Published On: Thu, Aug 18th, 2016

Expert Opinion from Opteck: The Most Important Part of Binary Trading

John Spencer of Opteck Trading has something to share with our audience: his view of the most important part of binary trading. The answer may surprise many new traders, but experienced traders will find that they already follow this one important aspect of binary option trading.

What’s the most important part of binary options trade?

Money management.

Money Management Removes Common Trading Obstacles

Traders will come across two main obstacles when they first begin trading. These obstacles are:

  • Emotional: It’s common to get emotional when making a trade. You’ve done all of the market and technical analysis, and now you may be biased when making a trade. Emotions lead to losses.
  • Psychological: Everyone will be on the losing side of a trade. A lot of traders will brush it off and keep going on, but others will let the loss cause psychological roadblocks. Fear to make trades or take risks will ruin a trader’s future.

Money management is the long-term strategy to remove emotions and psychological issues from trading.

Before a person even starts thinking about money management, they need to have a trading system in place. This is a system that will be in place to help you meet your goals. Once this system is in place, money management must be put center stage.

Money management will allow you to:

  • Manage money long enough to make money
  • Reduce risks
  • Remove emotional risks
  • Put hard limits on trade values
photo/ screenshot YouTube

photo/ screenshot YouTube

If you lose your entire bankroll, your time as a binary options trader is over. Many traders have become too emotional or overconfident that they’ve lost their entire bankroll on one trade. Nothing is ever a sure trade.

Kelly Criterion

There are a lot of money management systems open to traders, but one system that has an immense following is the Kelly Criterion. This is a system that was founded by John Kelly in an effort to help AT&T with signal noises in 1956.

The potential of the system was realized by the gambling industry, and many people use it to this day.

Two main factors are put into the equation:

  • Winning probability
  • R – win/loss ration

Kelly’s equation is % = W [(1 – W) / R].

And this figure will give you back a percentage. This percentage will be used to determine how to properly diversify your trades. Of course, there is room for error, and you want to never put more than 20% (a high number) of capital into a single equity.

Using the Kelly system requires you to:

  • Access your last 50 trades
  • Calculate the winners (Winning trades/total trades). A trade is considered a win if you made money.
  • Calculate “r.” This is your win/loss ratio. Calculate this figure through the following equation: average gains of positive trades / average loss of negative trades.

Now, plug these figures into the Kelly equation above.

What this system allows you to do is calculate how to diversify trades, and it can be used as a form of risk analysis. The percentage is your chance to minimize the risk of a trade. Following this strategy, and never putting more than 5% of your balance into a trade, will allow you to better manage your money.

Author: Jacob Maslow

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