There is a substantial different between simply knowing that binary options trading involves risk and actually being able to gauge the risk level of each trade. Determining risk level can require a bit of research in order to arrive at a precise determination. However, there are also some very simple forms of risk assessment which can be used by all traders.
Risk and the Binary Options Broker Payout Percentage
The payout percentage on each trade is one indicator of risk level. Lower payout percentages are often linked to binary options trades which offer less risk. This can be viewed as an indicator that the broker feels that the odds that the trade will end in favor of the trader are high. Alternately, higher payout percentages can be a sign of a riskier trade. In this case the broker may feel that the odds of the trade ending in the money are decreased, thus allowing them to feel confident in offering a higher payout percentage to those who do indeed make the correct prediction.
Assessing Risk Using Historical Underlying Asset Price Data
Asset price data is used on risk assessment as well. Though this form is not as simple as just viewing payout percentages, all traders need to learn how to read financial data and the interpret it as it applies to each binary options trade. These numbers can show anything from strong trends, to price stability, to asset price volatility. All of this information can be used to determine which trades and positions are presenting more or less risk. Armed with this information, traders are provided with some level of control over risk.
Risk Assessment Based On Binary Option Trade Type
Recent underlying asset price movement can be a strong indicator of risk in binary options trading. This will vary by trade type. Trades which require some level of price stability will be riskier when the chosen asset is performing in a volatile manner. Alternately, trades which require the asset price to be in movement in order to end in the money will be riskier when stable conditions are in place. Market conditions and underlying price performance must be factored in when selecting the trade type. Failure to do this could increase binary options trading risks immediately.
Risk Assessment From A Financial Standpoint
Risk assessment is not always related only to the possibility of trade success or failure. It can also be viewed from the standpoint of what one can financially afford to lose. Since some losses will be a part of binary options trading, there will be a need to assess risk from a financial standpoint. A strong money management plan will limit risk in this area. This plan should include never investing an extremely large amount on any given trade, regardless of how likely it seems that the prediction will be correct.
Strike Price Risk Assessment Factors
Last but not least, binary options risk assessment should include some consideration of what must happen in order for each trade to end in the money. For example, should the strike price be far apart from the price that must be reached in a Touch trade, one can assume that a higher level of risk is in place. The strike price can be used as an indicator in all trade types, as it serves as the starting point, with the trader knowing in advance what must occur in order for the trade to end in the money.
A total accounting of risk may only come from using each of these methods to determine the overall level. Risk indicators are everywhere. Traders need only know where to look. Though it is completely impossible to eliminate risk from binary options, each trader has the power to avoid trades which present a high likelihood of resulting in the loss of the investment amount.
Written By John Anthony, BOTS Guest Writer
With the introduction of binary options trading in 2008 John Anthony, an experienced stock and forex trader, decided to embark into this field full time. Since then and with the development of the internet and devices like ipads and smartphones, the ease of placing binary options trades is what makes the industry so popular. In mid 2012 John decided to launch Master Binary Options Trading to help and advice new traders on which brokers to use and how to spot opportunities.