Binary Options Trading Psychology 101
Why do you want to trade binary options? This may be one of the most important questions you will ever ask yourself, especially if the answer has something to do with actually making money. Even if you are getting into trading largely to entertain yourself though, you can benefit from examining your own motives. It can prevent you from making foolish decisions with your account balance that could cost you more money than you are willing to lose. It also can help you to get more out of your bankroll and stay in the game for longer.
There are a lot of different reasons traders get into binary options. Here are just a few:
- Some traders trade binary options because they are in it to have a good time. You may look on binary options as an alternative to going to a casino. Like roulette, a slot machine, or a poker game, trading binary options involves elements of chance. This can be a thrilling prospect. The idea of winning or losing money based on luck can be very enticing. And if you do happen to win, even better—you get to profit while having fun.
- Other traders trade binary options because they are looking for a new source of revenue, or even a replacement for a primary income stream. This is a noble goal, one which can be highly motivating. This does not mean you should quit your day job. But one day, you might be able to. The only way to get to that point however is to trade with a great deal of discipline, base your trading decisions off of a top-notch trading system, and learn as much about yourself as possible. Find out is it possible to earn a living trading full time?
- Some traders trade to make some extra money (whether a little or a lot) so that they are able to achieve another goal. Your goal might be something like this: “I want to make extra money trading so I can cut back on my work hours and spend more time with my family.” Another example would be, “I want to make enough money trading that I can finally fulfill my dream of taking a trip around the world.” Or maybe your goal is, “I want to make extra money trading so I can donate it to charity.” These goals are also highly motivating because they have specificity and meaning. Use these tips to trade with a full-time job
Here some examples of goals that are not helpful:
- “I want to make a ton of money trading.”
- “I want to be a millionaire within a year.”
- “I want to double my trading account within a week.”
These goals suffer from several different problems. The first goal is nonspecific. The others suffer because they are time-based. There is nothing wrong with wanting to make a lot of money fast, but that is a given. Of course you want to make a lot of money fast. But thinking in terms of time may lead you into making hasty trading decisions, which will actually make your goals harder to reach, and slow you down in the process.
Figuring out why you want to trade tells you a lot about yourself as a trader. Knowing your own motivations is the key to figuring out your approach and your style. A trader who wants to have a good time will not necessarily need to invest the same time and energy as one who wants to trade for a living, but both types of traders will need to manage their money responsibly. Use our guide on bankroll management to ensure you are being responsible. There is nothing wrong with trading for fun, but it is important to acknowledge the difference between gambling and running a business.
There are many other aspects of your personality which can play into your trading. Not every trader excels at using every trading system. You can take ten systems that work (in theory), and ten people who can handle the pressures of trading. If you give each person the system that suits his or her trading personality best, all ten may be profitable. But if you give each person a system that does not suit him or her, all ten may fail. This should tell you a lot about the role of the trader’s psychology. It is one of the core elements of success or failure.
Here are some questions to ask yourself. The answers will lend you some useful information which you can use to try and determine which trading methods may or may not suit you.
- Are you prone to impatience during trades? Or do you have more difficulty dealing with the pressure of fast-paced trades?
- Do you feel more comfortable if you have a lot of signals telling you that a trade is a good one? Or do you feel overwhelmed by too much complexity?
- Do you know a lot about economics, or would you consider yourself a novice in that regard? Do you find economics intuitive or dense?
- Are you good at spotting patterns, especially visual ones?
- What kind of work schedule do you have? What about your sleep schedule? What hours are you available to trade?
- Do you prefer to spend a lot of time each day in front of the computer looking for trade opportunities? Or would you rather spend longer time periods in trades but less time at the computer?
- How many trades would you be comfortable being in at one time? How much of a multi-tasker are you? How many assets are you comfortable working with and keeping track of?
- Would you consider yourself to be someone with good intuition?
- Would you benefit from making discretionary changes to your trading on the fly, or do you think you would do better following your signals with rigid, mechanical discipline?
- How comfortable would you be relying in part (or entirely) on others? Do you think trade signal services are useful, or would you tend to look at them as a crutch?
Some of these questions you may be able to answer even before you get started. Others you may discover the answers to while you are researching trading systems and testing them. Different systems are ideal for different personality types. For example, if you do not enjoy the feeling of being rushed, you probably would do better using a method designed for trading longer expiry contracts. If on the other hand you tend to get impatient and make foolish decisions when you are waiting, you might do better with shorter term contracts like 60 Second binary options.
Another example would relate to the question about complexity. If you prefer to have a lot of signals telling you to buy or sell, you might do best to use a technical analysis system that involves a lot of indicators. If on the other hand complexity only confuses you with conflicting signals and uncertainty, you might want to opt for a more simplistic method like price pattern analysis, and leave off all those indicators. Likewise, if you find economics intuitive or you happen to be an expert in the field, it would make sense to choose a system based on fundamental analysis. If you don’t, it would make more sense to go with technical analysis or price action.
Emotions and Trading
One more important aspect of trading psychology to consider is your emotions. Everyone likes to say, “Leave your emotions at the door” when you start trading, but if we face reality, we recognize that is on some level impossible. You are not a machine, and no matter how mechanically you attempt to behave, you cannot alter that fundamental reality. So to some extent, your emotions are going to have an impact on you as a trader. That being said, you can still attempt to minimalist their impact, or at least be as honest with yourself as possible so you can mitigate their effect.
How do you learn about this aspect of yourself? You will start to discover it when you begin testing a system. Even in backtesting you may notice yourself making emotional choices. During demo testing and live trading, the effect of your emotions will become even more pronounced.
You would be a fool to skip demo testing!
Keeping a trading journal is a great way to keep track of your emotions and how they impact you. Both negative and positive emotions can be detrimental if they are not kept in check. Despair and confusion can make you trade poorly, but so can pride and arrogance. Doing really well may lead you to make foolish decisions out of overconfidence, just as under confidence and uncertainty can cause you to fail.
Always seek to cultivate balance in your emotions when you are trading and to come from a clear, level-headed perspective. Learn how to identify times you should not be trading, and come up with ways to clear your environment of distractions and ensure you are always at your best when it comes time to trade. Make healthy lifestyle choices and get plenty of food, sleep, and leisure time so that you are leading a balanced life. This will help you take a balanced approach to your trading.
Do What You Can to Never Lose a Trade
When we talk about binary options trading, we talk a lot about winning. How many trades have you been winning lately? How large are your winning trades? What do you do to ensure that you win as often as possible? It can pay off now and again though to consider your losses. When you spend all your time thinking about how far you can get if you succeed, you often overlook the setbacks which can lead to your failure. Impatience and overconfidence can cause you to start losing more trades.
When you lose a trade, in a way, it’s like you have lost twice. Not only do you lose the money which you have, but you also lose the money which you could have made. Still though, closing early from a trade which is going against your position could spare you half of that loss. Even though you would still lose the potential money you could make, at least you would not lose the money you already have. If you lose all the money you risk on a trade, first you have to make that money back, and only then can you consider making a profit. You find yourself fighting just to break even again.
That is why it is important to think about losing. Next time you sit down to test your trading system, ask yourself this question: “Am I doing what I can to never lose a trade?” If you can manage to reduce your losses, your profits will generally take care of themselves, since there is nothing which slows down profitability quite as much as losing. After all, it takes a lot of breakevens or small losses to add up to a single big one, and even if trading conservatively means you trade less often or make smaller profits, be sure they will add up if they are not overset by large losses or frequent losses.
Always Think In Terms of Risk
The lesson you can learn from reducing your losses goes beyond your actual trading methodology and encompasses your psychology. When you start doing everything you can to never lose a trade, you change the way you look at your trading. You stop asking yourself what you can gain (wishful thinking) and start thinking about what you can lose (good money management). This is not to say you should become skittish or anxious. But it can make you a more conservative trader and can help you to focus on realistic goals instead of on how fast you can become a millionaire trading binary options.
Steps to Take
Here are some considerations that you can take into account to try and prevent your losses. You may want to add them to your trading checklist for entering and exiting trades:
- Before you enter a trade, ask yourself whether you would consider this an “A” trade (think in terms of grading scales). If the trade is not an “A” trade, you should not take it. There is no reason to ever take a trade you would rate as a “B” trade, when you can find an “A” trade by looking at another financial asset or by waiting patiently for another setup to come along. The moment you start compromising on your trade standards, you will begin losing more trades.
- Do not change how much money you wager arbitrarily. There are two reasons for this. One is that making arbitrary money management decisions will lead to unpredictable results. The second reason is that you should again be asking yourself why you would wager more on one trade than another. Doesn’t that indicate that not all of your trades are “A” trades?
- If your broker permits you to use early closure, you should monitor your trades and consider getting out of them if circumstances change to adverse ones. Always ask yourself this question when you are having difficulty deciding whether or not to stay in a trade: “Do the original reasons for taking the trade no longer exist?” If they do not, then it probably would benefit you to pull out early and reduce your loss (or keep whatever profit you have managed to achieve by this point). If the rationale is gone, so is the trade. Learn how to choose your own expiry time
- When you do lose a trade, do not simply accept it. Ask yourself why you lost that trade. If you are unable to come up with the answer right away, come back to it later and analyze it again. Once in a while you will find a loss which seems inexplicable, but often you will discover the reason for a loss is obvious once you sit down and mull it over. Often it has something to do with breaking your trade rules or ignoring context. Make corrections in the future to avoid repeating losses that you do not have to incur.
Trading binary options can be fun and rewarding, and even profitable. Some traders even manage to stay in the game for the long term or trade for a living. Those tremendous wins will only happen if you take care to reduce your losses however. Do everything you can to never lose a trade and your profits will take care of themselves.