How Much Money Should You Risk On Binary Options?

The following lesson discusses how much of your portfolio you should risk on binary options trading.

Understanding Risk Allocation

Risking money on any investment requires substantial thought and should be considered within the scope of an asset allocation.  As with any investment, investors should only risk money that is considered discretionary, and not needed for food, shelter or any necessity.  With this in mind, and investor can considered how to allocate their investment relative to other types of investment and create a diversified portfolio of investment assets.

Asset allocation is a methodology that generates a portfolio using different types of instruments, as well as, specific strategies that are used to create returns. This process involves distributing capital to a portfolio targeting different asset categories, such as stocks, bonds, commodities and alternative investments such as binary options.

risk parity

The methodology creates a mix of assets that are invested based on an investors risk reward profile.   By using binary options an investor can minimize the risk of having a number of assets that are correlated an under-perform during adverse market conditions.

What Determines Asset Allocations?

Generating a portfolio were the product mix is stable is usually determined by an investors risk tolerance.  To achieve the returns an investor is looking to generate he/she should create a basket of assets that are uncorrelated to one another.  Using multiple different types of financial instruments can allow an investor to succeed in multiple market environments. Binary options are generally uncorrelated to other assets as risks and the rewards are predetermined.

Allocating funds different asset classes as well as different types of financial instruments will provide both the conservative investor as well as the risky investor the ability to achieve his goals. There are very few instruments that have predetermine returns, which is why using an instrument like binary options will help diversify a portfolio.

Allocation analysis allows investors to create a mix of assets that will perform over time. Historically, major asset classes have been uncorrelated, which means their movements do not perform in tandem. Binary options are not categorized as buy and hold assets, and therefore can be allocated as a separate asset class, despite the fact that the underlying assets are similar to the ones that might be held in a portfolio.

Asset allocation as an exercise is very important because it can determine an investor will meet their financial target. If a portfolio is conservative, the upside is limited.  If a portfolio on the other hand is very risky, investors could lose substantial amounts of capital during adverse market conditions.

Principles of Allocation

Applying asset allocation principles to an investment portfolio will not only decrease the effects of adverse market movements, but it will help you take advantage of the inherent opportunities when an adverse market condition appears.  Not only will a trader be protected if they are exposed to multiple assets, but they can take advantage of low prices of a market collapses.

Allocation is forms of risk management, which will not only assist in generating solid market gains, but will also, mitigate market risks.  There are numerous types of processes that are used to allocate a portfolio.  Allocation can range from a discretionary style in which an investor uses guidelines to allocation capital, to statistical analysis where investors use a covariance matrix to find the best historic portfolio.

Diversification

A diversified portfolio should be structured in a way to create a portfolio that is diversified in multiple ways.  Not only does an investor want to spread risk into numerous categories such as stocks, bonds and alternative investment such as binary options, but also diversify risk within a specific category.   The key is to identify investments in segments of each asset category that may perform differently under different market conditions.  Binary options brokers generally provide a broad array of assets which can provide the diversification a trader needs to build a robust binary options strategy.

Asset allocation and diversification are the keys to generating wealth over a long period of time and investors should venture to understand the theories behind successful allocation in an effort to maximize gains and minimize risks.

For an investor that is looking to add an alternative investment such as binary options they should consider using a mix that is approximately 20% of their portfolio allocated to alternative investment such as binary options.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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