How to Reduce Risk Factor in Binary Options

How to Reduce Risk Factor in Binary Options

Submitted by adil on Tue, 04/23/2013 - 08:04

The principle of �risk-return tradeoff� states that if you take higher risk, you will get higher return. Option markets, including the binary options, offer a trader high returns and are therefore inherently risky. As a trader, you are directly exposed to everything that affects price. Whichever position you hold, you face uncertainties emanating from political outcomes, demand conditions, fiscal or economic reports, platform failures etc.

When trading in binary options, you face risks from following key areas; the market, the broker and yourself. The best thing about binary options is that, you know the losses and gains at the time of execution; your risk is known, and it is limited. Some researches show that 90 percent of the traders face losses in their trades, mostly because of their own mistakes. You can minimize your risk for incurring losses by addressing the key risky areas as follows:

The Market:

Markets are always unpredictable and volatile. Although binary options are less risky than normal options, you still need to check your exposures to these volatilities. Unless you have solid research and analysis, never open positions in binary options for a long period. You can always get help from various paid sites that provide potential market signals or direction of price movements over the next trading session. You can also utilize the hedging strategy when markets seem neutral or when you are unsure of the price�s direction. Utilizing this strategy, you will take long and short positions simultaneously. If price firmly moves in one direction, you can close that position with fix losses and obtain gains on the other. The payout on the bet you won, helps you lower your losses substantially.

The Broker:

Often times we fail to realize that there are brokers out there who rob their customers off. They do this by manipulating their platforms to delay or expedite price fluctuations. They bet against their own traders. You need to find a reliable broker who also offers you various tools to help you address your risks of losses. The services such as sell-back option and trade roll-over option allow you to address the event when you are out-of-money. With sell-back option you can sell back the options before expiry, and get your investment refunded. The percentage refunded may vary from broker to broker.

With a trade roll-over option you can roll-over your trade before it hits the original expiry to another extended expiry. This will allow you to take advantage of your anticipation for the price in the extended period. It is also essential that the platform you choose to trade on, must be user friendly, allowing you easy access to making trades and viewing price charts. Furthermore, it would be great if your broker also provides you with its own detailed market analysis and other technical support.

These are various ways through which your broker will help you to further minimize your risk while trading with binary options. This only highlights the importance that you need to be resourceful while selecting your broker.

Yourself:

You must realize that your own practice and knowledge will play a great part in letting you make some profits. You should know how to perform technical, fundamental and sentiment analysis, to determine the possible price movements. You also need to understand your risk appetite. This means that you should never invest that amount of money that you cannot afford to lose. You should never use extended leverages for your investments until you are experienced enough to take that risk. To keep your losses minimal, you should keep your option expiries smallest and invest small amounts of money at a time.

As mentioned earlier, the key to addressing much of the risks of trading in binary options can be mitigated only by you. Hence you must stay on top of the game and give meaningful time and effort in using binary options to make your regular income stream.

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