Risk Management in Quotex Trading
Risk management is the best thing when it comes to trading binary options on Quotex, but it is something new traders tend to overlook. Traders are all about looking for ideal trading signals but forget that even perfect signals can lead to huge loss if proper risk management is not followed. The basic rule of risk management is “never risk more than you can afford to lose”. Which is never risk living expenses for trading money. Used only “cold” money, losing lives which will not much affect your life.
The golden rule of risk management is the 1-2% per trade. What this means is that on every trade, you risk no more than 1-2% of your total capital. If your capital is $1000, for example, your maximum trade per position can be $10-20. Though it seems to be conservative, the rule will protect your capital from massive losses that could occur on a losing streak of trades. Position sizing is a technique of calculating the position size based on the risk incurred. Position sizing for the scenario of binary options is simpler because you are aware of the sum you will lose if the trade loses. Rather than having a variable position size based on how certain you are of the trade, focus should be on consistent position size.
Binary option stop loss is an original concept versus conventional trading. Since you’ve already determined what you’ll lose before you open a trade, a “stop loss” is actually more of a discipline not to revenge trade when you lose. Don’t try to recoup losses by increasing position size. Diversification is one way to reduce risk. Do not put all your capital into one asset class or in one instance of time. Distribute your trades across assets such as forex, cryptocurrencies, and commodities. Keep overtrading within a single trading session away as well. Create a rule for the maximum trades per day and stick to it.
The correct money management ratio is 70% trading capital, 20% reserve, and 10% learning and tools. Never trade with 100% capital since you must have something to fall back on to cover up for unavoidable drawdowns. Use the 20% reserve to top-up trading capital when there is a very high-probability setup. Psychological stop refers to the situation of stopping trading when emotions get out of hand. Create a rule like “if you lose 3 consecutive trades, stop trading for the day”. Negative emotions like frustration and anger have the potential to destroy judgment and lead to irrational trading.
Risk-reward ratio is a comparison of possible gains vs. possible losses. In payouts of binary options, it is usually 80-90%, meaning that you will need at least a win rate of 53-55% to breakeven. Therefore, prioritize quality rather than quantity. It is better to trade 5 times with a win rate of 70% than trading 20 times with a win rate of 45%. Drawdown management is how one handles consecutive periods of losses. All traders will eventually go through a drawdown, the question is how to handle it. Don’t panic and don’t switch strategies in the middle of a drawdown. Assess if the drawdown was a result of a strategic mistake or merely temporary bad luck.
A risk journal is a record of every single trade that was entered and why entry, exit, and what was experienced. The journal shows patterns of mistakes and what to work on. Also, make a note of your mood when trading because the psychological factor is a very large part of trading performance. Binary options may be hedged by shorting related assets. For example, if you buy a call on EUR/USD, you may buy a put on USD/CHF to hedge. Hedging reduces the profit potential, though, so use it only when necessary.
Preservation of capital is the highest priority in risk management. The rule is “protect your capital at all costs”. Lost capital must have a much higher return to recoup. If you lose 50% of your capital, you must have a 100% return to be back to where you started.
Always review and modify your management approach. What is effective in some market situations might not be as effective in other situations. Flexibility in modifying risk parameters while staying consistent with fundamental principles is the key to long-term accomplishment.