Like many other financial market products, binary options offer advantages and disadvantages. Financial market products are therefore often a bit complicated to understand and do not inspire confidence in the private trader. In the eyes of the inexperienced trader, the structure of the product seems to favor the provider. But if you look at the products in a catchy way, you will notice the differences.
The advantage of shares over binary options is, for example, the possible sale. While binary options can only be sold prematurely under certain conditions and not with all brokers, shares can be bought and sold at any time, depending on trading hours. On the other hand, binary options offer the possibility of trading with a small share of capital and outside of trading hours. Whether this is an advantage then depends on the trader himself. Success often depends on factors other than the structure of the product. One of these factors is money management.
How does money management work?
The term money management is familiar to every experienced trader and actually describes the meticulous management of existing capital. And this is exactly where you can already tell the difference between a gambler and a trader: the trader is always aware of his amount and stake, while the player recklessly raises his bets, hoping to land the big hit with the next trade.
The components of money management generally include all activities relating to managing capital:
- Maintaining a trading journal
- Planning the risk (risk management) depending on the available capital
- Planning the position sizes
In the narrower sense, money management only refers to the determination of the next assignment depending on capital. In the next example, we would like to trade a broker's option on the Dax. Regardless of whether call or put, we first have to determine what we are willing to do for it. The whole thing could look something like this:Equity € 5,000 fixed stake / trade relative5.0% fixed stake / trade absolute € 250
So if the trader stakes 5% per trade, he virtually manages his capital and protects at the same time from rapid losses. Money management is therefore very closely designed for risk management, although there is still another delimitation for risk management.
How does risk management work?
Im In contrast to money management in the narrower sense, the trader does not calculate the position size as part of risk management, but rather the maximum loss he accepts. Here, too, he can make a relative statement that corresponds to his risk preferences. We'll see why this is particularly important for other products.
If, for example, the trader wants to trade a futures contract on the US index S&P 500 instead of a binary option. This means that there is no other choice for risk limitation than working with manually defined stops. For example, this could look like this:Equity € 10,000 profit / loss per point € 50 maximum acceptance for loss relative5.0% maximum acceptance for loss absolute € 500 maximum number of points for loss500: 50 = 10 pts.Stop Loss = purchase price - 10 Item 2.010-10 = 2,000 item
As you can see, in this case the trader not only manages the existing capital, but his risk. He thus defines the 5% as a possibility of loss. He is ready to lose this on the trade. He converts this percentage into points and sets the stop manually. Which use he makes for this is not important at first, because he only deposits a security deposit that he will get back in any case, whether profit or loss.
However, in the case of binary options, this part is completely omitted, because the loss limit is already built into the structure of the product. So what the binary options trader has to do is just focus on money management.
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In summary, we can state that financial market products are within and above their structure May have disadvantages. In the case of futures, it is the security deposit and the standardization by the exchange. However, the complexity of the product in terms of money and risk management has a disadvantage for the private trader.
With binary options, the advantage is that money and risk management, which usually overlaps anyway, is one and the same. When the trader has determined his stake, he also determines the largest possible loss that he can accept.
Basically, it should be said that traders are trading in leveraged products, i.e. products in which the return is many times higher is higher than the stake, the accepted loss per trade should never be higher than 5% of the available capital and even 5% is already an increased risk.
Binary options do appear to be non-leveraged, nevertheless Is it you. The inexperienced trader can easily recognize this from the fact that the return exceeds the price change of the traded underlying by a multiple. In our example, this would mean that if the S&P 500 index rose from 2010 to 2020 points from the current level, it would be a change of 0.5%. So if we buy this index without leverage, we pay the full price of 2010 U $ and only have a profit of 10 U $ (simplified without commissions etc.). When trading binary options, however, we achieve returns far in the one- to two-digit range.S&P 500 current price2,010 points S&P 500 price at the end of the day2,020 points 500 U $