If you are using a binary options demo, you ask yourself, When am I ready to trade for real? Luckily, there is a definitive answer to this question: you are ready to trade for real when you have developed a trading system that guarantees that you make money by trading binary options.
In this article you will learn:
- Which components you need to create a profitable trading system,
- How you can measure the success of your trading system,
- When you are ready to take your trading system to real money trading.
With this information, you will be able to plan your journey from a newbie demo account to a real money binary options trader that makes a profit.
When am I ready to trade for real? How to get there
Step 1: Creating your trading system
To trade for real, you need a profitable trading system. A trading system is a combination of two strategies that guide all your trading decisions. Those two strategies are:
- A trading strategy, and
- A money management strategy.
Your trading strategy defines how you find trading opportunities and how you capitalize on them. Your money management strategy defines how much you invest on a single trade.
When you have developed both strategies, you are reading to trade for real. Then, you will have a system that you know makes you money. To get to this point, you should use a binary options demo that allows you to trade with play money instead of real money. A demo allows you to develop your trading strategy and your money management strategy in a risk-free environment until you can guarantee to make money.
To develop your trading system, you should focus on these issues:
- For your trading strategy, you must define which trading signals you trade with which tools. Clearly define how you find signals – which time frames you use, which assets you analyze, which indicators you use – and how you react to them – which binary options type you use with which expiry.
- For your money managements, define how much of your overall capital you want to invest on a single trade. If you are trading a risky strategy, you should invest a smaller percentage per trade than if you trade a safe strategy. A good rule of thumb is to invest less than 5 percent of your overall capital with a safe strategy and less than 3 percent with a risky strategy.
Combined, these two strategies can guide your trading.
Step 2: Measuring the success of your trading system
The most important advantage of such a system is that it makes your trading repeatable and comparable. Knowing that, if you would ever encounter the same situation twice, you would do exactly the same thing, allows you to predict whether this decision will make you money or lose you money.
With this approach, you can also evaluate the profitability of your entire system. All you need is a little fourth-grade math.
The first thing you need to know is which percentage of your trades you will win with your system. A binary options demo account provides you with the perfect opportunity to find this value. Simply trade for a week or two with your demo, and you will have a good idea of how many trades you win.
The second value you need is your average return. Your average return is the sum of your investment plus your average payout. Most binary options demo provide you with a history of your past trades, which allows you to easily find your average payout. To get your average return, simply add 1 to this value. If you average payout is 70 percent or 0.7 times your investment, you only have to add one time your investment (you get your original investment back, too), and you have calculated your average return of 1.7.
All you need to do to know whether you make money or lose money with a certain strategy is multiply both values. With high / low options, you should be able to win around 70 percent of your trades or 0.7 times all your trades. With an average payout of 70 percent, the final equation to define whether you would make or lose money is:
1.7 x 0.7 = 1.19
Since the result is bigger than 1, you would make money by trading such a system. You now have the guarantee to make money, and you are ready to trade for real.
There are only two more things you need to know:
- With option types that offer higher payouts than high / low options, you can easily afford to win a lower percentage of your trades. If you trade one touch options and only win 40 percent of your trades, for example, do not let our example discourage you. As long as your average payout is higher than 150 percent (which would result in an average return of 2.5), you will make money.
- Do not make the mistake of chasing a high calculated return. As long as your strategy creates a return over 1, you will make money with it. A strategy with a return of 1.4 is not necessarily more profitable than a strategy with a return of 1.2. These things depend on how well the strategy suits your character and your daily routine. Make sure to have a value of more than 1 and keep improving your trading, and you will be fine.
That is all you need to know. Define your strategy, measure your success, and make sure to get your return on investment average above 1. Then you are ready to trade for real, and you know that you will make money.