Trading digital options is a type of trading where you speculate on the price direction. If your predictions were right, you would get a fixed return. If they were wrong, you would lose the invested capital. Some brokers allow, under some restrictions, to close the transaction earlier so you do not lose the whole amount, but generally, it works like described above. To define your position size that is how much money you risk in an individual trade is crucial for your future success. It should not be coincidental. Neither should it be determined by how strong trust you put in your predictions. It should be, though, dealt with as a formula that you would use every time you enter the trade.
The size of risk you take
It is never smart to risk too much. The amount you are prepared to risk should be as small as possible. It is said that the risk equal to over 5% of your balance account is unwise. I can tell you that professionals risk only 1% of the total capital in their account. Or less.
Let’s assume you have $100 in the account. You should make a decision not to risk more than $1 or $2, which will be respectively 1% and 2% of your capital. $5 will be an absolute maximum, but try to avoid such a risk.
Risking too much is a common mistake newcomers make. They come to the platform in the hope of making fast money. So they put big amounts on single trades. And when they lose, they are angry and emotions take control over their actions. They wish to make up for a loss by investing a big amount once more. This is a short path to end up losing everything.
That is why you should always follow the rule that says you ought to protect your capital in the first place. Learn how to keep the money in the account and then start thinking about making a profit. Risking small amounts gives you also the time to try different methods and observing what works well and what do not.
The risk in digital options trading
There is a fixed risk in digital options trading. This is good news as you know what you can lose from the very beginning. Its size is equal to the amount you place on a trade.
The establishment of the position size
How to calculate the precise amount of money you should place on a singular trade? Sum up what you have already learned. The amount you are prepared to lose which is the percentage of your account balance and the volume of risk you can take in digital options trading.
If you have $1,000 in your trading account, and you took a decision to risk 2% of the whole capital, it will give $20 per trade. In case there is no rebate offered by your broker, and in most cases there is no, your maximum risk will be $20. This is the number you should put in the amount box on the trading platform. You place $20 on a trade and you are ready to lose $20.
A few remarks on the position size in real trading
In the beginning, it would be wise to calculate the position size every time you open a position. You should determine the investment amount in accordance with the percentage risk tolerance and the particular trade you are about to enter. Repeating this procedure will exercise your ability to make such a decision faster. Note, that the sum of money you can place will vary depending on the total capital in your account. You will be able to increase the invested amount after a winning trade and to reduce it after you lose. The important thing is that the percentage remains the same.
With time and practice, you will learn how to operate on the same investment amount regardless of the small fluctuations in the total capital. Look, in my account, there is always a similar figure. By the end of the month, I withdraw the profits. If I incur a loss, I will recover from it fast by placing a few profitable transactions. What I want to tell you is that after you gain some experience in determining the position size, you do not have to change the investment amount for each trade. If the balance in your account is around $5,000 all the time (as you withdraw the profits and balance the losses), you will risk $100 per trade which is 2% of the whole amount. Do not change the position size when the amount in your account moves up or down by a few dollars.
One advantage of not adjusting the position size to every trade you make is that you can make decisions fast. You do not need to think any longer about the investment amount and the percentages, and you can only focus on the action. If your investment amount is $100, you just place $100. It will not matter in the long run if it was $90 or $105.
The whole idea is that by risking only 1% or 2% of your account, you have the awareness that even if you lose 50 or 100 trades, you will not drain your trading account.
Start with calculating the position size you are willing to risk. Remember that it is recommended to invest 1% or 2% of your capital and no more than 5%. When you get the number, this will be the maximum amount of money you may lose in one trade.
If you are a beginner, do the calculations before each trade. Adjust the position size to the balance in your account. With time, when you gain the experience and your account stabilizes, you can skip calculations and invest the same amount every time you enter the transaction. The small fluctuations will not change the overall situation in your account.
Have a pleasant experience!