Money Management Increases Profits
Knowing what the market will do before it does it would give you a huge advantage when it came to making profits, even if you were right only 75 percent of the time. This might seem like an unrealistic fantasy, but there are actually things that you can use to improve your direction prediction accuracy to this number or better. Some of these things you can do on your own, and others can be purchased as advanced trading software or signals services. Either way, improving your accuracy will only lead to better overall profits, and that means more money in your pocket.
Money management will obviously be a big factor in your success when it comes to predicting market movement. Taking a page out of the gamblers’ handbook is actually a good idea here. The difference between gambling and the financial markets is that gamblers have random chance to work against, and traders are acting with much more certainty, but some money management strategies remain constant. One principle is putting more money into trades where you have a higher probability of success and less money where your certainty levels are a bit lower.
The trick is to figure out which trades have the highest probability of success. Even when you are using a software program to predict the best trades for you, this ability is something that can only come through observation and experience. The more time you spend watching the marketplace of your choice and the events that influence movement and momentum, the better equipped you will be to make these probability predictions. And even the best experts out there cannot do this with 100 percent accuracy. At best, you will be hypothesizing, although the more educated your hypothesis is, the more accurate your trading will become.
However, you can add an extra degree of certainty to your trading when you start using binary options. This is because binaries do not rely on the amount of change to determine your profits or losses, but rather the direction of movement. So, if you are looking at the S&P 500 index and you think that it will go up by 1 percent in the next hour, you can buy a large number of shares in an ETF to make this movement worthwhile. But, what if the S&P only moves 0.05 percent in the direction you thought it would? If you didn’t buy enough shares, odds are you will still lose money because of broker purchase fees. If you had gone with a binary options broker, you would have received the maximum profit, though. Binaries rely on direction and not the amount of change that happens. It makes your prediction process easier and simpler to put a probability of occurrence on. And a more accurate probability assessment makes money management more focused and profitable for you.
Figuring out the exact amount to risk per trade is a process that you will fine tune over time. There are formulas out there that can help you get an exact amount down to the penny in regards to your account size and perceived probability, but these advanced methods are not necessary for most people, especially because most brokers will not allow you to risk these fractions of shares or, if using binaries, amounts outside of the designated dollar amounts given. If you feel that risking $32.72 is the right amount based upon your data, and you need to choose between $25 and $50, always round down. This will give you a safety cushion and account for the fact that your estimation of probability will never be spot on.