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Table of
Contents

Chapters Page

INTRODUCTION 3

Chapter 2
02 Basic Considerations 4
2.1 Education 5-6
2.2 Investing at the right place 7
2.3 Discipline and principles 8-9

Chapter 3
03 Demarcating risk and money management 10
3.1 Risk Management 11
3.1 Money Management 12

Chapter 4
04 The Kelly Criterion 13-14

Chapter 5
05 Conclusion 15

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Introduction

At some point or another, all of us have come across a guy earning twice our salary and saying
that his salary isnt enough to get him through the month. When this happens, its normal to
become intrigued by how that much money does not suffice to someone. The answer is simple.
Wherever there is money, proper management is required. Otherwise, no amount turns out to
be the right. It also goes without saying that wherever there is money, risks are present. Every
investment carries risks and binary options are no exception.

Investing in binary option trading involves the risk of losing 100% of your invested capital. This
is the truth but it is subjective to the kind of trader you are. Traders who do not know how to
manage their capital and the risks associated with this form of trading are more prone to losing
money in the financial market. At BinaryOnline, we believe and explicitly express that trading
options with us is also not bereft from risks. However, we do not want our traders to incur losses
of any sort, especially monetary losses. To live up to that aspiration, we put up this ebook which
aims at educating traders on how to manage capital and risks while trading binary options.

Being able to merge risk and money management is an essential combination for an optimum
trading experience. On the other side, failure to have these strategies may lead to the depletion
of the traders capital in only a few trades. Though risk and money management are intrinsically
connected, they are not the same and have to be approached differently. One thing is for sure:
Risk and money management are not only implemented at the time of trading; but starts way
before that.
It starts with abiding by basic etiquettes, the most important of which include a proper education,
the right state of mind, being driven by rationality rather than emotions, trampling greed
and resisting luring temptations. All of these may be assembled under one roof: risk/capital
management. Education is the first step of it all as risk/capital management is not necessarily
an inborn ability. It can be inculcated through education and requires acquaintance with some
basic techniques and formulas.

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CHAPTER 2

BASIC
CONSIDERATIONS
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Education

BinaryOptions can be defined as being a trading practice which requires


one to speculate over future trends of particular assets. Profits flow in
as speculations go right. However, speculation cannot be much trusted
as one can speculate anything, which does not necessarily make of it an
inevitable eventuality. Should trading have been mere speculation, many
of us would be earning millions.

Then how can success be even anticipated in this form of trading? Well, binary option trading
requires one to make calculated speculations. Predictions have to be based on proper analysis
of the financial markets and being able to do it properly is subject to proper education. As
such, the risk of predictions going wrong can be minimised and all favorable conditions can
be put on ones side. Losses are significantly minimised when proper market analysis is
done. Successful traders are those who have learn and apply technical and fundamental
analysis to their trades.

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The truth is that the financial markets are volatile and keeping track of an assets price
movements is vital for any trader interested in that asset. Unless a trader is a well informed
and well documented news seeker, he or she will not stick around for long. Keeping track
of daily trends, political and economic events, international news and financial reports are
key to an effective risk aversion strategy. This is because the risk of an assets predicted
movement changing suddenly is always there. In the event of unexpected global events,
assets can swing wildly. Informed traders know how to tackle these situations.

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Investing
at the right place

When you go buy a T.V, its normal to consider which brand is best, which
reseller is more reliable and what type of T.V is most suited to your needs
and budget. Otherwise, you might end up investing in the wrong T.V or
reseller and curse yourself for having wasted money. The same happens
in binary option trading.

Binary brokers swarm the net. Say you discover that you got your money stuck with a scam,
you would feel dumb isnt it? Traders should not let themselves be tempted by the cunning
invitations of brokers lurking out there. The first thing a wise trader should do is verify
whether the broker he or she wishes to invest with is a credible one. Afterall, hard work and
determination bring desired results if they are wisely channelled. Otherwise, the risk of being
in the face of despair is higher. As such, before investing with any online binary option broker,
thorough research has to be done. So take your time to scrutinize brokers well with the help
of reviews and legal proofs. A legal certificate of regulation or any other piece of information
proving a broker is licensed by a regulatory body is a good proof, amongst others.

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Discipline
and principles

Greed is unethical. In trading, greed can take over in a very subtly and
often camouflaged form we call ambition. There is a very thin line between
being ambitious and being greedy and succumbing to greed is synonymous
with losses. Therefore, investing excessively on a trade for big profits
profits is not recommended. A reasonable stake on trades is advised and
consistency is what leads to success.

Traders might even go broke if they do not make wise investments. If investments are not
channelled properly, outcomes can be devastating. You should also note that trading is
not a whole day process. Traders should not let go of their day job. Capital should not stop
flowing and for that, a fixed source of income is necessary. Trading cannot guarantee an
uninterrupted, fixed income because markets are volatile and predictions go wrong many
times. As such, a fixed income is important.

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Also, it is important to always keep capital for all your obligations such as bills and basic needs
and trade with the remaining surplus. Unpaid bills matter a lot. Earning a living from trading
isnt everyones cup of tea. It is preferable to trade with spare money and make trading a
part time endeavor at first. With the better part of the income, fend for your daily expenses.
If you dont have enough money to satisfy your basic necessities, trading is not for you. Weve
said it earlier, trading is a rational process and decisions led by greed are detrimental. Some
traders tend to invest money meant for necessary daily expenses. In such instances, you
could even ignore the monthly bills piling up and just go on trading hoping that you would win
big if you invest big. This is self-defeating as big investments can imply big losses too.

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CHAPTER 3

DEMARCATING
RISK AND MONEY
MANAGEMENT

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Risk
Management

As the name suggests, risk management is the proper assessment and


monitoring of the risks associated with a trade. In addition, a good risk
management plan will allow the trader to invest judiciously in each trade
while minimising the losses incurred if trades are Out-of-the-Money. Risk
management can be practiced in different ways but the most popular one
is known as the Diversification of Investment.

The most straightforward strategy, the diversification of investment is also the easiest one
to implement. Traders using this method do not invest more than 5% of their capital in a
single trade. Since the amount invested per trade is not high, this method ensures that
traders never face huge losses if their trades are not won. This method is also a good firewall
against emotions. It has often been said that emotion is one of the principal weaknesses of
many traders and it is not recommended to place trades while being emotionally disturbed.
However, if its impossible for you to trade without emotions, this strategy will reduce the
risks of losing large sums of money.

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Money
Management

Money management is the principle of managing money/funds in such a


way that you are always financially stable. It is an important ingredient for
a healthy and lucrative trading experience.

Coming up with a consistent money management strategy starts with self-discipline, as


mentioned above, so as to have a better control over money invested. This self-discipline
can be developed by conscientiously keeping track of losses incurred during a day of trading.
Having a concrete overview of all losses will act as a wake up call and traders will realise
how much money they can lose in a single day. Amounts of money lost vary according to the
appetite of different traders. For example, for some traders, losing $500 a day is reasonable
but for others, they would not want to lose even $100. Once you have decided on the amount
you can afford to lose per day, you can craft your budget. A budget can be made on a daily,
weekly and even a monthly basis. Nevertheless, it is of utmost importance that the budget
is respected. Even if sometimes you think it is okay to go overboard, avoid giving in to the
temptation.

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CHAPTER 4

THE KELLY
CRITERION

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The Kelly
Criterion

The Kelly Criterion is a mathematical calculation that determines the ideal


investment amount per trade. The percentage varies according to the
amount of money won or lost in the past few trades.

Below is an applied example of the Kelly Criterion:

Assume that from your past 50 trades, only 28 were profitable. This makes your Winning
ratio (W) 0.56. By dividing the average amount of money earned through your 50 past
trades by the average amount of money lost, you get 1.2 which is the R.

Once you have all the different values, replace them in the Kelly criterion equation.

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Conclusion
Risk and money management are pivotal in
trading.

The right blend of both is what creates


legendary traders. As says Warren Buffett
risk comes from not knowing what you
are doing and never test the depth of
river with both feet.

So invest wisely and conscientiously


to limit risks and losses