Binary Options Risks
Trading binary options is not risk-free and it is very important that you understand these risks before you start trading binary options. Binary options are often referred to as "all or nothing options", since most of them only have two possible outcomes. If the underlying assets (e.g. the stock index or an individual stock) evolve as you predicted, you earn money.
This income can either be predetermined (eg 85%),or it can depend on how the underlying instrument evolves. The underlying asset is not evolving as you predicted. If this happens, you lose your entire bet. When this happens normally your investment in binary options is losing its value.
When you invest in binary options, you do take a risk of losing your entire bet. However, you cannot lose more than the option's price, unlike when trading with other kinds of options its limited to your original bet. Binary options must be due to their nature only be used as a spice in your investment portfolio. They should not be your only type of investment her are two reasons:
- They can bring high returns, but are also associated with high risk. By limiting their share of your portfolio, you limit the risk you take.
- Binary options are a short-term investment. They do not create long-term value and they are not long-term investments. Therefore, you should also invest in longer-term assets such as stocks and bonds.
Binary Options Recommended Investment Size
We recommend that you never bet more than 5-10% of your investable capital in binary options. It is important to remember that binary options are investment properties where both luck and skill will determine whether you make money or not. Knowledge and skills will help you to predict how the stock market will probably evolve during the life of the option. However, it is impossible to predict how the stock market will develop for a limited time and need therefore to have luck on your side in order to make money.
Self-control in Perspective Of Binary Options Risks
It is important to remember this when trading with binary options, do not become annoyed and emotional when luck is not on your side. If this happens, there is a risk of starting to take stupid decisions in order to recover your loss. When you begin to "chase" what you lost there is a higher risk of losing even more. In poker and other games this is often called the "tilt", i.e. when your emotions take over and prevent one from acting logically and successfully. This is an equally real risk when trading binary options just as when you play poker.
Limit Your Binary Options Risks
It is often helpful to limit the risks you take when dealing with binary options. This is because the binary options often have very short maturities. Down to as low as 10 seconds. These short durations makes it easy to quickly lose a lot of money. Especially if you "tilt" as described above. You should therefor put a limit on how much you let yourself trade for or lose on binary options in a single day or a week. In this way you can prevent losing too much money when your luck is not on one side and maximize how much money you earn over time.
Binary options can spice up your investment portfolio and it can be a great way to make lots of money quickly but to be a successful trader it’s required to know the market, yourself and the risks of the trade. If you do not know these factors, you won’t reach to the full potential and would very likely earn less money than you otherwise would.