If you’ve started to look into taking up binary options as a means of financial trading then you will no doubt have seen it mentioned that you should trade to a plan.
This it is said, will give your trading discipline, help you to avoid unwanted risks and also increase the profits that you can make. These of course all sound like good valid reasons to create a plan for your trading.
But how exactly do you come up with a binary options trading plan and what should it look like?
What A Trading Plan Does
The purpose of a trading plan is primarily to provide focus to your trading. It should detail your objective and provide you with a structure with which to reach this. It is your blue print for success, a map to guide to you to trading profits.
It’s value, as with any map, rests in it providing you with good clear instructions if you want to gain the maximum benefit from your binary options plan.
Creating Your Plan
There are two big misconceptions about trading plans. The first is that they have to be long and complicated. The second is that it is sufficient to spend just a few minutes on creating a plan simply to check it off your list.
The reality is that you should spend a sufficient amount of time to plan in order to create something worthwhile. The goal of any trading plan is to create a blue print that you can use to dictate your trading. It shouldn’t be so constrictive that it holds back your trading, but it should provide you with sufficient checks and balances to protect your account at the same time.
A well constructed plan will address the most important parts of your trading. Here is a list of the most important things that you should consider -
It is important that you know what you are trading. Therefore any plan for investing with binary options should start with an outline of the markets that you are going to trade. By focusing in on just a few markets or even individual assets, you will make it much easier to focus your analysis and keep track of economic data and market news.
It is a common misconception that the diverse range of markets that you can access through a binary options account necessitate that you try to trade all of them. Concentrating on just a few assets won’t eat into too much of your time and will provide you with plenty of opportunities to build good profits on your account.
Strategy And Timing
These are included under the same header and to some extent one dictates the other. The strategy that you use will normally dictate the times that you trade and the time that you have set aside for trading will also dictate the strategy that you trade. To get the best from a strategy you are going to need to define the best time window for its implementation, but it is also important to set boundaries for your trading.
A common mistake is to try to trade too much. Over trading is a common failing of many new traders. An over enthusiasm for profits and a desire to trade ‘around the clock’ can see otherwise profitable strategies fail. Define the best time to trade your strategy, stick to it, and enjoy your time away from the markets.
It is important that you properly work out and document the profitably of your strategy. You should know how many trades you are expect to win and the profits that this will deliver.
The dealing platform provided by your binary options broker will also have an influence here. The return on a winning contract and any rebate you stand to earn on those that end out-of-the-money will have an influence on your overall profitability.
Once you have worked out your profitability you will be able to refine the markets that you trade. For example if your strategy is profitable, but has a low win rate, then it may be preferable that is traded via a broker with a good rebate level. If conversely the strategy has a high win rate, with few losses, then you may be better dealing through a broker that offers the highest return.
Risks And Money Management
Risk management is a very important part of any plan and therefore some guidelines should be included. Working out the amount of capital to risk on each trading position is just one element of reducing your risk and managing your money well. A good money management strategy for binary options normally advocates using no more than 2-5% per contract but this will ultimately depend upon the strike rate of the strategy used.
You also need to think about avoiding trading on correlated assets and any plans for rollovers or selling out of contracts early which is possible with some brokers. In fact any variable which could crop up when live trading should be reasoned and documented so you know exactly the course of action to take when the time comes.
Record Your Results
Integral to your plan should be the ability to record your results and monitor your overall performance. In keeping a record of the trades that you place in your binary options account you will be able to carry out analysis in to your performance which you can then feed back into your plan.
There are several things that you can look out for, including Assets with a low level of profitability, poor trading results at a certain type of day, improvements to money management etc. Without an easily accessible record of this information it will be difficult to find and correct any weakness in your trading.
Creating a trading plan for binary options is not difficult. It can help you to define your objectives and importantly add a process to your trading. This can not only help you to avoid making impulsive trading decisions on your account, it will also allow you to identify areas of trading improvement easily. However a plan is only as good as the trader and therefore it is vital that you stick to your plan.