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Binary options offer traders superior risk management capabilities. The settlement nature of the options allows for traders to put on a trade with a well-defined reward to risk ratio. This means that traders can essentially manage their risk without having to do anything. Most traders who trade binary options hold them until expiration and will let them settle at maximum value or go to zero. While this is a valid strategy, traders managing their positions more actively can experience lower volatility in their returns.
Although Nadex does not offer stop loss orders a trader can manage their risk and profits manually. To lower overall volatility of returns a trader should consider using profit targets when trading binary options. Instead of holding a position to expiry traders should be taking profits as the position moves in their favor and looking to trim losses as it moves against them. Using a mental stop loss and predetermined profit targets lowers the overall level of risk that a trader has in any given position.
What most traders fail to realize is that if this position moves in their favor their overall level of risk in the position also increases. To help manage that risk traders should be using a mental stop loss level and taking profits based on that stop.
In this case we will look at how profit targets would be place if we used a 50 percent stop. Profit targets can be placed based on that distance so a trader insures a good reward to risk ratio.
In managing positions in this way a trader is able to lower the volatility in returns and traders can play a more active roll in risk management. Binary options do not need to be an all or nothing trade. Consider getting more involved in position management and you might see your returns smooth out. James Ramelli is an trader and options educator at AlphaShark Trading, where he actively trades futures, equity options, currency pairs and commodities.
As one of the moderators of the Live Trading Room, Ramelli educates members on strategies, trade setups, and risk management while trading his own capital.
Ramelli holds a B. The information contained above may have been prepared by independent third parties contracted by Nadex. In addition to the disclaimer below, the material on this page is for informational and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere.
Please note, exchange fees may not be included in all examples provided. View the current Nadex fee schedule. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representations or warranties are given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk and any trading decisions that you make are solely your responsibility.
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