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How Much to Risk on Each Binary Options Trade
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Binary options are an all-or-nothing option type where you risk a certain amount of capital, and you lose it or make a fixed return based on whether the price of the underlying asset is above or below (depending on which you pick) a specific price at a specific time. If you are right, you receive the prescribed payout. If you are wrong, the capital you wagered is lost.
That definition has expanded though. Back in 2009, the US-based Nadex exchange created options that allow traders to buy or sell an option at any time up until expiry. This creates a wide range of scenarios, as a trader can exit for less than the full loss or full profit.
No matter which binary options you trade—Nadex options or traditional binary options—”position size” is important. Your position size is how much you risk on a single trade. How much you risk shouldn’t be random, nor based on how convinced you are a specific trade will work out in your favor. View position size as a formula, and use it for every trade.
How much to risk on each binary options trade
How much you risk on a binary option trade should be a small percentage of your overall trading capital. How much you want to risk is up to you, but risking more 5% of your capital isn’t recommended. Professional traders typically risk 1% or less of their capital.
If you have a $1000 account, keep risk to $10 or $20 (1% or 2%) per binary options trade. Risk 5% ($50 in this case) is the absolute maximum and isn’t recommended. When you start trading you’ll want to make as much money as you can, as quickly as you can. Making some quick cash is why many people attempt trading. Avoid this impulse though. Risking a lot on each trade is more likely to empty your trading account than create a windfall. Most new traders don’t have a trading method they tested and practiced, and therefore have no idea if they are a good trader or not. Better to risk small amounts of capital on each binary options trade, to test your trading methods and hone your skill, and then gradually increase the amount you risk to 2% once consistent.
How to Determine Risk on a Binary Options Trade
Binary options have a maximum fixed risk. This lets you know in advance how much you could lose if the asset (called the “underlying,” which the binary option is based on) doesn’t do what you expect. For binary options, the risk is the amount you wager on each trade.
If wager $10 on a binary option trade, your maximum loss is $10. Some brokers offer a rebate on losing trades; 10% for example. If this is the case, your maximum is only $9, calculated as:
maximum loss + rebate = trade risk
-$10 + ($10 x 10%) = -$10 + $1 = -$9
Nadex binary options don’t have rebates on losing trades, but if you buy an option at 50, and it drops to 30, you can sell it for a partial loss, instead of waiting for it to drop to 0 (or move above 50, which would produce a profit). Ultimately though, at expiry, the Nadex option will be worth 100 or 0. Therefore, when determining your risk you must assume the worst case scenario.
Nadex binary options trade between 100 and 0. With each digit representing a $1 profit or loss. If you buy one option at 30 and it drops to 0, you have lost $30. If you sell one option at 50 and it goes to 100, you have lost $50. You can trade multiple contracts to increase the amount you make or lose. This is a tutorial on position size, not Nadex options.
Determining Position Size on a Binary Options Trade
You know how much you are will risking risk (percentage of account, converted to a dollar amount) and you know how much money you could lose in a binary options trade. Now, tie the two together to calculate the exact amount of money you can wager on a trade.
If you have a $3500 account, and you’re risking 2% per trade, the maximum you want to lose is $70. If the broker offers no rebate on losing trades (this is the norm), then only risk up to $70 on the trade.
In the “Amount” box on the binary options trading platform, input $70 (in this case). That means you are willing to risk $70 on the trade.
If the broker offers a rebate, for example, 10%, then you can increase your position size by the amount of the rebate. in this case 10%. Because of the rebate, you can risk $77 on a trade ($70 plus 10%). If you lose you will receive a $7 rebate, so your maximum loss is still only $70, which is in line with your 2% risk parameter.
For Nadex binary options you have an extra step because you can purchase an option at any price between 0 and 100, which affects how much you could lose. Assume you have a $5500 account and are willing to risk 2% per trade. That means you can lose up to $110 per trade and still be within your risk parameter. Don’t take a trade where you could lose more than $110.
Assume you want to trade a gold binary options contract, because you believe the price of gold will rise today. You can buy the option at 50. If you are right, and gold is higher than the strike price (price level of gold that determines if you are right or wrong) when the option expires, the option will be valued at 100. You make a $50 profit on each contract you buy. If gold is below the strike price when the option expires, its value is 0, and you lose $50 on each contract.
Therefore, your risk is $50 for each contract you trade. You are allowed to lose up to $110 per trade, so you can buy two contracts at $50. If you lose on the trade you will lose 2 x $50 = $100. This is below the $110 allowed. You can’t buy three contracts though because that exposes you to a $150 loss. A $150 loss is more than your established risk tolerance.
Considerations for Real World Trading
When you’re starting out, calculate your ideal position size for each trade. Even when actively day trading there is time before each trade to quickly determine how much to wager based on your percentage risk tolerance and the trade you are considering. This repetition will serve you well, and when you are losing money the dollar amount you can risk will drop (as the account value drops) and when you are winning the dollar amount you can risk will increase (as the account value increases). Note that your percentage at risk doesn’t change, but as your account value fluctuates the dollar amount that percentage represents does change.
As your account stabilizes you may trade the same amount on every trade, regardless of the fluctuations in your account. For example, the balance in my trading accounts stays the same. I withdraw profits at the end of each month, and any drops in the balance are usually quickly remedied by a few winning trades. Therefore, there isn’t the need to make tiny changes to my position size on every trade. If your account value stays around $5000 (because of profit withdrawals, or profits and losses balance each other out), and you risk 2% per trade, then risk $100 per trade. Don’t reduce or increase this amount by a few dollars every time your account fluctuates slightly above or below $5000.
The point of only risking 1% or 2% of the account is that you can lose 100 or 50 trades in a row before you are cleaned out. That’s a good level of safety. if you are using a researched, tested and practiced strategy.
Not constantly changing your position size for every minor fluctuation in account value also allows you to make quick trading decisions in fast moving market conditions. If you know you can risk $100 on a trade, you can just act, instead of calculating if you can actually risk $105 or only $95. In the long-run, it won’t matter too much.
Once you are creating a good income for yourself, and you are happy with your account size (withdrawing profits over that amount) then it is quite likely you will trade the same position all the time, and it will rarely change.
Final World on How Much to Risk on a Binary Options Trade
First, establish the percentage of your trading capital you are willing to risk on a single trade. Ideally, this should be 1% or 2%, with the absolute maximum being 5% (not recommended). For a normal binary options trade, this dollar amount gives you your maximum position size. For a Nadex option, also consider your maximum risk on the trade, and then calculate how many contracts you can take to stay within your risk limit.
In the beginning, calculate your position size on every trade. It’s a good skill to have. As your account balance stabilizes—as you improve as a trader—you may opt to use the same position size all the time, regardless of the minor fluctuations in account value from day to day.
Binary Options Guide: The Truth About Binary Options
Trading binary options can seem deceptively simple, but leaning too far into that notion can blind people to some of the risks that often accompany this type of trading.
Before I go any further, I want to make it clear I’m not a binary options trader. I trade penny stocks and teach day trading. I’d love to see you join the Trading Challenge — it’s the result of over two decades of trading and a decade of teaching. It’s awesome.
If you’re interested in taking the binary options path, it’s critically important to understand exactly what you’re getting into and set appropriate expectations. And you should get a mentor who trades binary options. Seriously. Preparation is key.
Again, I don’t trade binaries. For the most part I think they’re scams. Can you trade them successfully? There are successful traders in every niche. But most traders lose. That’s the reality of the industry.
It doesn’t matter if you’re trading forex, penny stocks, options, big caps, or … binary options. Most traders lose and most trading teachers don’t want you to know about it. So I’m going to tell you about binary options in this post. But I don’t trade them and I don’t recommend it.
Will trading binary options enable you to buy a villa in the South of France next year? Probably not. Will they allow you to quit your full-time job and finally start on that novel you’ve always wanted to write? Don’t count on it.
Here, we’ll take a look at what binary options trading is all about and you can decide whether it’s right for you. As you read, keep in mind that binary options are getting outlawed in more and more countries. Companies are getting shut down. Or they’re based overseas in places where you can’t sue them. More on that later.
Table of Contents
What Are Binary Options?
Before we dive into specific binary options trading strategies, let’s review exactly what binary options are. According to Investopedia’s definition:
A binary option, or asset-or-nothing option, is a type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money. The success of a binary option is thus based on a yes or no proposition, hence “binary”. A binary option automatically exercises, meaning the option holder does not have the choice to buy or sell the underlying asset.
At the core, binary options are based on a yes or no proposition. You must decide whether you believe an underlying asset will be above or below a specific price at a specific time.
Binary trades are ruled by expiry times. These time constraints indicate how long you have to make your predictions regarding whether you believe an underlying asset will be above or below a specific price at a specific time. Once the expiration limit occurs, your predictions determine whether you gained or lost money.
Expiration times vary from binary option to binary option. Some of these minimums are known as short expires, which means the expiration date is actually within mere minutes of the buy-in.
There are medium and long expiries, as well. For medium expiries, the deadline could be anywhere from two to five hours. Long expiries typically last between two and 24 hours. Many experts believe that longer expiration times can help make predictions easier.
What Are the Underlying Assets of Binary Options?
In order to participate in binary options trading, you must first have ownership of an asset that can be optioned for a fixed amount. The types of assets common in binary options include stocks, indices, commodities, and currencies. Many binary traders chooses to trade with stocks, as this option can allow them to get high returns within a short span of time.
Along with indices and commodities, currencies are another popular binary option vehicle. Since currencies are liquid and often subject to dynamic price fluctuation, many traders choose to analyze their binary options across the complex — and often shifting — global currency market.
A quick aside since we’re talking about forex. Be aware that the forex market is among the most difficult to trade. Why?
Because it’s the biggest and most liquid market in the world. You’re up against the smartest, richest, and often most experienced traders in the world. Personally, I don’t want to compete against that. Plus, the forex markets move so fast on news you don’t have access to, that there’s no edge whatsoever.
And now, a new asset has emerged: cryptocurrency. I don’t trade crypto, either. I’ve traded the random crypto-based stock. But this is a whole niche unto itself and I’m happy with penny stocks. Crypto has its own version of binary options — which is why I’ve included it here.
Led by Bitcoin, this new, digital currency class is intriguing investors around the world who see the digitization of finances as the way of the future.
According to Options Advice, there are two prominent ways you can capitalize on Bitcoin binary options. The first strategy is by trading on what you think the imminent fluctuation of Bitcoin might be, and the second is trading regular options with Bitcoins as your currency.
If you’re interested in taking the cryptocurrency binary options route, I strongly suggest familiarizing yourself as much as possible with the trends dictating the ebbs and flows of the altcoin market.
An entire niche financial industry has been built up around educating consumers and future investors of digital coins and tokens. From resources like Cryptoslate to ICO listing sites like Coinschedule, there are many resources available to help you make the most strategic crypto trading moves possible.
There are also a lot of scams. And strange happenings. Like when a crypto exchange CEO died with the ONLY key to $137 million in crypto. Ouch. More than 100,000 cryptocurrency holders learned a very hard lesson. Back to binary options …
What is a Call and What is a Put?
Two of the most common terms you’ll hear throughout the binary options world are call and put. These two labels represent the market positions of binary options.
You typically choose to call if it looks like the value will rise within the confines of the expiry time.
Options also have a strike price, which is the price at which the security would be bought or sold.
If you choose to call, you’re signifying your confidence that a stock will rise within the time limitations. If the stock valuation moves upward at all, you’ll receive both your initial investment as well as the return.
On the opposite end of the spectrum, a put signifies your confidence that the valuation of a stock will drop within a certain time limitation. So if you predict that a stock valuation will decline before the expiration date, and the stock does dwindle, you will have succeeded at that trade and will receive your initial investment — as well as the trade — back.
What Are Other Types of Binary Options?
Beyond call and put options, there are other distinguishing factors that separate binary options from one another.
This guide from Binary Tribune delves more specifically into binary options types based on the number of interactions a trader must initiate with the trade. The levels include one-touch, no-touch, double one-touch, double no-touch, and paired options.
Let’s take a look one-touch and no-touch options …
Essentially, a one-touch binary option indicates that in order for you to receive a payout, a trigger (or predefined barrier) must be reached. Traders often choose one-touch if they feel confident that a stock will move in a certain direction at a minimum amount.
The option only has to meet the predefined trigger level once (hence the “one-touch” term). However, as indicated by Binary Tribune, this strategy is often accompanied by some risk.
Beyond simply calling or putting, you also must feel confident that a certain valuation threshold will be crossed. However, with greater risk often comes greater reward.
In contrast, a no-touch binary option essentially depends on a trigger level not being reached.
Rather than hedging your bets that the valuation of a stock will rise above or dip below a specified amount, you’re betting that the trade will not dip above or below an amount.
Because you’re making the trade with the intention that a threshold will not be crossed in either direction, it’s referred to as “no-touch.” Like their one-touch counterparts, these trades come with greater reward — and risk — potential.
I liken one-touch and no-touch calls and puts to something like an electronic stop-loss. The problem is, you don’t have control. You’d better be damned sure you’re right. Which is impossible.
What Are the Pros and Cons of Binary Options?
Now that you understand binary options basics and the different factors between them, you might be wondering whether this type of trading aligns with your goals. Let’s weigh the pros and cons.
We’ll start with the benefits …
Low Barrier to Entry. You don’t need a masters in economics to engage in this kind of trading. For this reason, many first-timers enter the trading arena through buying and selling binary options. Comparatively, binary trading is relatively simple. When compared directly to other types of trading, including quantitative or arbitrage, trading binary options is straightforward.
Fast Returns. Many traders are eager to see fast results and liquidate within a specific time frame. Those who play the long game (investors) are typically most concerned with growing their money steadily over long periods of time. Many opt to invest in index funds, IRAs, or bonds. Trading binary options is fast paced.
Thing is … you can get all the speed you need trading penny stocks. So, while binary options might be a fast game, the reward might not be worth the risk.
High Rewards. Binary options trading is touted by those who promote it as high reward. It’s possible to receive up to a 70% return on their investments if your binary trades reach your expiration dates in the money. This high average return is what makes this type of trading vehicle attractive to many novice and expert traders.
As explained by Investopedia, the risk on binary options is capped off, so while the rewards could yield high returns, you can’t lose more than the cost of a trade.
Low Cost. If you’re just getting started with trading, there’s a good chance you don’t have excess capital lying around to snatch up shares of the fastest-rising stocks on the market. Binary trades offer an alternative to other types of investments that require high-capital buy-ins.
In theory, you can experiment with a binary trade for any amount you’d like, whether it’s $5 or $50. Starting small and working your way up to bigger trade amounts incrementally is a great way to learn the lay of the land.
As you familiarize yourself with expirations, strike prices and — if you’re interested in one- and no-touch options — triggers, it’s best to gamble with an expendable amount that won’t derail your entire financial status. Notice I used the word gamble — just sayin’.
Accessibility. Binary trading platforms make it easy to trade on any day and at any time. When it comes to binary options, traders aren’t necessarily beholden to standard market times and broker availability.
Now, let’s explore some of the disadvantages of binary trading …
Scams. Conduct any Google search on binary trades and one of the first things you’ll likely notice are the abundance of hits warning against binary scams and shady binary brokers.
Remember when I said I’d get back to the part about shady companies? Here goes …
… and I say this to protect and warn you.
Like I said, these companies are often based overseas. Places like Cyprus. (I have nothing against Cyprus. It’s a beautiful country with amazing people.) Anyway, these companies are based in places where you can’t sue them if they screw you.
Then you sign away pretty much your entire life in the forms they make you fill out. Your odds of winning are so low the brokers who do it are pretty much laughing at you. They’re laughing that so many people fall for this crap. It’s like going to the casino.
So, if you come across a binary broker that sounds too good to be true, it’s because he or she most likely is. And if you come across a binary broker who doesn’t let you liquidate your investment, run in the other direction.
Short term. Binary trades have expiration dates that are often fairly short windows of time. Given this, it’s impossible to use binary options as mechanisms for long-term investments. Which, of course, I don’t mind because I day-trade and teach day-trading. But if you’re looking for buy-and-hold investing, binary options aren’t the right solution.
Can You Really Make Money with Binary Options?
Short answer: It’s possible, but you MUST know what you’re doing. Like I keep saying. Most traders lose. Doesn’t matter the niche. I would never trade binary options. Ever. Your choice, I’m just tryin’ to keep it real.
If you’re serious about binary trading, start small. By making small trades and working your way up, you give yourself breathing room to assess market trends and develop the necessary skills.
As is the case with many types of trading, history is sometimes the best predictor of the future. Many successful binary options traders experience trading wins and financial growth because they’ve spent time studying and familiarizing themselves with market movements.
Wait. Does this sound familiar? Yep. You guessed it: you can’t cheat your way to success. Doesn’t matter the niche. I don’t trade binary options. I don’t recommend you trade them. But if you decide it’s for you then prepare yourself. Study your ass off.
Learning common candlestick patterns can make it easy to spot recurring trading patterns. If you want to understand candlestick patterns — and you do if you are serious about trading — I recommend you get a copy of the classic “Japanese Candlestick Charting Techniques” by Steve Nison. Doesn’t matter which niche you trade, this book should be on your bookshelf.
Of course, trading patterns are never 100 percent accurate, so don’t fool yourself into thinking of them as absolute stock predictions. However, the more you can learn about patterns and begin to recognize them yourself, the more likely you’ll be comfortable making your own options decisions.
Is it Safe and/or Legal to Trade Binary Options?
Naturally, binary options contain risk. And by now you know my take. I pretty much think they’re scams. But there are differing opinions and some even consider them safe trading routes. I’m not gonna tell you not to trade them. I recommend you don’t. I’ll be interested to hear back from you. When you’re ready to trade the way I teach … apply for the Trading Challenge.
While it’s legal to trade binary options within the United States, they’re only available to trade on Commodity Futures Trading Commission (CFTC) regulated exchanges within the country.
Binary options traded outside the U.S. are structured differently to those traded here. You can learn more in this article on Investopedia: What You Need To Know About Binary Options Outside the U.S.
The Bottom Line
The good: Some traders like binary options because they are traded at fixed costs. You know where you stand.
The bad: Binary investments are too much like flipping a coin, there are too many scams, and your odds of winning are so low you might as well go to the casino.
The bottom line: Educate yourself like crazy. Avoid sketchy brokers. Start small and work your way up. Remain vigilant. Stick with these rules, and someday you might reach your trading goals. Will you do it with binary options? I doubt it. But you might prove me wrong.
Want to Try Binary Options Trading?
At this point, I hope I’ve shed enough light on binary options trading that you don’t do it. But … you might be thinking about giving binary options trading a shot. If you do, study your butt off. Get a mentor. Don’t screw around. The best of the best in every niche work with a mentor.
Trading — any type of trading — can quickly become complicated. Like any other sector of trading, it’s important to seek out an education before you attempt to invest in this way. I can’t help you trade binary options. But I can help you learn to trade penny stocks …
Is the Trading Challenge for You?
As a teacher I want to help my students forge long-term, sustainable careers as traders. The Trading Challenge can help you reach your goals through risk-averse, conservative trading.
Plus, my best students — those who have become millionaires themselves — join me in coaching you.
What do you get?
- Wednesday morning live trading webinar. I show you live trades so you can see how it’s done. And it’s not only wins. These are true live trades. Sometimes I lose. But you’ll see how fast I cut losses and why I get out so fast when things turn against me.
- Wednesday evening live lesson and Q&A. No matter where I am in the world. This is killer stuff.
- Thursday live trading & review with Mark Croock. @thehonestcroock is at it every Thursday. You don’t want to miss this. Mark is one of my best students/teachers. He’s constantly in the challenge chat room alerting students.
- Annual Penny Stocking Silver Membership. You need this. Thousands of hours of video lessons and archived webinars. Immerse yourself. This is how to get good fast.
- PLUS: Two monthly bonus webinars by my top student Tim Grittani. It won’t take long to understand how Tim went from $1,500 to where he is now when you see how meticulous he is about his trades. Learn from a master.
WAIT! There’s more …
I always wanted to write that. Anyway, there is more, but you have to apply for the Trading Challenge to get it. Simple.
Will you be my next success story?
As you’ve now learned, if you study hard, start small, keep your scam radar on high alert, and stay educated, then becoming a successful trader is possible. But it’s not easy. So don’t even think about doing it if you’re not willing to work hard.
As for binary options …
Look, whatever you decide, it’s about how much time and effort you put into learning. I don’t think binary options are a good way to go. Plain and simple. But there are success stories.
If you’d rather learn what I teach, then apply for the Trading Challenge. But no lazy losers allowed. Seriously. Only join the Trading Challenge if you’re willing to work hard.
Are you a trader? Do you trade binary options? Comment below and let your fellow traders know how it works for you. Even if you are brand new, I love to hear from readers. Comment below!
How Much Can I Earn With Options?
I’ve encountered a group of questions and comments from traders that tells me that traders have a certain way of viewing the world. These each represent part of the Trader’s Mindset. Today I’ll tackle one of those questions: How much can I expect to earn when using options?
I plan to reply to each question and will group them as part of the Trader Mindset Series. Taken together, they represent how one trading professional, but psychology amateur, views the psychology of how trader’s think.
Are You Asking The Right Questions?
I understand the thought process behind today’s question, but it always disturbs me. It’s just the wrong question. It would be better to ask any of these:
- How much time should I expect to devote to my options education before expecting to earn money?
- How much cash do I need before opening an options trading account?
- Do most new option traders find success? Or do most give up?
- I’ve never traded stocks or anything else. Will that make it difficult to learn to trade options?
- Should I learn to trade options or pay someone else to trade for me?
These questions demonstrate that the person who wants to become an options trader recognizes that this is not a gimmie, and that some time and effort must be expended before rewards can be expected. The commonly asked question: ‘How much can I earn?’ suggests to me that the person asking ‘knows’ success is easy, and that the only thing holding him/her back from joining the game is wondering whether it’s worthwhile.
I seldom, if ever, receive a question along these lines: ‘What does it take to succeed?’ It’s always similar to: ‘I’m going to succeed. How much can I make?’
A recent letter from Jo:
Is it possible for an ordinary person to generate income from trading options if they are able to sustain themselves for a few months without a job while they learn the ropes? How much can one hope to earn through trading options on the conservative side, and how long does it take to become an expert on average? Is it necessary to purchase special software for options trading (technical indicators and such)?
Yes. It can be done. You can generate income. However, when you ‘need’ the money for living expenses, it often places too much pressure on the investor/trader to succeed, and succeed right now. That added pressure can will lead to poor trading decisions. I know you understand. And that’s why you plan to have ‘a few months’ cash in reserve.
The good news is that you recognize that profits do not begin from day one. The not so good news is that you are asking whether it’s reasonable to learn enough to make a living – during those few months. The first answer is that every student has a different ability to learn and some just have a better aptitude and can understand how options work more quickly than others. So yes, it is possible to produce earnings within that time slot. But not everyone can move that quickly.
To succeed, you must understand what you are trading, and that means taking time to learn options basics. You should have no trouble understanding that options are different from other trading vehicles.
But I must warn you that some traders never get the special characteristics of options and mistakenly believe that they can be traded as if they were stocks. Options are different. Not difficult to understand, but they are different.
If you are brand new to trading, that means there is even more to learn, including basic things such as how to enter an order, how to use your broker’s trading platform, the different order types (market, limit, stop etc.). Someone with stock trading experience is already familiar with those items.
In addition to how options work, the trader must possess (or be able to develop) certain personality traits.
Jo, if you are willing to learn how options work, and if you believe you can demonstrate the traits listed below, then you may very well be able to succeed. No guarantees.
I do want to mention one important point. If you expect to make money (income) by buying options and then selling them for profits, let me tell you that this is an almost impossible path. When earning an income stream, the method of choice is to adopt specific option selling strategies – all with limited risk.
Anyone can trade. Anyone can enter the arena and place his/her bets. But to have a chance of making money on a consistent basis, the trader must have:
- The ability to recognize risk
- How much money is at stake for a given trade
- The probability of losing money
- Patience to learn before trading
- Patience to practice what you have learned, usually in a paper-trading account
- Ability to control your feelings.
- Fear leads to panic, which results in terrible decision making
- Greed has you taking too much risk for too little reward
- Pride has you refusing to recognize that you made a bad trade and must accept a loss
- Recognize that a few successful trades does not make you a star trader
- Understanding that you cannot make money every month
- Understanding that low probability events do occur – just as statistically predicted
- Recognize that a 90% chance of winning means there is a very real 10% chance of losing
- Accept the fact that you cannot make much money when you only have a small sum to invest
- Knowledge that luck plays a role, and your job is to manage risk when luck is bad
If you are not a member yet, you can join our forum discussions for answers to all your options questions.
Now, to your Question: How much can you make?
If you trade high risk strategies, you have a chance to earn a large sum (10+% per month), but that comes with a very high probability of going broke. High rewards come with high risk.
If you are more conservative (as you are), you may try to earn ‘only 2-3%’ per month. That’s a very good return. Most professional traders cannot earn that much. Brett Steenbarger once told me that the best professional traders earn ‘in the low (emphasis on low) double digits’ per year. That sounds right to me.
Going by that, earning 1% per month is a realistic target.
However, to give you a better answer, I must ask: How much cash do you have for trading? This is a key question that most beginners ignore. They assume they can earn the same amount of money, no matter how much cash is in the account. This is a huge fallacy. Why? When you begin with a small sum, the risk of ruin, or the probability of going broke, is very large. When you have extra cash, you can withstand a string of small losses and still stay in the game.
Also: When you have a small account, if you have outstanding success and double the account in one year, the total dollars earned is small. It does take money to make money.
Thus, I repeat, how much cash do you have? If you have $10,000 and can do an excellent job and earn 2% every month, that’s a grand total of $200/month. That will not take you very far. I assume you would want to earn a minimum of 10 to 20x that amount. To do that you would have to take big gambles. There’s a chance that you could have a nice win streak and quadruple your money in a year or so. But the most likely outcome of seeking such huge returns is the loss of all your capital.
Yes Jo, you can do it. If you have the patience. If you take the time to learn and are not rushed into trading. And if you have sufficient capital to give you a realistic chance. If you lack the capital, you can still learn and trade part time. If you grow the account, if you save more cash over the years, if you show the talent and discipline, you may eventually have enough to try trading full time.
I wish I could offer better encouragement, but trading is not a business for everyone. Being a successful investor can be very rewarding over the years. Trading full time is different.
Becoming an Expert
On average, far more traders go broke than become experts. Very few become experts. This question depicts another trader mindset that I believe demonstrates no conception of reality. How long does it take to become an expert? A lifetime.
Experts are few and far between – assuming that by ‘expert’ you are referring to someone who knows how to make money and then actually makes it and keep it. With that definition, few are experts.
Trading is a game in which you are continually learning. And that’s important because markets change over time and if you still do whatever it is that you are an expert at doing, eventually it will no longer work and you will cease being an expert.
It is not necessary to become an expert. You do not have to earn more than the next guy. In my opinion, you can do well (earn decent income) if:
- You have the ability to understand how options work. This is not difficult, but some people just don’t have the head for it
- Trade with discipline and overcome emotions. Fear and greed are harmful. It takes a while to overcome those and trade with confidence
- You take the time to practice. That means using a paper-trading account with fake money. But to gain useful experience, you must believe it is real money and trade accordingly
- If you don’t have to win right now, you need the time/patience to learn. I don’t know if a few months are enough. That depends on you
No. I have NEVER used technical indicators. I know that some traders are very skilled in doing just that. But they do not learn overnight, and anyone who tells you it’s easy to learn is not telling the truth.
I use no trading software, other than risk management software supplied by my broker.
I suggest getting started by reading or attending some free seminars. If you like what you read and hear, if you understand what you see, then go for it. Plan to spend some time in the education mode. Especially if you set a few months as the time limit. There’s no time to waste. I wish you good trading.
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According to one independent expert, Binary Options, there are even weather changes. In his own words, he wanted to emphasize that the terms of option contracts can be absolutely anything. However, brokerage firms offer the average trader, as a rule, the following options.
Type 1. Above / Below Options
The most popular type of option contracts. The trader assumes that the price will be higher than the current value, or lower. For example, if I buy the option “higher” and the American currency will rise in price at least by a penny – my profit. Instead of the dollar, there may be a bitcoin exchange rate, and indeed, anything.
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Transactions of this type are recommended for both beginners and professionals. Price fluctuations can be predicted based on simple technical analysis methods, so there will be no particular difficulties in trading.
Another important point. “Higher / lower” is a fixed-income option: the trader’s earnings do not depend on anything, he is taken for granted, unlike the contracts of the following type.
Type 2. Touch Options
It is necessary to predict whether the price will affect a certain time interval of one or another level (most often there are two of them – above and below – you need to choose any). The price will stay outside the level or not – it does not matter (but sometimes this parameter matters), the main thing is that the touch is fixed.
Agree, it’s more difficult to predict the movement, and therefore the stakes here are higher. If you plan to trade touch options, read about measuring average volatility (volatility).
Type 3. Simple Barrier Option or Range
A complicated version of the second type of options. Now the price should not touch one of the levels, but hold on to it. The trader predicts whether the price will be above the upper or lower level to the expiration date.
So, there are three types of options – with one level, with two levels per touch or “step over”. All the rest of the variety that is found on the sites of brokerage firms is a derivative of the three species we have examined.
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