Many traders fail due to the lack of money management. In this lesson Sam Morton teaches some basic, but strong, money management rules. Sam also teaches the importance of money management.
BO110 Lesson – Money Management Transcript
Welcome to Binary Options 110, Money Management. This is the 10th video in our Binary Options 100 training course. My name is Sam, and this course is brought to you by binaryoptions.education.
So what is money management? Money management is a set of investment or money-related rules. And it is absolutely essential that good, strong money management is part of any trading strategy. If we don’t have good money management, we will eventually lose the funds in our account. And having strong money management will enable us to trade another day.
No matter how good our trading strategy is, there’s going to be days and sometimes a number of days in a row where we lose where we end the day with less than we started. So we have to have money management rules and principles in place to ensure that our trading account can take those losses and have sufficient funds to enable us to carry on trading.
So what are some examples of money management rules? I have some examples in front of me. For example, a set number of trades a day. We may be looking to open two binary option positions a day. We may be looking to open five binary option positions a day. But we need a rule like this in place to stop us opening an amount of positions that could potentially blow our account in a short period of time.
Another example of a good money management rule would be a set number of losing trades per day. So once we’ve paid the equivalent of two losing trades, three losing trades in a day, we stop for that day. And vice versa. We could have a desired profit per day. So once we’ve made the equivalent of two winning binary option positions a day, or our account has grown by 3%, we would stop trading for that day.
And then very similar to that, a maximum loss per day. So different from a number of losing trades per day, we could have a maximum loss for the day, such as 2% of our account.
The golden rule of money management, which is a rule that should be part of any money management system and trading strategy, is we only risk a set percentage per trade. So no matter how many trades we’re entering, we’re always looking to risk a set percentage of our account on each and every trade we make day in and day out.
Now, there are a number of rules here. You do not have to have all of these rules implemented to have strong money management, but I’d say you need at least two of these rules to have a base money management system as part of your trading strategy.
So let’s look at two examples of possible money management rules in a trading strategy. So this is money management example one. Our first rule is we’re only going to risk 2% per trade. So this is the golden rule. So if we have a $200 account, we’re only looking to risk $4 per trade.
Example Rules #1
Risk 2% per trade – $200 account, risk $4 per trade
Only open 2 trades per day
And our second rule is we’re only looking to open two binary option positions per day. Now, risking 2% of our account, if our account was at $200 and is now at $400, do we start risking 2% of $400 or the original $200? Or if our account drops to $100, would we still risk 2% of the $200 original amount or the lesser $100 amount?
Example Rules #2
Risk 1% of account per trade
Stop trading once 2 losses made on same day (2% loss)
Stop trading once 3 wins made on the same day (2.1% gain)
Percentages should be set on account balance at the start of a certain period. So if our account was at $200 at the first of the month, we would risk 2% of $200 throughout that month no matter how much our account grows by or decreases by. And this doesn’t have to be a month, it could be at the start of a week, each fortnight, every quarter. It doesn’t matter. But we do need to set this percentage.
So let’s look at another example of a money management system. So this is example two. In this example, we are risking 1% of our account per trade. And that’s set on our account balance at the beginning of each week.
So at the beginning of the week, if we have $200 in our binary options trading account, we would risk 1% of $200 per trade throughout the week. Week two, if we now have $400 in our binary options account, we would be looking to risk 1% of $400 throughout that next week.
Our second rule is we will stop trading once two losses made on the same day. So if we make the equivalent of a 2% loss, so two 1% losses, we would stop trading for the day. And also, we would stop trading for the day once we have three wins. Now, depending on the payout of the binary options we’re trading, this may be around 2.1% gain for 3 wins.
So with this example, we’re going to stop trading once we’ve made a 2% loss for the day or a 2.1 gain for the day. So it doesn’t matter how many positions we’re opening that day. But once we’ve made the equivalent of a 2% loss or a 2.1% gain, we will stop trading for that day.
All the figures I’ve used in this video are purely for example, such as growing your account from $200 one week to $400 the next. These figures are purely for example to demonstrate money management. And I’ve also used money management rules set for the day, such as two losses for the day or three wins for the day.
Once again, this is purely for example. And these rules can be set for any period of time, such as two losses for the week or three wins for the week, depending if we’re going to be day trading binary options or swing trading binary options.
As always, please check out our website, and thank you so much for watching.