Do you know that money management is an essential aspect of trading? You need to pay attention to this aspect because it will help to decide your profit margin. Some traders make a common mistake, and that is they focus only on the binary options type they wish to trade.
This is a wrong approach. As a trader, you also need to focus on the money that you are willing to invest. When you invest a lot and end up losing the trade, then it becomes quite difficult for you to come out of that situation.
For example, it is not a wise decision to invest about 50% of your capital on a single trade. Remember that if you invest about 50% of your capital, then you need a gain of about 100% to get your money back.
At the same time investing too little is also not a viable move. The reason is that you will not be able to make any significant profit this way.
Defining Your Money Management Strategy
When you go for a proper money management strategy, then it helps you define a fixed percentage of the capital that you should invest every time you trade. Most traders invest about 5% of their capital when they invest in trading.
Traders who are conscious about their losses decide to invest only about 2% to 3%. Let us understand this by a practical example.
Assume that you have an account balance of about $1000. You follow the rule of 3% investment on trades. This means that you will invest about $30 on your next trade.
If your account balance experiences a major change, then your investment amount will change accordingly. If you are account balances increases to about $1500, then your investment amount for the next trade will be $45.
If you suffer losses, then, in this case, your account balance will change to $1000, and your investment per trade will be about $30.
If you follow this system to the core, then the benefit of this practice is that you will never end up investing too much or too little.
With the help of a good money management strategy, it becomes easier for you to manage the losing streaks as well, but your strategy has to be flexible.
Another mistake that we need to highlight here is that most traders make is that if a trading strategy makes them profit on some trades, they keep on applying it. For example, let us assume that a strategy helped you win about 70% profit.
If this strategy worked on a few trades, there is no assurance that it will work on all the trades. The worst part is that if you lose trades in a row, then your account balance will reduce in no time.
This is why you should use your discretion so that you can end up smartly placing the trades. Try to stick to your money management strategy because it will help you get success.