Binary Education: How to Mitigate Risk

Let's talk about mitigating risk

Clearly you've decided to invest in binary options. You may already be an experienced trader. In either case, you surely have read and internalized some aspects of risk management.

The importance of risk management cannot be overstated. One aspect of risk management, mitigating risk, is so essential that it deserves a thorough discussion of its own.

Risk

We accept risk in almost everything we do, from crossing the street to eating a piece of steak. We naturally reduce any risk of harm by not jaywalking or by taking small bites and chewing well. Risk in investing can also be reduced by careful, thoughtful trading.

Risk can be mitigated in three ways: you can avoid the risk altogether, you can minimize the amount you can lose by investing less money, or you can make the soundest possible analysis based on study and up-to-date information. You are a committed binary options trader so, obviously, you accept some risk. Smart analysis is the best way to mitigate risk.

Keep in mind that we are talking about reducing risk, not eliminating it. To eliminate risk is to not invest. Since that is not an option, we must find sensible ways to reduce risk.

Exposure

Risk means exposure to loss. You can and should buy insurance for your health, your home, your car. Insurance reduces your exposure to financial loss.

There is no specific form of insurance for traders. So, in a sense, mitigating risk is a form of self-insurance, where by smart trading based on sound analysis you can reduce your exposure to devastating financial loss.

Going for a Walk in the Dark

Just as you might choose not to go for a walk alone in the dark, you should not invest alone in the dark. There are many sources of information about every financial instrument you can invest in with binary options.

We constantly emphasize the importance of study for successful binary options trading. We have discussed using fundamental and technical analysis as a guide to helping you understand the assets and markets you enter when you buy a binary option.

Now we are encouraging you strongly to use all methods of analysis as a means to mitigate risk. The well-informed, conservative trader is far less likely to jump on a bandwagon that will lead to loss.

One of the easiest ways to enlarge risk unwisely is to jump on a bandwagon. This means buying when everyone says an investment can't miss. Investors have long known that it is often best to buy when the vast majority is selling and to sell when the majority is buying.

Stay Within Yourself

Even the best professional investors make big mistakes. Seventy years ago the President of IBM famously saw little use for computers. After all, they were huge and slow and extremely reliant on the human element.

You don't have to be a great genius to profit nicely from binary options trading. You do however have to see yourself as a cautious trader who studies the markets and pays close attention to financial news.

Conservative Trading

Wild and uncontrolled trading will surely put you in the poorhouse quickly unless you are one of the lucky few who get rich quick. Binary options are a sound way to grow your finances. It is important to understand at the outset that you will not get rich quick, you will not be the one in a hundred million, you will not reap unrealistic profits.

There are many aspects to conservative trading. Sure, it's less thrilling than putting your children's future on the line in one fifteen minute option. But it is the most sensible way to mitigate risk.

Technical Analysis

This method of analysis quantifies investor sentiment or emotion regarding any asset at any given moment. Although investors are fickle and will pursue profit in any way they can, over the long term trends become apparent. It takes some time to get comfortable with this form of analysis. Take your time and respect the risk you are taking with each binary option purchase.

Fundamental Analysis

This analytical method describes the real world in cold terms. It tries to be as unemotional as possible. Here you will read or hear cold, hard facts about assets.

While everyday observation doesn't help us in technical analysis it does help us in fundamental analysis. We can see, for example, that the Apple Corporation has a great new product on the market. We realize that during the Christmas season so millions of people are looking for great gifts to give loved ones. It just could be that in this environment Apple stock will trend upwards.

Similarly, if a major storm disrupts air travel, airline stocks might trend downward for a time. As air travel decreases, the price of oil might decrease as well. Remember, the price of oil needs to decrease by only one cent for a binary option to finish in-the-money and pay off handsomely.

If we pay attention to the world we live in we can see many such trends. Fundamental analysis can be a number-crunching activity but it can also be simple, clear observation. We mitigate risk in direct relation to how well we observe.

The Bottom Line

We don't become active in the binary options market in order to practice our dart-throwing skills. We accept risk gladly because profit comes only when we do so. But, unless we have money to burn, we must do everything we can to mitigate risk. In that way, we survive financially to invest another day.

Written By: Denise Marie