fact that each and every class is being influenced by different factors and drivers and what is valid for one asset class may not even more other market.
To give you an example, on a rate hike from a major central bank, like the ECB (European Central Bank) for example, the Euro related pairs in the FX market as well as Euro shares are going to be influenced and volatility should be higher when compared with the shares in US or the US dollar majors like usdchf or usdcad.
Coming back to the example from above, the portfolio should be divided into equal parts based on what assets are going to be traded. In our example, there are six different asset classes so six the amount to be traded should be split into six different parts.
Divide the Assets
The next step is to divide the asset classes into sub-classes if there is this possibility and the resulting number of sub-classes should benefit from the original amount of that class divided with the number of sub-classes.
The perfect example for that comes from the FX market where the FX instruments can be divided into majors and crosses as we all know by now that majors are traveling faster than crosses and different strategies can be applied.
The last thing to do is to split the investment one wants to make into the currency pairs that are intended to be traded. In this sense, for example in trading FX majors, it makes no point to trade currencies that move in the same direction, unless you get a better price. If call options for the EURUSD are being traded and market moves in your favor, then trading call options for GBPUSD let’s say makes no sense as long as EURUSD call option is in the money as basically this means overtrading and overexposure, but more about this subject to be find out in our next binary options article.