Low-risk binary options trading requires two things:
- A solid understanding of what risk means in binary options, and
- A good strategy.
In this article, Low-risk binary options trading, you will learn both. You will learn:
- How to assess risk correctly,
- How to reduce risk by making more profitable decisions, and
- How to compile your knowledge of risk in a strategy.
After finishing this article, you will be able to easily trade binary options with low risk.
Low-risk binary options trading – The guide
Many traders involuntarily increase their risk when trading binary option because they fail to understand how exactly risk works in binary options trading. By understanding this relationship better, you can not only reduce your risk, you can also increase your profits.
In the long run, risk and profit go hand in hand. With a good strategy, your trading becomes repeatable, which is why the strategy with the biggest margin above the break-even point is both the most profitable and the safest strategy.
The key to low-risk binary options trading is refusing to let short-term distraction distort your view on the long-term picture.
To understand how to apply this rule to trading, let’s look at an example: You expect a strong market movement and want to trade the movement with the lowest risk possible.
For this task, most traders would intuitively choose high / low options. Knowing that high / low options would allow you to win the trade even if the market moves in the right direction by the smallest margin possible, they conclude that high / low options give you a higher chance of winning this trade than other option types, which require stronger movements.
While it is true that high / low options give you the best chance of winning this trade, this fact is irrelevant to long-term risk.
To make a correct risk assessment, you have to understand risk in relation to the potential payout you would get if you win your binary option. Since high / low options offer the lowest payouts of all option types, choosing an option type with a lower chance of winning this trade but a higher payout can make long-term sense.
- If you know from experience that a high / low option would give you a 70 percent chance at a 70 percent payout (total return = 1.7 times your investment), your winning expectancy would be 1.7 x 0.7 = 1.19.
- If, in the same situation, a one touch option would give you a 50 percent chance at a 250 percent payout (total return = 3.5 times your investment), your winning expectancy would be: 3.5 x 0.5 = 1.75.
In this situation, your chances of winning this trade might be lower by investing in a one touch option, but your chances of earning money in the long-term are higher with one touch options.
As this example shows, in a situation where you expect a strong market movement, your odds of winning a one touch option might be so close to your odds of winning a high / low option that you can increase your profit and decrease your risk by investing in a one touch option.
How to translate this knowledge into a low-risk strategy
The trick we mentioned above aims to improve your long-term profits. Consequently, for this trick to work, you need to keep making the same decision in the same situation. If you only invest in a one touch option once, this trick has too little time to unfold its full potential. To reap the full rewards of your improved understanding of risk, you need to make this decision at least ten times in the same situation.
The tool to help you make the same decision every time is a trading strategy. With your strategy, you define exactly what you will do when.
To translate your knowledge into a trading strategy, you have several options:
- If you trade the news, you could define exactly which news reports you want to trade with one touch options because they create the strongest movements. For example, you could trade unemployment reports and surprising earnings announcements with one touch options and news from the FED or a central bank and less surprising earning announcements with high / low options
- If you trade a technical analysis strategy, you could use a technical indicator to decide which option type to use. For example, you could make it a rule that, if a momentum indicator’s reading is more than half the distance of your one touch option’s target price, you invest in the one touch option. If the reading is lower, you invest in a high / low option.
Of course, these are only two possibilities. There are more high-payout option types and more indicators available, and you can combine them in any way you want.