Prospective traders are often attracted by the thought of potential profits – one example is a profit made by a trader I know who recently took a small size in a highly leveraged product and turned $100 into $1,000 in a week. These types of stories tend to fuel the fire of motivation for traders; but there is another side to big gains, and that is big risk. As we gain more experience we realize that the best traders are the ones that control risk.
One well publicized trader once said his largest losses came right after his biggest gains. The emotional stimulation from big profits can be a double-edged sword, and often leads to a decreased emphasis on risk management. The trader I mentioned above who turned his $100 into $,1000 in a week’s time found his success reversed shortly after when he turned that $1,000 into $10.00, – yes, ten dollars – just two days later. This is unfortunately a true story.
It’s long been said that fear and greed are controlling factors for traders; and experience backs up that saying. Experience also teaches us that the most important element to trading is managing risk. The earlier example illustrates the idea that without risk management, the ability to sometimes score profits becomes far less effective when combined with subsequent losses. The best traders are risk managers who take care of risk first. When it comes to trading, longevity is key; and a trader can survive longer with proper risk management.
Yesterday’s article included an example of a trade that would not have succeeded. The idea was for the equity indices to have limited gains yesterday; however, the stock market had its own mind. While it was going higher, some traders were tempted to short and were getting beat up by a market that was climbing almost non-stop.
The unfortunate thing is that in order to handle trades that are not going their way, many traders have to negotiate stops, decide where they want to get out, and debate whether they should give trades more breathing room. With a market like yesterday’s, unless you shorted the top, you probably shorted too soon.
Fortunately, binary option traders have the benefit of a product with risk management built in. These options have a limited amount of risk that is clearly defined when opening the trade. This means that traders do not have to decide whether to widen their stops and take on more risk; if their market view ends up being incorrect, they can toss that idea, take their loss, and move onto the next idea. Of course, this is not suggesting that binary option traders are perfect risk managers just because of the built-in stops in these products. Binary traders still have to control their trade size and impulses just like everyone else; but there is a strong opinion that the limited risk nature of these options help traders control emotions and assists them in becoming better risk managers.