Money Management – The Importance of a trading plan

Money Management – The Importance of a trading plan

Plan your trades, trade your plan

The saying “Plan your trade, trade your plan” is well-known among traders. My personal opinion is that nothing is less true and that this statement also applies to binary options trading.

It should all start during the weekend already by looking at the economic calendar when major economic events take place in the coming week and which currencies will be affected. Ultimately, knowing what moves a currency pair from a fundamental point of view is vital to success in binary options trading.

Determining investment

The next decision an investor or binary option trader has to make is how much money he / she wants to invest, since it is unnecessary and unwise to trade everything. Ultimately, trading and investing is just like life itself; it contains ups and downs. This means that some weeks are positive and some are not, but what is important here is that we want to trade profitably in the long term. The only way to achieve this is through discipline and good money management, two personal qualities which have central role in this educational series.

What to trade in?

After having selected an amount to invest in a trading week, the next step is to distribute the money among the currency pairs you want to trade, and then divide it again into smaller pieces to buy multiple positions. It makes no sense to put all your money into one stock or one binary option, always diversify your risk and never bet on one horse.

The last important step is to determine the correct expiry time (expiration date). Avoid short expiry times where possible and open trades before the end of the week and the end of the month. Binary options brokers pay up to 80% return on investment so waiting for a couple of days shouldn’t be a problem for a disciplined option trader.

A trading plan is absolutely necessary to decide in which instrument to invest and what your expectations are.

Choosing the right assets

First of all, a trader or binary option trader has to determine which assets or financial products he/she wants to trade and see if his / her (binary option) broker is offering these assets. There are various classes of assets which are all influenced by various factors.

Currency markets are the most generous because Forex is the most traded product, especially in high frequency trading (HFT) and with binary options, where short-term expiry times are very popular.

However, it does not mean one shouldn’t use medium and long term expiry times, since using longer time frames is more accurate and safer in the long term.

The foreign exchange market can sometimes be difficult to trade because there are so many factors that affect the price on the Forex markets, from political and geopolitical factors to company mergers, interest rate changes and supply and demand.

Practical example

To give you an example of how a currency is influenced by mergers in the business world, suppose a company from America plans to buy a company in Europe. To complete the purchase, the company has to pay in local currencies, in Euros, and thus there will be more demand for Euros.

This does not mean that the entire amount will be purchased on the spot market however, but that consortium banks will buy every dip in the price of Euros in order to arrive at the previously agreed upon price.

The stock market is a great place to find suitable companies to trade binary options on, but in order to do so one must know what moves this particular stock. Jobs data in the United States and the NFP are the benchmarks for the US and for global equity markets in general.

Federal Reserve Mandate

The Federal Reserve in the United States has a dual mandate: keep inflation below or close to 2% and create jobs. These two elements influence interest rate decisions and there is a direct correlation between shares traded and interest rates: if interest rates rise, shareprices on the stock market decline, while a lower interest rate makes for an increase in the value of shares.

These arguments also apply to trading indices and binary options.

Last but not least, gold and oil are also popular and making an investment plan before you start trading these markets is very much recommended. Oil is hardly affected, only by OPEC meetings and oil supply figures from the United States, so be sure to know when these meetings are held and when the oil supplies are published by Baker Hughes by looking at the economic calendar.

Read other articles in the money management series:

Money management – How to prevent overtrading
Binary options money management system