There’s no such thing as risk-free trading. The truth is, trading always carries some amount of risk. Most of the time, traders have a 50/50 chance of losing or gaining in trades. Of course, the actual ratio depends on individual strategies and levels of experience, but it’s undeniable that trading is a matter of luck as well.
If you’re trading on Binomo, you have the choice to exit a trade before it expires. But doing so will mean purposefully giving up a portion of your money, something not all traders are alright with.
Capital management is a financial strategy that involves reducing risks to maintain optimum cash flow. Remember, you can only minimize risks, not completely remove them. And in today’s guide, we’ll show you some of the best capital management strategies for trading on Binomo.
Best capital management strategies for successful trading
Investing the same amount per trade
Losing trades can be quite difficult, both emotionally and mentally. No matter how long it’s been since I first became a Binomo trader, I still feel sad or even disheartened whenever I lose a trade. Sometimes, after losing a trade, I feel like investing a bigger amount in the hopes of receiving back what I lost.
If your thought process has started becoming something like this – hold it right there.
Take a moment to pause, breathe, and think. Yes, it’s normal to feel down due to a loss. But the thing is, a lot of times, increasing the amount on your next trade isn’t a very good choice. After all, you’re not sure if you’re going to profit at the next one. What if you end up losing it as well?
One of my favorite capital management strategies to suggest for beginner traders is to invest the same amount per trade. It means exactly what it describes: you only invest the same amount per trade, regardless if it’s a gain or not.
Here’s a visual example to help you better understand what I’m talking about:
As you can see, if you only invest the same amount per trade, you’ll have a higher chance of coming out successfully despite a few losses along the way.
Reinvesting profits
The second capital management strategy that I also use consistently is to reinvest profits.
First of all, reinvesting profits is one of the most common tried and tested methods for capital management. Second, it’s so easy to implement that even complete beginners can do it too.
So, how is it done? Basically, you merely invest all the profits that you earned with the last trade you completed. For example, if you started out with $10 and you profited $8, that means you’ll be funding your next trade with $18.
Again, here’s a chart for better understanding:
As you can see in the table above, although I lost the second trade, ultimately, my three trades still came out as an overall gain. Despite my $10 loss in the second trade, my total profit was still $15.92 – a number you can get by deducting my $10 loss and the $32.40 that I invested in the trade.
By reinvesting my profits, I’m making use of the power of compounding to offset any previous losses and still come out in profit.
That said, do know that this is a very high-risk strategy that’s better suited for experienced traders who already know what they are doing. These traders usually trade only two to three times per day, which means this is their best attempt to earn as much money in as few trades as possible.
Also, if your account balance isn’t that big yet, you’re better off doing the previous strategy instead. You should also stop trading once you’ve already made two or three losing trades.
Using the Martingale strategy
The Martingale strategy is a controversial strategy that involves increasing the amount to invest after every loss. It works with the idea that it’s impossible to lose all the time. Hence, if you keep increasing your investment amount after every loss, you’re bound to succeed eventually, but please bear in mind the associated capital loss risks.
Obviously, it’s a very risky strategy that only experienced traders should even bother trying. It’s basically the exact opposite of the first capital management strategy that I listed above, ‘investing the same amount per trade’.
Here’s a visual table as to how the Martingale strategy works:
One important thing to remember is that there are more disadvantages associated with the Martingale strategy than advantages.
The biggest disadvantage is probably the fact that it’s easy to lose money if you get into a losing streak when using the Martingale system. What if your strategy was to invest double the amount every time you get a loss? Let’s say you start out with a $100 account balance and a $10 initial trade. You could literally wipe out your entire account in less than 5 trades!
Here’s another disadvantage. Same situation as the last. Let’s say you finally earned some profits in the third trade. By the time you earn something from your third trade, you would’ve already lost a substantial amount of money. Will your profits really be enough to offset those losses?
Of course, we wouldn’t mention it here if it doesn’t work completely. Actually, the Martingale strategy does work sometimes. One example is when you’re trading using support and resistance levels. When prices are already hitting the support level, then they’re likely to stay within that range. This means that you could safely use the Martingale strategy as long as the prices are still fairly predictable. Once the price breaks out though, you’re probably better off dropping this strategy as well.
In conclusion, the Martingale system may be good for some instances, but it’s still too risky to recommend to anyone, especially beginner traders. Although their rewards may not be as high, the first and second capital management strategies on this guide are still a lot better than the Martingale system.
We’ve got some articles here featuring the Martingale system in case you’re interested:
Trading instinctively
A very high-risk, high-return “capital management” strategy is simply to trade instinctively.
What does it mean? Trading instinctively means investing money based on how you think the trade will go. For instance, after studying the charts and analyzing the current trade, you think there’s a good chance that you’ll enter the correct position and earn a lot of profit. So you trade instinctively and invest what you feel like, likely a big amount, since you feel that you’ve got a good chance.
On the other hand, if you think you’re not sure if you can make a lot of money from the next trade, you might just trade a smaller amount to minimize losses.
In theory, this is well and good, but the biggest problem with this is that it opens up a lot of opportunities for you to start trading with your emotions. That’s right – trade instinctively for some time and you’re sure to turn into an emotional trader, a type of trader that you definitely don’t want to be.
Now you know why I put the words “capital management” in quotations. Instinctive trading isn’t really a management strategy; in fact, it describes the lack of any strategy whatsoever.
Why is it important to use capital management strategies?
Nobody invests money just to lose money, especially not traders. Although losses are inevitable when trading, at the end of the day, you’ll still want to end up with a profit. Capital management strategies like the ones I listed above are a great way to make sure that you can protect your account balance from getting wiped out.
Of course, there are some “strategies” that are a lot riskier than others, just like the Martingale strategy and instinctive trading. If you’re going to implement those in your strategy, you have to make sure that you have enough discipline to know when to continue trading and when to stop. The Martingale strategy is especially dangerous because of this since it’s so easy to wipe out your entire account just by using this system.
Ultimately, your top goal as a trader would be to earn profits, and these capital management strategies can help get you there.
And that’s it for today’s guide! As you can see, there are so many different capital management strategies for successful trading on Binomo. Which one you’ll choose depends entirely on you. I recommend assessing your own trading goals and preferences so that you’ll have an easier time figuring out which one works best for you.
Obviously, trading involves a lot of risks, but by implementing some of these capital management strategies, you can at least mitigate the risks and improve your chances of growing your account.
Good luck on your trading journey with Binomo! Don’t forget to sign up for your free practice account here!