We have already discussed the issue of money management, the tool used by all traders to mitigate the risk of loss of capital and to correctly manage their own money.
This allows to tackle the adventure in the world of trading with wisdom and rationality, and above all increases the chance that after the initial learning phase and the likely as inevitable losses, the trader is always there with enthusiasm and desire for profit, necessary to start finally to gain.
Properly manage your own capital basically means:
1. Don't squander the whole capital to trading in a few operations
2. Reduce the risk
3. Don’t be greedy
4. Working with criterion and strategy
Many novice traders instead underestimate the importance of capital management and they throw in a triple pike jump as if they were Olympic divers.
Let us see the typical mistakes that are committed by beginners:
Almost all binary options brokers allow you to open an account with real money and with very low minimum deposits, about 50-250 $/€, depending on the currency that you choose. This might appear a great opportunity for those who don’t have lots of money, but you have to be careful because the inexperience often transforms an opportunity in a destructive weapon.
Most experts advise of not investing in a single operation more than 5% of the capital held, as a general rule of a good Money Management. However, with almost all brokers to open an operation takes a minimum of 25 €/$.
If the trader starts with a minimum deposit of 100 €/$, then 25 €/$ is already 25% of its capital. No more wasting four operations in a row to squander capital and remain without money in the account. With these figures the management completely skips.
Amongst other things, some traders of old school, more traditional and conservative, perhaps because they operate in other markets and with other instruments such as forex, advise of not investing more than 2% of the time. Making a quick calculation are 50 times the minimal operation planned by the broker, then 25 €/$ x 50 = 1250 €/$.
In fact, even a 5% would be enough, are in fact 20 operations before being left with zero euro on the account. Unfortunately, the risk remains high, especially because after the first attempts at a loss, you forget the management of the capital and the irrational and greedy part of brain says of having to recover all costs, doubling or tripling the investment.
For example, suppose you have closed at a loss the first 2 investments by € 25 each. If we have deposited € 250, 20% of the capital has been lost. There would be all the possibilities to recover it and bring in profit, thanks to the remaining 80% of the initial capital. At this point, the less experienced tend to underestimate the money management and after losing patience invest € 50, € 75 or more. In this way, are sufficient 3-4 consecutive failures to see each other draining your bank account.
Not invest in that way! The money management should be respected because it is a powerful weapon.
What you should do?
First, if you want seriously begin to define your minimum deposit and not that of the broker, you have to multiply the amount of the individual transaction for the type of money management that you plan to take (aggressive or conservative). We have said that 5% may be fine, but if you want to be more careful, then reduce this rate to 4, 3, 2.
A money management of 5% with a minimum operation of 25 €/$ wants a minimum deposit of 25 x (100/5)= 500€/$
A money management of 2% with a minimum operation of 25 €/$ wants a minimum deposit of 25 x (100/2)= 1250€/$
With a more aggressive capital management, the minimum deposit shall be then of 500€/$, with that more conservative of 1.250€/$.
Of course we have done the calculation with 25 € / $ of minimal operation and with only two percentages (5% and 2%), but just follow the formula above and change, depending on the broker and the risk appetite, the minimum amount of operation and the percentage of money management.
For example, suppose you find a broker with a minimum operation of 15 € / $, the use of a money management of 5% provides a minimum deposit of 15x (100/5) = 300 €/$.
Or, if the trader wants to invest more money per transaction, eg 50 € / $, but simultaneously want to take a less risky money management, the minimum deposit becomes 50 x (100/2)= 2.500€/$.
Don't forget that some consecutive losses always comes. The management of capital allows to face these steps without falling.