Binary options trade – your recipe to be super-rich, or is it an apocalyptic tool?
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The all-or-nothing trades make the binary options. When you place a certain amount in a binary options trade, either you make a quantifiable gain, or you lose it all. It depends on the appreciation or depreciation of the price of an underlying asset at a specific price and time. Based on the amount you pledge, you either receive a payout if you are correct or if wrong, you lose the amount.
The US-based Nadex exchange allows the traders to buy or sell options till expiry. Thus, increasing the range and facilitating a chance to reduce losses.
Your position size determines your risk appetite. Should you pledge a higher capital? How risky is your pledged capital?
How much to risk?
The risk volume should be based on the total available trading capital. The risk engaged in a binary options trade should be a small percentage of the set total trading capital. It is advisable not to pledge more than 5% of your entire portfolio capital on the binary options trade. However, professional traders keep the exposure to 1% or less.
For example, let’s say you have a capital of $2000 in your account. You must keep the risk to $20 or $40, .i.e. risk of 1% or 2% respectively per binary options trade. Exposure of $100 or 5% touches the absolute maximum number based on your capital. It is not an advisable level to have.
Although making quick gains is the motive for most people to start trading, you should avoid such an impulse. You want to make as much quick cash as possible in the shortest time. But, pledging a higher risk on a single trade may even lead to emptying your coffers sooner than you expect.
Often it happens that new traders who do not understand the trading process stumble more often than expected. They do not have a trading process that has a record of prolonged practice hours and testing. When you are in such a situation, you do not know how you are as a trader.
It is advisable to trade cautiously under these circumstances. The reason for it can be the presence of an overwhelming number of people who got exploited because of not being careful. Binary options scam through robots, software, trading, and signals or ideas have hit several people.
The concept of giving trading ideas or tips has allowed scammers to commit fraudulent practices. As a safeguard mechanism, many regulators of various nations have banned binary options trading. Several services may help such affected people. The binary options scam recovery by PayBack is one such service that they can check out.
The advent of such companies helps better handle unscrupulous ones. They help the victims collate information and documents about fishy trades. Pursue their cases and help them get back their money.
Determination of risk
There is no doubt about the fact that binary options trade has the maximum fixed risk. You can consider this underlying fact as the gospel truth of such binary options trades. However, it is also a fact that your trade exposure will determine your risk in such situations.
Some brokers often offer a 10% cushion or rebate on the trades. It means that if you have an investment of $20, your maximum risk will be $18. The calculation is as follows:
Maximum loss + rebate = trade risk
For our example, the equation stacks up as:
-$20 + ($20 x 10%) = -$20 + $2 = -$18
The Nadex or the North American Derivatives Exchange does not have such options. But it can help you control the extent of your losses. Considering the above example, say you have an investment of $20 on a particular binary options trade. When the wager is going against your will, say it drops down to $15, you have the option to sell them. So, you take a hit of only $5.
Nadex allows you to take a call way before the actual expiry when the value of your wager might be $50 or $0.
In conclusion, you can remember to keep your risk appetite in check and an exposure closer to the ideal 1% or 2% mark. If you opt for the traditional binary options trading, the dollar value of the trade is your total exposure. Nadex, however, allows you to limit your risk on capital exposure. You can take cognizance of the risks associated with these trades way before getting into the market.
