2020 risk-reward ratio - minimize risk - how it works!

2020 risk-reward ratio: is it possible to minimize the risk potential of binary options? Open an account now & learn the basics.

Trading is primarily about analyzing prices and risk management. How to analyze the courses is up to each dealer. As a result, traders often use different setups and patterns to signal when to buy.

Risk management can also vary, but most traders agree that leveraged derivatives, in particular, should take a low risk as the Lever also works in the opposite direction.

The difference between the risk of a CFD and that of a binary option

To clarify the product structure and the risk following a comparison between the risk of a CFD on the DAX -Future and a binary option on the same course. To calculate the risk of a CFD, we first need to know what the point value of a DAX CFD is. Usually this is € 10, while there is no point value for binary options.

Point Value DAX-CFD10 € capital € 5,000 maximum acceptable loss per trade1% / € 50 point value binary optionx capital € 5,000 maximum acceptable Loss = investment sum 1% / € 50

The difference is immediately clear: the same trade in the CFD is associated with a higher risk at first glance, because the € 50 loss is already achieved after a 5-point change in the DAX price. On the other hand, the profit is also unlimited. Each point increase in a long position is rewarded with € 10, while the profit with a binary option is usually limited to 80%, i.e. € 40. The security on the one hand is paid with a cut in the profit. From the following finding it could therefore be deduced that binary options are better suited for beginners than CFDs, since this makes active risk management easier.

2020 risk-reward ratio - minimize risk - how it works!

Another way of minimizing risk

The step outlined above is one of the first that a trader should take - and that for every single trade. In addition, a favorable risk-reward ratio can reduce the risk enormously. However, this is not so much a matter of calculating the risk on the basis of the maximum acceptable loss, but rather of choosing favorable entry points. The question is: if I take a position at the given time, is the loss on negative outcome less than the profit on positive outcome of the trade? If this is the case, then one speaks of a cheap CRV.

But how do you get a cheap technical CRV? This is an essential task for a trader and can be simply expressed as follows: the better the timing, the better the CRV. This means that the better the price when you get started, the lower the risk, the lower the price.

In trading it is not so easy to achieve good timing. If so, any trader could get rich without any problems. There are two hurdles that stand in the way of a trader:

  1. Too little information
  2. Reverse thinking contradicts logical thinking

The first point may well be or badly not avoided, because there are always market participants who have better information than the private trader. The information everyone has is market technology. The private trader must either expand his competence towards others through market technology or take point No. 2.

The point No. 2 is easy to explain in theory. Implementing it, however, makes most fail, because that requires a reverse mindset and, above all, experience with regard to course behavior. The second point requires entry in the opposite direction; you buy accordingly when prices fall and sell when prices rise. However, traders cannot apply this statement across the board, because the market direction must be the right one. Therefore, one should avoid reaching indiscriminately into a "falling knife".

The upper chart of the DAX futures shows a clear upward trend. So the basic direction is long. To get a good CRV in this case, the trader should choose a price that is as cheap as possible. This in turn means that he is buying directly from a support - alternatively, he can also wait and see if the price turns at this level.

If traders now hedge themselves below this support - provided they are trading CFDs - then the loss at the end is less than the profit if the price actually turns at this point. If you trade binary options, it is less about the hedge, but more about the fact that the probability of a reversal is very high and you can quickly get "in the money". The technical CRV also reduces the risk when trading binary options.

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Conclusion

Risk management is one of the first steps that a trader must take before making a trade received. The difference between CFDs and binary options is that CFDs have unlimited risk and unlimited profit potential.

Binary options have both a limited risk and a limited profit potential. To further reduce the risk potential, the technical CRV can be a good help. It is often used by CFD traders, but it can also improve trading tactics in the case of binary options. With 24Option as an established broker for German-speaking customers, beginners can immediately see the tactics.

2020 risk-reward ratio - minimize risk - how it works!

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