Compounding is one of the more popular binary options money management strategies. Its popularity stems from the fact that it allows for profit growth, while simultaneously providing protection against large losses. Although the potential for large, fast profits certainly do exist, slow and steady profit building tends to be the best approach. Some patience will be required, but the good news is that through compounding, profits will grow along with experience and better trading.
Any amount of account funds can be used to start compounding, so long as there is enough money to meet minimum investment requirements. Per-trade minimums do vary from broker to broker, but in most cases are very reasonable. The strategy involves selecting a set percentage of total account funds, and using this percentage to determine the investment amount for each trade. With the same percentage being used, investment amounts will increase along with each win, then decrease along with each loss. The only action required on the part of the trader is to perform some basic math to determine what each investment amount should be.
Should you decide to use 10% as your compounding percentage and have $1,000 in your account, the first investment amount would be $100. Now, assuming that you enter into a trade that pays 80% and finishes in the money, your account balance would increase to $1,080. The next investment amount would then be $108. If the trade had been a loss, the next investment amount would be $90. With each trade, the investment sum will change along with the change in available account funds. Note, however, that when starting out with a small balance, adjustments may need to be made in order to meet minimum investment requirements.
The above example uses 10%, but it is certainly possible to select other percentages. Many who trade binary options opt for 5%, as it minimizes risk while allowing for relatively fast profit growth. Success will likely bring about some consideration of whether or not to increase the percentage. This can certainly be done at any point, but should not be considered until your overall win rate exceeds 60%. With an even higher win rate, the easier the decision to increase the compounding rate will be to make. The decision to lower the percentage can also be made when you wish to keep investment risk low.
Some binary options brokers do offer small refund rates on losing trades, but this should not impact the overall strategy. When a refund is applied in the case of a loss, those funds will be added back to the trading account. The current balance can then be used to calculate what the next investment amount will be. The same applies for the use of Sell features, which will allow you to sell an open position back to the broker. Again, the account balance will update as soon as the trade is closed.
There are other money management strategies to consider, but none offer the same type of profit building and loss protection. While most who trade binary options make trading the primary focus, some consideration does need to be given to fund distribution. It is possible to decide upon the investment amount along with each individual trade, but doing so will leave you open to making decisions based upon emotion. A solid plan that is followed will always be better than selecting random amounts based upon “gut” feelings.