Why Diversifying Your Binary Options Trading Can Increase Your Profits And Decrease Risk
There are many factors that will influence your ability to make money from trading binary options. However, making sure you know how to diversify your investments is one of the secrets to serving up long term gains.
Here are some suggestions that you can easily incorporate into your trading plan to start spreading your risks.
Diversify Your Trading Assets
For many new traders, the world of financial markets suddenly opens up to them once they get their first binary options trading account. There is a diverse range of different asset classes that can be traded in binary options. For many, access to some of these assets; commodities in particular, may be something entirely new.
While trying to track and trade each asset that is available is not advisable, there is merit in splitting your focus. It maybe for example, that you find when reviewing your trading plan that you tend to concentrate too much on Bank or Technology Stocks for example. This can leave you to susceptible to not only individual stock level risk, but also market ‘sector’ risk. This will hold true particularly if you have multiple positions open simultaneously.
Watch Out For Correlations
In trying to spread risk among different asset classes you have to be mindful of the way in which markets work. Many market correlations exist between seemingly unrelated assets and this can catch out the unwary trader.
What this in effect means is that a single market event such as news release or release of data can see multiple positions in your account affected even though there was no obvious relationship between the assets involved. Examples of this could be the relationship between the dollar and the gold price (dollar goes up gold goes down), the Canadian dollar and Oil (both tend to go up together) or an inverse correlation such as exists between the EUR/USD and the USD/CHF (one goes up and the other goes down).
Vary Your Strategies
Just as it can pay to diversify the assets that you trade, it can also help you to trade a range of different binary option strategies. In doing this you will avoid having your success tied to the fortunes of any one strategy. This should help compensate any trading losses in one with gains in the other.
To diversify your strategy you might also want to think about whether you combine a short and long term strategy to provide further diversity. This may shield you to some extend from any potential intraday shocks or alternatively compensate any losses on that you may encounter on longer term positions on your account.
Split Your Trading Between Brokers
This may seem a little extreme but it certainly bears consideration. In the case of binary options in particular, this is perhaps more pronounced as most brokers are not yet regulated. This is a step that many are now addressing, but even so, with many regulated major banks and asset managers failing in the current financial climate you cannot afford to take the risk.
Splitting your capital across several different top binary option brokers can provide a good way to provide the ultimate diversification of risk. You will not risk losing all of your funds if one company fails. But withstanding this doomsday scenario there are other additional benefits.
If you are trading more than one strategy than you can tailor the broker to the strategy as part of your trading plan so as to maximize your return. Furthermore it will also allow you to easily track and follow your performance of the strategy in an individual account.
The net effect of diversifying your binary options trading will not only lesson your risks, it will also help to increase your profits. The number one rule of a successful investor is to preserve your capital first to give yourself the best chance of making a profit moving forwards. This lesson will help you to achieve exactly that.