Avoid These Common Binary Options Trading Mistakes

With the odds of turning a profit per trade firmly stacked against you when trading binary options by evidence of the +70%/-85% dynamic, it is extremely important to manage risk in your losing trades as well as in your winning trades. Now you may be asking yourself what do we mean by managing risk in winning trades?  Well because the risk profile presented by most binary options trading platforms is slanted in favor of the house so it is in our best interests to be aggressive when trades are going our way (firmly in the money), take small losses when we lose and most importantly avoid turning winning trades into losers. Contrary to popular belief this can be done in binary options trading with smart hedging tactics.

Being aggressive with winning trades does not mean blindly increasing your trade size (aka Doubling-Down) when the trade is going your way. You may want to increase your trade size but simply doubling the trade size is probably the worst thing you can do. Why? The math simply makes doubling down a losing trade. For example, say you purchase a $100 call at 50 early in the expiration cycle and shares increase an amount such that the option is firmly in the money (say at 52). The charts are suggesting that shares will continue to move higher so you are debating whether to purchase another call or to just let it ride and likely collect your 70% profit. If you purchased another $100 call with a strike of 52, you would win $140 if shares finished above 52. However, if shares fell only 1 penny from the new strike of 52 you would lose $15 on the $200 investment. And if shares fell all the way back below 50 you would lose $170 (see the graph below):

Binary Options Strategy: Double Down

Being aggressive with winning trades does not mean blindly increasing your trade size (aka Doubling-Down) when the trade is going your way. You may want to increase your trade size but simply doubling the trade size is probably the worst thing you can do. Why? The math simply makes doubling down a losing trade. For example, say you purchase a $100 call at 50 early in the expiration cycle and shares increase an amount such that the option is firmly in the money (say at 52). The charts are suggesting that shares will continue to move higher so you are debating whether to purchase another call or to just let it ride and likely collect your 70% profit. If you purchased another $100 call with a strike of 52, you would win $140 if shares finished above 52. However, if shares fell only 1 penny from the new strike of 52 you would lose $15 on the $200 investment. And if shares fell all the way back below 50 you would lose $170 (see the graph below):

 

This is what we mean by turning winning trades into losers. Your initial trade was firmly in the money with a high likelihood of generating a $70 profit. Now you have increased the probability of losing by simply doubling down as the graph above highlights. In a situation like this if you really want to increase your lot-size we recommend choosing an amount that will still yield a profit should the 2nd trade move against you. In the previous example if you purchased a $50 call at 52 instead of $100 you would still generate a profit of $27.50 or 18% should shares fall below the 52 strike price. Clearly not as good as the $70, 70% profit you would have generated had you not altered the trade but clearly better than taking a loss on a double-down scenario. The upside would be if shares did continue to move above 52, you would have now turned a $70 profit into a $105 profit (see graph below for details).

Binary Options Strategy Modified Double Down

So our advice to you is to definitely be aggressive in your binary options trading but do it in an intelligent manner with an emphasis on protecting profits of winning trades. Next week we follow up on this theme and discuss why 3 is the magic number when trading binary options.

Next time in Lesson 7 we discuss The Advantages of Trading Touch Options.

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