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Trade binary options

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This book covers basics of binary options trading and how to trade profitably. Moreover the book also includes basics of different trading concepts including technical analysis, fundamental analysis, ...

This book covers basics of binary options trading and how to trade profitably. Moreover the book also includes basics of different trading concepts including technical analysis, fundamental analysis, money management and much more. www.BinaryOptionsGain.com

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    Trade binary options Trade binary options Document Transcript

    • Trading Binary Options Complete Guide To Binary Options SuccessThis book covers basics of binary options trading and how to trade profitably. Moreover the book alsoincludes basics of different trading concepts including technical analysis, fundamental analysis, moneymanagement and much more.
    • www.BinaryOptionsGain.comJoin us over Twitter, Facebook and YouTube for more up-to-datelearning material.It is also recommend that you visit www.BinaryOptionsGain.com , andsubscribe for more free up-to-date resources.www.BinaryOptionsGain.com Page 2
    • www.BinaryOptionsGain.comDisclaimerCFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAINLIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOTREPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THERESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAINMARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERALARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT.NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVEPROFIT OR LOSSES SIMILAR TO THOSE SHOWN.Commodity Futures Trading Commission Futures and Options trading has large potentialrewards, but also large potential risks. You must be aware of the risks and be willing to acceptthem in order to invest in the futures and options markets. Dont trade with money you cantafford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. Norepresentation is being made that any account will or is likely to achieve profits or losses similarto those discussed on this web site. The past performance of any trading system ormethodology is not necessarily indicative of future results.All information on the website or any e-book purchased from the website is for educationalpurposes only and is not intended to provide financial advice. Any statement about profits orincome, expressed or implied, does not represent a guarantee. Your actual trading may result inlosses as no trading system is guaranteed. You accept full responsibilities for your actions,trades, profit or loss, and agree to hold www.BinaryOptionsGain.com, BinaryOptionsGain andany authorized distributors of this information harmless in any and all ways. The use of thissystem constitutes acceptance of our user agreement.www.BinaryOptionsGain.com Page 3
    • www.BinaryOptionsGain.comIndex 1. Introduction To Binary Options i. What Are Binary Options ii. Binary Options Trade Example iii. Advantages of binary options 2. Trading Binary Options I. Introduction II. The Underlying Asset III. Forecast IV. Expiration V. Determine Your Investment 3. Fundamental Analysis I. Introduction II. Monetary Policy and Fiscal Policy III. Balance of Payment IV. Economic Releases 4. Technical Analysis I. Introduction II. Japanese Candlestick III. Support And Resistance IV. Trend Lines V. Channel VI. Common Chart Indicators VII. Multiple Timeframe Analysis 5. Money Management I. Introduction II. Learn To Protect Capital First III. Position Sizing IV. Common Mistakeswww.BinaryOptionsGain.com Page 4
    • www.BinaryOptionsGain.com 6. Putting It All Together I. Create a Business Plan II. Maintain A Trading Journalwww.BinaryOptionsGain.com Page 5
    • www.BinaryOptionsGain.com1.Introduction To BinaryOptionswww.BinaryOptionsGain.com Page 6
    • www.BinaryOptionsGain.com1.1 What Are Binary OptionsBinary Options are exciting new type of investment. Rather than buying an asset,investor speculates the price direction of the asset. Binary Options are also calleddigital options, all-or-nothing-options or fixed-return-options (FRO). As the nameimplies there are two possible outcomes to a binary options trade, called In-the-money and out-of-the-money. In simplest terms, if the option expires with theprice in forecasted direction then the option expires in-the-money, else out-of-the-money.There are two major types of binary options:cash-or-nothing binary options, and asset or nothing binary options.Cash-or-nothing binary options are more common, in which if the options expiresin-the-money investor earn certain amount of cash. Asset-or-nothing pays thevalue of the underlying security if the options expires in-the-money.A binary options trade on a typical platform might look like:An investor with an outlook that the XYZ stock price will end higher than thecurrent price at the end of the day, thus he purchase XYZ stock binary option for$100. If his outlook turns out to be correct he will gain 70%-90% over hisinvestment.www.BinaryOptionsGain.com Page 7
    • www.BinaryOptionsGain.com1.2 Binary Options ExampleThere is little difference in binary options contract traded over NADEX or CBOE.The basic concept remains same when it comes to trading binary options. Thefollowing example describes sample cash-or-nothing type binary option trade.Call Trade ExampleLet’s say the crude oil is trading at $89.299/Barrel on 18:08 15-April-2013 , theinvestor believes that the price will end higher (appreciate) by an hour then thecurrent $89.27 (called Strike Price). In order to take advantage if the priceappreciates the trader will place Call trade, set the option expiry to 1 hour (19:00)and finally set the amount he wants to invest in this case say $100.The trades have two possible outcomes.Outcome 1 Outcome 2Option Expires Above Strike Price Option Expires Below Strike Price89.299 (In-The-Money) 89.299 (Out-Of-The-Money)Payout $170 Payout $15www.BinaryOptionsGain.com Page 8
    • www.BinaryOptionsGain.comPut Trade ExampleSay the EURUSD is trading at 1.30125 on 18:25 15-April-2013, now the investorbelieves the price will fall. In order to take advantage if the price decline thetrader will place Put trade, set the option expiry to 1 hour (19:00) and finally setthe amount he wants to invest in this case say $100.The trades have two possible outcomes.Outcome 1 Outcome 2Option Expires Below Strike Price Option Expires Above Strike Price1.30962 (In-The-Money) 1.30962 (Out-Of-The-Money)Payout $170 Payout $15www.BinaryOptionsGain.com Page 9
    • www.BinaryOptionsGain.com1.3 Advantages of Binary OptionsBinary options offers numerous advantages over other sort of trading, below arefew of the advantages offered to binary options traders.Simplicity Above all the advantages offered by binary options is its simplicity tounderstand and trade options. Less detailed knowledge is required of an asset toprofit from its price change. In binary options Profit depends on price changerather than the difference in price.Calculated Risk Due to very nature of binary options investor is aware of acuterisk per trade. The risk is limited to the invested amount per trade.High Return The profitability depends on options expiring in or out of the money,rather than price difference. Binary options generally yield 70% - 80% in relativelysmall time.Small Investor Friendly Binary Options traders’ buys contract other than the assetitself, which allows larger audience to trade who would otherwise would berestricted by the high prices.Volatile Market Advantage Traders have great advantage when they trade binaryoptions in a volatile market conditions. Regardless of drastic swing in the market,binary options have fixed returns. While traditional investment could incur hugelosses.www.BinaryOptionsGain.com Page 10
    • www.BinaryOptionsGain.com2.Trading Binary Optionswww.BinaryOptionsGain.com Page 11
    • www.BinaryOptionsGain.com2.1 IntroductionBinary trades have 4 key features, i.e.Underlying AssetForecastExpiryRiskIt is important that traders understand these four key elements as they are vitalfor trading successfully. Each aspect is explained in the upcoming sections.www.BinaryOptionsGain.com Page 12
    • www.BinaryOptionsGain.com2.2 Underlying AssetWhen trading binary options you are not actually buying or selling the actual assetitself but rather predicting the direction of the underlying asset. Rather thantaking ownership of the asset you just take position for or against theirmovement.However it is very important that you understand the peculiarities of theunderlying asset, you are trading binary options of. Each financial instrument hasdifferent factors which affects its movement.Global market divide assets into 4 groups namely Currencies, Commodities,Stocks and index (indices). There are further numerous sub groups; each of thegroup belongs to association of exchanges or markets. Most of the people arefamiliar with New York Stock Exchange, with stocks such as Google, Microsoft andHSBC traded on its floor. Another example of exchange is foreign exchange(Forex) where Global currencies are traded. In a similar fashion Commodities arealso traded in their respective exchanges.Finally indices are made up of bucket of preselected stocks. Buying an index issimilar to buying the entire share that makes up that index, as well as the value ofthe index move up and down based on the value of the selected stocks. Few ofthe famous indices are S&P500 or the Dow Jones, in US or FTSE in UK and DAX inGermany.Binary Options allows you to trade options for different groups of assets includingForeign Exchange (Forex), Commodities, Stocks and Index (indices). Apart from ityou are only limited to stocks from single exchange or country, but can tradestocks from Asia, Europe and USA at the same time.www.BinaryOptionsGain.com Page 13
    • www.BinaryOptionsGain.com2.3 ForecastAnother major element of binary options trade is Forecasting either the price willend above or below. Your forecast will determine the trade type you shouldenter. Needless to say, if you analyze the price will end above the strike price, youwill enter call trade, whereas if you analyze the price will below at option expiry,you will enter put trade.Unlike other markets when trading binary options you only have to predict eitherthe price will move above or below certain price (Strike Price). Usually in othermarkets apart from predicting the direction you also have to identify the degree(or the measure in points) by which the price would move. This makes binaryoptions trading really simple.Each asset has different peculiarity, your research or analysis method might varyfrom asset to asset or from one asset group to another. Economic condition,Trends, Technical analysis and news releases are just a few methods could be useto form a trading bias.www.BinaryOptionsGain.com Page 14
    • www.BinaryOptionsGain.com2.4 ExpiryBinary options have different expiration times, ranging from 1minutes to a month.Expiration times facilitate all type of trading style either short-term (day trading),medium term or long term.Day trader’s wants to quickly get in and out of the market with small profit or lossfrom individual trades, these high frequency trades could accumulate largeprofits. Medium term or longer term traders might set the expiry to 1 hour tocouple of weeks.www.BinaryOptionsGain.com Page 15
    • www.BinaryOptionsGain.com2.5 Determine Your InvestmentDetermining your investment is one of the most important aspects of tradingbinary options and is also the most overlooked aspect of trading. MoneyManagement rules help protects our equity and also generates long-termprofitability. Trading without sensible money management rules is like playingRussian roulette. The chapter on “Money Management” elaborately explains howto determine your investment and manage your risk more sensibly.www.BinaryOptionsGain.com Page 16
    • www.BinaryOptionsGain.com3.Fundamental Analysiswww.BinaryOptionsGain.com Page 17
    • www.BinaryOptionsGain.com3.1 IntroductionFundament analysis is a form of analysis in which general economy, and factorsthat affect supply and demand are analyzed to make trading decisions. In simpleterms it means that we study the health of the economy and if the economyseems to be in good state then its currency value will appreciate. The chief reasonfor this is that other counties and investors will have more trust in that countryand additional capital will flow to the economy.A fundament analyst can focus on everything such as overall health of theeconomy, economic releases, IR (interest rates), earnings, and production.www.BinaryOptionsGain.com Page 18
    • www.BinaryOptionsGain.com3.2 Overview of US EconomyWhen studying fundamental analysis it is important to have at least a briefknowledge of how an economy especially United States economy works as USD(United States Dollar) is major currency.According to Investopeida.com economy could be defined as the following:"The large set of inter-related economic production and consumption activitieswhich aid in determining how scarce resources are allocated. The economyencompasses everything relating to the production and consumption of goodsand services in an area."United States Economy is the largest economy in the world which is oftenreferred as free market or capitalist economy. In a free market economybusinesses are controlled by private sector (non government) includingproduction and distribution of goods as well as services. Moreover in free marketeconomy prices are set by supply and demand. Free market or capitalist economyis opposite if planned or socialist economies in which manufacturing anddistributions of goods and services are done as well as prices are set by thegovernment.Practically United States economy is blended economy as the government doeshandle some of the tasks which cannot be passed to private sector such asmilitary, road building, education and law enforcement.It is important to understand that people usually prefer capitalism and freemarket economies therefore any move toward capitalism will generally result intomarket rally whereas move away from capitalism will be sensed by market as antibusiness and markets generally sell off.www.BinaryOptionsGain.com Page 19
    • www.BinaryOptionsGain.com3.3 Monetary Policy and Fiscal PolicyFiscal PolicyFiscal policy is any policy relating to government spending and taxation. Due todifferent reasons the economy under goes repeated growth and contractionwhich can be broken down as the following. 1) Contraction 2) Trough 3) Expansion 4) Peak (image source: Wikipedia.org)Fiscal policy is an effective tool at government disposal in regulating the businesscycle. Government spending and taxation must be approved by both congress andthe president.www.BinaryOptionsGain.com Page 20
    • www.BinaryOptionsGain.comMonetary PolicyMonetary policy is the process by which Federal Reserve in case of United Statesor monetary authority, central bank, or government of a country controls thefollowing: 1) Supply of money 2) Availability of money 3) Cost of borrowing money (Interest Rate)These policies are set in order to achieve set of goals which are oriented towardsstability and grown of the country’s economy.Interest rate and total supply of money have great impact on economy. Monetarypolicy is said to be contractionary if it reduces money supply or raises IR (InterestRate). Whereas, expansionary policy is used to tackle unemployment, this isusually done by lowering the interest rate in inflation.www.BinaryOptionsGain.com Page 21
    • www.BinaryOptionsGain.com3.4 Balance of PaymentIn long term stream of money from international trade, speculation andinvestment eventually decide the value of a country currency. When there is anincrease in demand for export products of a country and/or investmentopportunities look attractive to foreigners then all else being equal they currencyshould appreciate.Trade FlowsFlow of money in and out of a country due to global trade or commerce is calledtrade flows. In simple terms it means that money flow from the importing countryto exporters’ country for the goods and services being delivered.When a state imports goods this add money of the importing country to themarket and generate demand for the currency of the exporting nation. This is dueto the fact that goods are usually purchased in the currency of the country wherethey are manufactured or produced, so the country importing the goods mustexchange their currency.Capital FlowsFlow of capital (money) as a result of investment into and out of countries iscalled capital flow. As in previous topic we discussed flow of capital as a result ofinternational trade however capital flow results due to money flow due toinvestments such as stock and bond market, real estate and cross boarderacquisitions and mergers.www.BinaryOptionsGain.com Page 22
    • www.BinaryOptionsGain.comCurrent AccountThe formula for calculating the current account for a country is as following When describing imports and exports you will often hear about current accountsurplus or a current account deficit. When a value of country exports are morethan they are importing is known as current account surplus. Current accountdeficit is opposite of current account surplus. A country with current accountdeficit will generally have a weaker currency, this means that the country isimporting more than it is exporting and the money flow out of the country.Capital AccountThe general formula for calculating the capital account is as following:Ownership of foreign or domestic assets refers to things such as real estate,foreign and domestic companies’ investment and cross border mergers andacquisitions. Portfolio investment refers to investment in stocks and bonds.Whereas, other investments includes investment in loans and bank accounts.As we discussed in our lesson on capital flows, when a market in a country isoutperforming the markets in other areas of the world, money will flow into thecountry from foreigners seeking to participate in those out sized returns. Thesecapital flows are reflected in the countrys capital account. This is the casewww.BinaryOptionsGain.com Page 23
    • www.BinaryOptionsGain.comwhether we are talking about a countrys stock market, bond market, real estatemarket etc.Countries with aggressive inflows or outflows of funds have straight influence onits currency. If other things are kept constant then a country with major inflowscreate demand for the currency resulting into the appreciation in the value of thecurrency.Balance of PaymentIn simple terms balance of payment refers to sum of all the transaction by acountry with rest of the world. By using balance of payment as an indicator Forextraders can achieve immense imminent into the potential future price action of acountry’s currency.www.BinaryOptionsGain.com Page 24
    • www.BinaryOptionsGain.com3.5 Economic ReleasesIt is important for a trader to understand major economic releases and theirimpact on trading. There are numerous economic releases that are publishedevery day to cover each economic release will be out of the scope of the bookhowever some basic economic are briefly touched below.Gross Domestic ProductGDP which is also referred as Gross domestic income (GDI) is a gauge of nationalincome and output of any countries economy. For this reason trader and othermarket participants closely watch Gross Domestic Product Number (GDP).High rate of growth is a good indicator for the economy but if markets anticipatethat the growth is not sustainable without excess inflation, participant mightreach negatively. You can read the analysis from different sources includingBloomberg.com and dailyfx.com are best services available free of cost.Non Farm PayrollsNon Farm Payrolls (NFP), economic release is public each month on first Friday at8:30. NFP is released by the Bureau of Labor Statistics in United States which ismeant to show the number of jobs added or vanished in the economy over theperiod of one month. As the name implies NFP does not include jobs concerningto farming industry.When business are hiring people this means they are optimist about the futurehealth of the economy. This is expressed in form of NFP.www.BinaryOptionsGain.com Page 25
    • www.BinaryOptionsGain.com4.Technical Analysiswww.BinaryOptionsGain.com Page 26
    • www.BinaryOptionsGain.com4.1 IntroductionStudy of price movement by analyzing historic price action usually in the form ofcharts is called technical analysis. Trader usually looks at price action usually inchart form and anticipate future price of the instrument.A technical indicator is a form of chart plotted using mathematical formula whichis derived from the price and/or the traded volume of the financial security. Thegraphs are usually above or below the instrument price and are helpful inforecasting future price movement of the instrument.Technical indicators can be classified into two broad categories that is lagging andleading indicators.Leading indicators are calculated in an effort to anticipate the future movementof price. As leading indicators try to measure price movement from recent data,these indicator are prone to errant signals and it is usually recommended to usesuch indicators when there is no clear trend in the market.Lagging indicator pay emphasis on where the market has been and thereforewhat will be the future price. Lagging indicator produce least errant signal but at acost of delayed entry. Lagging indicators are believe to work better in trendingmarkets.www.BinaryOptionsGain.com Page 27
    • www.BinaryOptionsGain.com4.2 Japanese CandlestickCandlestick charts plots price against time. Each candle represents Open, High,Low and Close (OHLC) of an instrument at a particular time. If the open price isless than the close price this means for the particular time there was appreciationin the value and the candle is usually un-shaded or green.If the close price is less than the open price this means for the particular time thevalue of the instrument is depreciated and the candle is usually represented byshade or red color.www.BinaryOptionsGain.com Page 28
    • www.BinaryOptionsGain.com4.3 Support and ResistanceSupportSupport is the price level where the price action tends to find a support for fallingfurther. At this level there is enough demand from buyers to keep the price fromdeclining further.ResistanceResistance is opposite of support. If the price level of a particular instrumentwhere there is not enough demand from the buyer to keep the price to surpassthis level.There are numerous ways to determine support and resistance. One basic way foridentifying support and resistance (S&R) is by analyzing the chart to see were theprice hit a particular level multiple time without breaking it and retraces back. Ifthe price touches the support or resistance multiple time without breaking it themore strong the support or resistance becomes.A very basic strategy that traders use to trade using support and resistance is theybuy at support and sell just before the resistance level.www.BinaryOptionsGain.com Page 29
    • www.BinaryOptionsGain.comwww.BinaryOptionsGain.com Page 30
    • www.BinaryOptionsGain.com4.4 Trend LinesTrend lines are another most commonly used technical analysis.In its basic form, traders draw a line below the price in an uptrend (when theprices are moving upward) in order to identify support areas (valleys).Where as in downtrend (when prices are moving down) trader draw a line abovethe price to identify peaks (resistance areas).www.BinaryOptionsGain.com Page 31
    • www.BinaryOptionsGain.com4.5 ChannelsChannels are created by drawing a parallel line at the same angle of the trendline.To create an ascending channel (when prices are moving upward), we have tosimply draw a parallel line above the price at the same angle of the upward trendline.To create a descending channel (when prices are moving downward), we have tosimply draw a parallel line below the price at the same angle of the downwardtrend line.The channel also shows the range at which the price fluctuate when in an uptrendor down trend.Following chart shows how channel are created in an uptrend, downtrend andsideways (when there is no clear trend and the prices are range bounded.www.BinaryOptionsGain.com Page 32
    • www.BinaryOptionsGain.comwww.BinaryOptionsGain.com Page 33
    • www.BinaryOptionsGain.com4.6 Common Chart IndicatorsMoving AverageThere are different types of moving averages. Moving averages are plotted onprice chart and smooth out the price action of the security on which it is plottedby simply taking average of number of periods.Moving averages are used better representation of long terms direction and filterout market noise (slight fluctuations in price). In addition moving average can beused to identify positional support and resistance levels.www.BinaryOptionsGain.com Page 34
    • www.BinaryOptionsGain.comMACD (Moving Average Convergence Divergence)MACD (Moving Average Convergence Divergence) is an indicator which is used toindicate a new trend, either upward (bullish) or downward (bearish).MACD chart usually have three sub-indicators which include the followingThe first is the faster moving average.The second is the slower moving average of the first one.And the third is the number of bars which is used to calculate the MA of thedifference between the faster and slower MA (moving average).www.BinaryOptionsGain.com Page 35
    • www.BinaryOptionsGain.comRSI (Relative Strength Index)RSI (Relative Strength Index) is an indicator which is used to identify overboughtor oversold conditions of the financial instrument. RSI chart has value from 0 to100. Normally, if the indicator line is below 20, this indicates oversold, while thevalue above 80 means overbought.www.BinaryOptionsGain.com Page 36
    • www.BinaryOptionsGain.comBollinger BandsBollinger bands are indicator which is plotted on price chart and is used to measure marketvolatility. When the market is not trending and volatility is declining the band contracts. Whenthere is high volatility in the market the bands expand.www.BinaryOptionsGain.com Page 37
    • www.BinaryOptionsGain.comParabolic SAR (Stop and Reversal)Parabolic SAR (Stop and Reversal) is very basic indicator. It simply plots dots below the price ifit is trending up or above to indicate potential reversals in price movement and vice versa. Itgenerally believed that Parabolic SAR works better in a trending market.www.BinaryOptionsGain.com Page 38
    • www.BinaryOptionsGain.com4.7 Multiple TimeframeMultiple timeframe analysis means incorporating more than one time frame intoyour trading strategy. This gives you edge and ensure you do not trade with trendagainst larger timeframe which might change trend of the shorter time frame.Once you found entry signal in you preferred timeframe it is recommended tomake a strategic decision to go long or short based on the direct of the trend ofupper timeframe.Follow chart shows how to incorporate multi timeframe analysis into yourtrading.1 Hourwww.BinaryOptionsGain.com Page 39
    • www.BinaryOptionsGain.com5 MINwww.BinaryOptionsGain.com Page 40
    • www.BinaryOptionsGain.comDAILYAfter analyzing these charts we see the pair is in a down trend in 5 minute and thehourly chart however when we move to daily chart it shows not only strong butalso an extended uptrend. Therefore it is generally accepted by trader not totrade against large timeframe trend.www.BinaryOptionsGain.com Page 41
    • www.BinaryOptionsGain.com5.Money Managementwww.BinaryOptionsGain.com Page 42
    • www.BinaryOptionsGain.com5.1 IntroductionMoney management is one of the most important aspects of trading and is alsothe most overlooked aspect trading. Money Management rules help us protectingout equity and also make us profitable in long run. Trading without sensiblemoney management rules is merely playing Russian roulette.www.BinaryOptionsGain.com Page 43
    • www.BinaryOptionsGain.com5.2 Learn To Protect Capital FirstThe primary goal of successful trading is the safeguarding of capital. In order toexplain how difficult is to get out off losses there is an example shown below:Let’s assume a trader started with $10,000 and go down by $5,000. Thepercentage of capital he lost is 50%. Now in order to get out of his losses and tobreakeven even he need to made 100% return on $5,000. In order words he hasto be twice as successful to cover his draw down.It is important to incorporate sensible risk management into trading. This can beachieved by never risk more than 2% of your available equity on a single trade.Dr Alexander Elder stated as following in his renowned book “Trading for aLiving”.“Many studies have shown that trading strategies and traders who risk morethan 2% of their overall trading capital on any one trade are rarely successfulover the long term. From what I have seen most traders risk way more than thison an individual trade basis, another large contributor to the high failure rateamong traders.”www.BinaryOptionsGain.com Page 44
    • www.BinaryOptionsGain.com5.3 Position SizingPosition sizing is the main topic for money management and vital component forsuccessful trading. Position sizing strategy can be classified into two broadcategories martingale and anti martingale.Martingale is a strategy for position sizing which increases the trade size as thetrade suffer draw down or after a losing trade. Anti-martingale strategy isopposite of martingale strategy, which increases position sizing after winningtrade or when the trade moves in trader favor.Fixed Investment SizeMany traders make the mistake of choosing an arbitrary number such as $10,$20, $50 per trade or so on when they take first step toward trading. Using fixedinvestment sizing has many disadvantages, among is fixed lot sizing does notallow a trader to trade large amount on trades with high chances of winning andlower the trade investment on lower probability of success.% Risk ModelThe next level of sophistication in determining your position size is by usingpercentage risk method. In % risk based model investment amount is determinedby the risk on each trade in provisions of a percentage of your capital. As welooked in our previous topic that traders who risk more than 2% of their capital onany one trade are usually not successful overlong run.For instance if a trader has $100,000 in his trading capital and identify from hishistoric analysis of the strategy that 2% or $2000 of his trading capital is anappropriate amount to risk per trade.www.BinaryOptionsGain.com Page 45
    • www.BinaryOptionsGain.com5.4 Common MistakesNever Risk More Than 2% Per TradeOne of the cardinal rules which is also the most desecrated rules in trading is thattraders lose substantial amount of their account equity in one single trade bytaking too much risk. You will find hundred of stories of traders who lose years ofprofits on a single trade that goes terribly wrong. This is the chief cause why the2% stop-loss rule should not be violated.The table below demonstrates that large losses are extremely difficult to overcome Amount of Equity Loss Amount of Return Necessary to Re-store to Original 25% 33% 50% 100% 75% 400% 90% 1000%Let’s assume you begin trading with $10,000 and loss 50% of your capital which indollar terms is $5000. So in order to breakeven and overcome the losses you nowneed 100% gain of on your remaining equity. The best way to avoid this is to haveproper risk management and to avoid large losses. For this reason the 2% rulehold utmost importance in trading. If you limit 2% loss per trade this means thatyou can sustain 10 consecutive losing streaks in a row with a total draw down of20% of you account equity.Logic Wins, Impulse KillsTrader blew up their account more by trading impulsively than by any othermistake. If you ask a beginner trader the reason for taking a long position on acurrency pair, you might hear the answer, “Because it has gone down enough – sowww.BinaryOptionsGain.com Page 46
    • www.BinaryOptionsGain.comnow it’s bound to go positive.” This is an example of impulsive trading andwishful thinking; the trade decision is not based on a logical reason.Trading impulsively is merely playing the game of Russian roulette. Logical tradingis extra precise than impulsive trading.Trading impulsively is simply gambling. It can be a huge rush when the trader is ona winning streak, but just one bad loss can make the trader give all of the profitsand trading capital back to the market. Logical trader will know price dynamicsand reversals, whereas impulsive traders are only one trade away frombankruptcy.Adding To A LoserMost of the time trader increase their risk and keep on adding to them if tradegoes against them. This is a martingale technique in which traders desperatelyhope that a reversal will occur and their losses will convert to profit. Howeverdoing so increases the exposure while the trade goes in loss. In such scenarios asmart trader will typically close the option or let it expire and head toward nexttrade.www.BinaryOptionsGain.com Page 47
    • www.BinaryOptionsGain.com6.Putting It All Togetherwww.BinaryOptionsGain.com Page 48
    • www.BinaryOptionsGain.com6.1 Creating A Business PlanMany business fail due to their lack of planning and failure to create a businessplan to follow. Creating a business plan give the trader a sense of direction thatthey are trying to reach. It set goals, and plan to execute. Most successful traderswill agree that trading is not different than business and in order to be successfulin trading you should have clear and written business plan.Following are some of the things which should be included into your business planfor trading.  What are your reasons for which you want to become a trader?  What do you hope to achieve from trading? Be specific here. If the possibility of making a lot of money has drawn you towards trading then list out how much money you want to make from trading and what you plan to do with that money if you make it.  What are the things that are going to separate you from the large majority of traders who fail?  What are your biggest weaknesses?  How do you plan to address your weaknesses and leverage your strengths?  How much time can you devote towards actively following the market?  Do you plan to day trade, swing trade, position trade or a combination of the three? Does your choice here reflect the time you have to devote to the markets?  What market or markets do you plan to trade and why?  At what times throughout the day are you going to spend actually trading, researching trades, and then learning about the market?  What are your criteria for entering a trade?  What are your criteria for exiting a trade?  What is your money management strategy?  How will you know if one of the pieces of your strategy stops working?www.BinaryOptionsGain.com Page 49
    • www.BinaryOptionsGain.com  After identifying that one of the pieces of your strategy has stopped working what will you do to address it?  What trading software and equipment you will use to trade and how much is it?  What Broker/Brokers will you use?  Do you plan to add money to your account and if so where is that money going to come from?  If you are profitable do you plan to reinvest profits or withdraw some or all of them?  If you plan to trade full time how you will support yourself if you aren’t profitable right away.  How much money do you plan to start to trade with? Does the math work out when considering taxes, all costs, living expenses and your initial trading balance?Those who take time to think about and write down the business plan underthese heading generally have a higher chance of success.www.BinaryOptionsGain.com Page 50
    • www.BinaryOptionsGain.com6.2 Maintaining A Trading JournalThere is an old saying learn from your mistakes, for traders it mean to maintain atrading journal. Successful trader looks at each experience or loss as a chance tolearn and grow. Trader openness to leaning from their trades differentialprofitable and unprofitable trader. A trader should be willing to put effort toprepare a document for recoding his trades and from time to time review eachtrade.Trading journals could be used to document trades. You can simply write downdetails of your trades in a notebook or a word document. However using spreadsheet software like (excel) provides you more flexibility and handy analysisoptions.Below are 10 things that in my opinion it is important to document about eachtrade. : 1. What were the market conditions for that day or trade? 2. Why you take the trade, entry date, Expiry and price. 3. Was the trade short terms or long term? 4. Comment on market condition from the time you entered till you close the position. 5. Money management rules that used for the trade. 6. If possible attach a chart with your analysis. 7. Address you weakness for the particular trade or day. 8. Address your strength for that day or trade. 9. You can also add additional comments which you though might be help full.www.BinaryOptionsGain.com Page 51
    • www.BinaryOptionsGain.comWhat’s NextFor binary options trading strategies and moretutorials on binary options visitwww.BinaryOptionsGain.comJoin us over Twitter, Facebook and YouTube for more up-to-datelearning material.www.BinaryOptionsGain.com Page 52