Money Management: Introduction to the Three Styles of Risk.


As binary options traders become more and more proficient at navigating their company’s platform and  begin to recognise when is most conducing to the placing of trades, they will inevitably begin to start experimenting with money management strategies. In this brief tutorial series we will be bringing you everything you need to know about money management. But first it is important to get acquainted with risk styles and what they man to the binary options trader. Broadly speaking most people fall into one of three categories when it comes to money management. Risk averse, risk neutral and risk seeking. What kind of trader are you?

Risk averse:

Risk averse traders are normally unwilling to go in for a low priced stock with an uncertain future payoff. They would be much more willing to opt for a stock that pays less if this payoff comes with a higher degree of certainty. While reasonable and responsible in other walks of life this attitude rarely pays of in the financial markets as it is precisely the taking of risks that results in the big payoffs all traders crave.

Risk Neutral:

Risk neutral behaviour is found half way between risk averse and risk seeking. A risk neutral individual will tend not to differentiate between differing risk situations where greater or lesser possible gains are to be made. For a risk neutral person any of the two will do, whereas the risk averse individual will always take the safer option and a risk seeking person will always go for the more improbable and higher paying option.

Risk Seeking:

Risk seeking individuals are predisposed to always taking the long shot. In a situation where a wild gamble and a sure thing have the same real-world vale, the risk seeking person will always opt for the gamble rather than the safer option. The payout does not even come into the equation for the risk seeker, rather it is the thrill of picking a highly improbable winner that so attracts this type of trader.

Clearly for the trading of binary options risk aversion will not do as every trade carries its own definite risks, even if this risk is known in advance. Similarly risk seeking behaviour may land you in the money by sheer chance and may even win you some extremely lucrative payouts. Nevertheless over time the law of averages will catch up with you, it will whittle your risk capital down and leave you with  nothing to continue to invest with. It is the risk neutral individual who has the advantage here. Risk neutral traders tend to be very level headed, they do not lose it at the drop of a hat and begin trading wildly to consolidate earlier losses. This coolness aspect of their trading game puts them at a significant advantage over other traders, but fear not, no-matter which of the three categories you think you belong in, this series will teach you all you need to know about money management so as to slowly be able to shift your behaviour towards a more risk neutral style. Read on.