10 Types of “Bad” Profits in Binary Options Trading
In business, you may have heard of the terms “good profits” and “bad profits.” You might think that profit is always good—who doesn’t love to win? But bad profits do exist. There are variable definitions, but the one I like best is this:
“Bad profits: Any profits which carry an opportunity cost that either outweighs their advantage, or pulls you away from better, more lucrative opportunities.”
There are numerous forms that bad profits can take in the business world in any sector. As you might expect, there are also many types of bad profits that can emerge while you are trading binary options. It can be tricky to identify these profits and figure out what to do with them for the simple reason that they are often somewhat subjective. Oftentimes, the bad profits are tied to some element of your trading which is not exactly wrong, it is just wrong for you. Other times, it may be more obvious, but you still may resist change.
What are some examples of “bad” profits in binary options trading?
1. Trading without a system
Any profit you make on a trade that you took at random is a “bad profit,” as is any profit you make on a “B” trade that does not satisfy all the constraints of your trading system. Trading without a trading system always represents a bad profit situation, assuming you are profitable at all.
Why this is a bad profit: You may be profitable now, in the short term, but this is luck only. In the long run, if you continue making trading decisions without a system or without following your system, you will lose a ton of money. In other words, the long-term opportunity costs far outweigh the short-term advantage. This is what happens to gamblers at casinos playing games of chance. They may win in the short term, but the house always wins over the long run.
2. Breaking money management rules
Maybe you are having a bad week trading. In a fit of pique, you decide to invest 60% of your remaining bankroll to win it all back. You win, and your account balance goes back up. This is a profit, but it is a bad profit.
Why this is a bad profit: It is true, you got all the money you lost back, but in order to do it, you violated the rules that protect your account from huge losses. Encouraged by your big win, you may decide to do it again, and next time, you could suffer a massive drawdown. So many traders blow their accounts this way, all because they made a big profit once and lost perspective!
3. Trading with the wrong system
This is a very common scenario. You see a trading method which is popular and which has excellent results for a lot of other binary options traders online. Encouraged by their success, you learn the system and start testing it or trading live with it. You have moderate success with it, or on-and-off success. Your account is growing slowly, but not as steadily as you would like, and you find the system less than intuitive. In fact, at times, trying to use it drives you crazy, but why would you give up a profitable system that works for everyone else? Eventually you will achieve their high rate of return, right?
Why this is a bad profit: Maybe you should keep using this trading method, but this is a highly subjective situation where it is difficult to figure out the right move. Oftentimes, this is a bad profit situation. The trading method may be netting you 64%, but another trading method which is a better fit for your personality may net you 70% or 80%. The more time and energy you invest in a system that does not suit you, the more opportunity you are giving up to start winning with a method that does fit you. It is all too easy in life to settle for less. Learning a new system is challenging. But there may be something better out there for you.
4. Trading in the wrong types of markets or timeframes
This is closely related to the above situation, but may not be interchangeable with it. You might have a trading method which is right for you, but you may be misapplying it by trying to use it in the wrong market contexts. Maybe you have a system designed for flat markets, and you keep trying to use it in trending situations, or vice versa. Or perhaps you are a momentum trader, but you keep trading during times of low volatility. Or maybe you keep trying to place 60 Second trades because it is all the rage, but you are more profitable when you stick with longer expiry times.
Why this is a bad profit: Again, even if you are profitable doing these things, they may be stopping you from seeing you that you could be more profitable if you stuck with friendlier contexts. Trade the timeframe and market context that fits both your personality and your trading method, and you will get better results.
5. Dealing with bad trading partners
Another bad decision in any business it to work with the wrong people. Picture this scenario: You are a struggling trader who is searching desperately for an edge, and you meet someone who has one. You get to know each other and start working together. The other trader is helping you learn his techniques and has even loaned you some money to help you get started. But you are sharing that trading account, and he is difficult to deal with. Maybe he attacks you every time you make a mistake, or there are no clear terms over how the money will be split and when. You do not trust him, and he gets you down. He makes you feel incompetent and worthless.
Why this is a bad profit: While you may be picking up new trading skills and growing your abilities, you are also dealing with a toxic individual. Odds are good he will steal your percentage later down the line, and even if he does not, he is stealing your time and dampening your confidence. His is a stressor, and over time, he will probably make your trading worse in many respects. This is a situation where you probably should take what you have learned and move on. If he is withholding useful information, he is playing power, and will only do you worse turns in the future. You can bet those bad turns will cost you money and more.
6. Bad exit rules
Your trading method should tell you more than just which trades to take—it should also include rules for exiting your trades. If those rules do not make sense or you do not follow them appropriately, you can lose money. Consider a situation where you have lost some trades and become discouraged, so you start using the early close tool to capture partial profits more often than you used to. You know that according to your tested trading method you should not do this, but you are scared of losing money. You justify your actions because you are still maintaining a high win percentage, and you are making money.
Why this is a bad profit: Yes, you are continuing to make money, and you are still doing it consistently, but your partial profits are substantially smaller than the full profits you should be making, and you may only be marginally improving your win percentage. If you were to run a test with these new exit rules (which you should!), you might well discover that you are actually cutting into the profits you could be making and likely would be making if you were not abusing the early close function. These smaller profits tempt you away from the bigger profits you should be making, so they are bad profits.
7. Trading on weekends and during other questionable times
If you have a system that allows you to do this without consequence, more power to you. But if you get dubious results on dubious days, you may want to rethink those Friday trades, weekend trades, and holiday trades—even if sometimes you make money.
Why this is a bad profit: Maybe you have made money trading at questionable times before, but if it encourages you to turn it into a habit, it may end up costing you money over time. These are challenging and dangerous times to place trades, because the market is subject to extra volatility and unpredictability. You may feel like you have a handle on things, but odds are you do not. Eventually, these trades will probably end up taking a toll.
8. Accepting a bonus
Here is another excellent example of a bad profit. Bonuses are exciting to many novice traders, who look at them as free money. It is hard to say “no” when a broker offers you $200 free to open up an account, or even more than that. Why would you ever say “no” to free money?
Why this is a bad profit: The reason that accepting a bonus is a bad idea is because it is not so much a “bad” profit as it is an illusory one. There is no such thing as free money, and if you have been offered hundreds of dollars to open a binary options account, you had better bet it is with strings attached. Typically, those strings take the form of a turnover requirement. You usually need to trade the amount of the bonus + your initial deposit 30-40 times before you are allowed to withdraw the bonus. Worse, it can make it hard to withdraw any of your money until you have met the turnover requirement. So while $200 in your account balance may seem like a great thing right now, the long-term are not worth it.
Auto-trading programs and signal services are promoted as the easy way to make money trading binary options. You sit back and let the program do all the hard work. Ostensibly, you can head to the beach and sip a margarita and watch the sunset while profits stack up in your account. For a while, it may even work, but I would argue these are almost always bad profits if you do not keep them in perspective.
Why this is a bad profit: Auto-trading may pay off over the short term, but there are multiple ways it can cost you money over time. First off, it is possible that the program itself or whatever system is behind it will eventually fail. If and when it does, it will cost you money, and you may not even notice it happening right away. Secondly, it is tempting you to be lax with your trading efforts. You are not learning or growing as a trader. In fact, you are not really a trader if you rely on someone else to make your money for you. You are just a customer. The only way you will make any real long-term trading profits is by trading!
10. Workaholic trading
One of the biggest temptations for any entrepreneur is to keep working hard no matter what the cost. Traders can be particularly susceptible to this because of the repetitious nature of the work, and the fact that it is common to wait days or weeks for a great trade setup to come along. You may think staring at the charts all day every day is a good idea, because you never want to miss an opportunity. The more trades you can take and win, the better, right?
Why this is a bad profit: Ask around and you will undoubtedly find many examples of traders who pursued such a path and are no longer trading. They may even have lost their accounts. If not, they probably burned out. When you invest all your time and effort into the pursuit of riches, you are not being responsible, even though you may feel like you are. You are actually being irresponsible by not taking care of your physical and psychological health. Profits you make while disregarding your health are bad profits. Over time, they will cost you.
It can be tough to figure out whether you are making bad profits or not. Most of us are trained to think any and all profits are good by nature, but that is simply not the case. If you are relying on someone else or on luck to make money for you, you are probably making bad profits. If you are breaking rules you have set for yourself and diverging from methods you have successfully tested, you may also be trading poorly. If you are overtrading or behaving like a workaholic, you will fail. It may not be obvious yet, and your numbers may still be ticking up, but gravity will catch up with you eventually, and when it does, those numbers will come crashing down. So learn to identify your bad profits, and start replacing them with good ones by trading right!