A risk asset in binary options trading is an asset that has an unknown future return. Usually, this type of asset will have a return that varies over time. The price of risk assets will depend greatly on the dynamics of the conditions in the financial markets.
In general, risk assets are securities and shares, and their rate will vary hugely. Their rate of return will usually be greater than the interest rate found on safe assets in order to compensate traders for taking the risk. When trading stocks, these returns are non-fixed dividends. With other assets, the return depends on the asset’s price, and in binary options trading, purchasing an options which is based on an underlying risk asset enables a trader to convert a variable return into a fixed one.
Binary options mostly pay a return rate of about 85% on investments if risk assets move in the correct direction. The amount by which it moves does not actually matter so long as the price move equals the predicted direction. Therefore, it is simpler to gain an idea of how much return there will be if your call on your underlying asset is correct as the rate of return is not as pronounced.
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Understanding Risky Assets in Binary Options
When you trade assets in binary options, you can gain profits even when the asset’s value falls as long as you have correctly predicted the market’s movement. Therefore, investors are still able to achieve successful trades even in times of economic stability as they can earn the same amount as they could in a booming market. This is because a correct forecast of any drop in the financial market will net the trader exactly the same percentage of the investment as they would gain from correctly predicting a rise in the financial markets and this percentage could be as high as 85%. Traders can profit from a financial crisis therefore by betting against price rises when prices are likely to fall dramatically.
Developing a Strategy for Trading Risky Assets
It is important to be careful when trading risky assets as binary options as the temptation is often to plunge straight in without taking due care and attention and therefore risk making spectacular losses. A strong money management strategy is key in order to limit risk and this is a key part of developing a profitable strategy.
As binary options appears to be a relatively simple way to make profits, a strategic approach is necessary with regard to discipline and the process as a whole. Since it is so easy to obtain a quick result, binary options trading can represent a very tempting opportunity to over-invest as the excitement of the trade and the emotions involved overcome the rational mind.
When starting out with trading, it is important to never risk a greater amount than half of your available total capital. After making the first profit from your trade, you should divide that amount in half, setting half aside and investing half of the profit into a future trade. In this way, it is possible to always keep part of your profit, even if you fail on your following trade, and will eventually increase your investment capital over time.
Some traders are put off from adopting this 50% strategy as they want to maximise their profits as much as possible, and when dividing profits in half, they are obviously earning less than they possibly could. However, wise investors will put this strategy into practice as they are minimising their overall financial risks and taking sensible steps to protect their capital which can then be invested into further trades without ever risking bankruptcy.
Other educational articles
- How to Use Hedging Strategy to Manage Risk Effectively in Binary Options Trading
- Using Fundamental Analysis in Binary Options Trading
- Is It Possible to Successfully Trade a Flat Market in Binary Options Trading?
- Dealing with Expanding Triangles in Binary Options Trading
- Trading Double Combinations, One of the Most Complex Corrective Waves
- Trading The Apex Of A Triangle For Profitable Binary Options Trading
- The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Lintner, J. (1965). The review of economics and statistics, 13-37.
- “The option pricing model and the risk factor of stock.” Galai, Dan, and Ronald W. Masulis. Journal of Financial economics 3, no. 1 (1976): 53-81.