You may have heard the horror stories about day traders going from making a lot of money to suddenly being tens of thousands of dollars in debt, or more. One recent story involves a trader who woke up to find that he owed his broker over $100,000 because of his short positions going against him. While this is an extreme example, it does illustrate a very important point. Trading of any sort entails a good deal of risk, and if you do not have the proper risk management system in place, you are exposing yourself to catastrophic losses.
Still, there is a lot of money to be made going against the grain when you short stocks. Yes, the traditional trend of the marketplace is upward, but if you focus on the short term, every single company out there will create opportunities as their prices oscillate up and down. If you are not entering shorts cautiously, though, you will find that you are guessing. And when you speculate on Wall Street, you will always end up losing.
This stresses the importance of trading protection. You need to always trade with stop-loss points in place. If you are going short on a stock, always place an order with your broker that if shares rise to a certain point, your positions are automatically closed. These can be costly, but having a $100,000 bill show up is far more costly than if your broker charges you $50 for a stop-loss order.
You may also want to consider using binary options. The stock that the above mentioned trader was focusing on a tiny stock that would never be traded on a binary options broker, but the point is the same. What can happen to one stock can happen to another, even a big stock. The difference is that big stocks have more volume and thus wild swings are not as likely. The concept is the same regardless. If you are not trading with the proper precautions in place, you are not going to get out of a bad position quickly enough when the markets go sour.
With binary options, your risk is only as great as you stipulate before the trade. If you risk $1,000 on a short position, the most you can lose is $1,000. This is done in the form of a put option, and when you’re wrong, you simply lose what you risked. If you are correct, and prices do go down, your gains are also previously known. You can also limit your risk by manipulating the timeframes of your trades. You can choose how long before the expiration occurs, limiting your exposure to the market and more quickly freeing up your money so that you may enter other trades.
Proper precautions are also needed for trading binaries. For example, if you have $10,000 in your trading account, risking $5,000 on a single trade is not smart. If you are incorrect in your prediction, your trading account has instantly been cut in half. This is far too much risk and will eventually lead even a highly skilled trader to go broke.
If you are a day trader in the stock market, but you do not have a hundred thousand or more in your account, you are taking on undue risk. Yes, you may have a solid strategy, but in today’s market where volatility is becoming the new norm, there is just far too much uncertainty to have the same confidence levels that were present just a year ago. Taking on extra risk is not something that the average trader should do, and binary options present a cheaper way to alleviate this problem.