Trading 101 states one of the biggest mistakes any trader can make is to attempt to correct past losses by ‘doubling down’. When a trader is faced with a scenario whereby a trade moves precisely in the opposite direction of what was anticipated and realises a loss – there is the burning temptation to abandon personal (and professional) trading rules and continue trading in the same (incorrect) direction with the mindset that the ‘market was wrong’ (and not me)!
What is Doubling Down?
A trader Doubles Down when, after each losing trade, doubles on the next trade to cover the losses of the losing trade and continues to do so until winning trade is achieved and a profit is yielded. Also known by some as a martingale strategy and first introduced by casino gamblers (for use in particular on the roulette wheel), a double down strategy is a classic red or black approach to trading whereby the win or loss statistic is a perceived 50% probability.
Binary Options and Doubling Down
Because binary options traders are not concerned with how much an asset moves in price, only the direction, a win or lose double down strategy is not unlike the red or black gamble on the roulette wheel. A trader places a call trade if they believe the assets price will move higher and a put trade if they believe price will move lower over a given period. When price moves against the binary options positon and results in a loss, a trader can double down in an attempt to recover the loss and ‘beat the market’. (NOTE: To achieve a profit it is necessary not just to double every last bid, but the sum of all previous bets lost).
Perfect Double Down Market
In a perfect (or pure) market and for the double down strategy to have the perfect outcome, a binary options trader would have an unlimited money supply and an unlimited amount of time to achieve the perfect result. This is because, the greater the drawdown (or risk amount) traded, the lower the probability of making a loss. However, should a trader exit the strategy prematurely (before a profit is realised), the losses can potentially be catastrophic.
Hints for Successful Double Down Strategy Trading
- Confirm your trade with a signal
Irrespective of the signal chosen, it should indicate a high probability trade. Whether a trader chooses a strategy which trades with the trend or produces signals for a ranging market, a counter trade against the signal is not advised.
- Maintain trade structure
To maintain the perceived 50/50 probability percentage, as well following trading rules, it is considered integral (to the percentage outcome) that a binary options trader maintain position trading the same asset on the same expiry timeframe.
- Do not exceed Double Down limits
A binary options trader should never ‘chase the market” on what they perceive as a 100% profitable trade. This approach will compromise the integrity of the strategy and distort the payout returns against the trader should the trade fail.
- Avoid a catastrophic loss
Because the trade risk on a losing trade sequence increases exponentially, a double down strategy should not be entered into if the binary options trader not be a position to complete the strategy and exits prematurely. The losses may be considered catastrophic.
- On completion of the strategy return to zero
Once a profitable trade is achieved (after a series of losses), do not continue to double down exponentially. Rather, re-start the strategy at zero.
Responsible money management ensures that the losses don’t mitigate the profits.