TorOption: The 5/15 Rule Explained
If you are interested in binary options, or just trading in general, then you know how difficult it can be. There are two broad problems that every trader faces. First of all, they need to be able to predict the future movements of the price of a variety of assets. Next, they need to decide how confident they are in those predictions and settle on a specific bet on those predictions coming true. The process of forming a portfolio of positions and trades comes from a trader like you coming up with your own solutions to those problems. In this post, we will discuss a way to help solve the second problem, which is how much to bet. The topic is a rule of thumb called the 5/15 rule that guides how you should invest your portfolio.
The 5/15 rule is a way to structure how much of your total account, or bankroll, you risk on individual trades. If you are an active investor who trades frequently on an elite platform like TorOption, then you need to know how much you can afford to risk on those trades. If too many of them go badly for you, then you can exhaust your whole account quickly. The 5/15 rule is a way to prevent that from happening without forcing you to learn a convoluted formula or making you recalculate your acceptable exposure all the time.
The first part of the 5/15 rule is the 5. Here, 5 refers to 5 percent. The rule says that you should never risk more than 5 percent of your account on any single trade. Any more, and the risk to your bankroll is just too high. If you are betting more than that, then eventually a bad trade will wipe out your gains, because no trader is right every time. By limiting your exposure to one trade to 5 percent, you are limiting the damage. That does limit gains per trade as well, but it’s better to diversify and have many smaller trades than one big one. This is because with many smaller trades, you can still come out ahead if you predict correctly on most of them. If you get the one big trade wrong, then you are in trouble.
The second part of the rule is the 15. This is also a percent. It means that you should not have more than 15 percent of your account at risk in open trades at any given time. For example, if you always like to place 5 percent on trades, then you should have no more than 3 positions open at any given time. This is another way to limit losses, because if you get a string of bad trades at once, you should only lose 15 percent of your money. When trading, it is all too easy to get emotional and trade too much. Some traders try to put a lot of money on the line to make up for losses. Others feel that they are on a hot streak and want to capitalize. Forces like these push traders to put more on the line than they should. That is the value of the 15 percent cap: no matter how well or poorly you are doing, you can never risk more than 15 percent at a time.
If you want to follow this rule, do no make exceptions. The whole point is that these rules apply all the time, no matter what you feel or see in the market. They are designed to counterbalance your inclination to risk more, and that inclination comes up all the time. So if you tell yourself that you are going to follow the 5/15 rule unless you see something special, then you have undermined the entire rule. The philosophy of the rule is that you as a trader are never guaranteed to be right. So you need an external rule to keep your money safe.
There are other rules about how much to risk at a time and how much to risk per bet. The 5/15 rule has the benefit of being simple. You can check the numbers in just a second to see if you are complying or not. You also have freedom– you choose how much to risk per trade up to 5 percent and where to put your 15 percent of tradable funds. So you still make the big decisions: the rule just guides you on how much to risk at any time. If you follow the rule, you can cut losses easily and trade in a safe, sustainable, and long-term manner. It’s a useful rule of thumb for any trader.