How to Choose a Binary Trading System
In binary options trading, there are three crucial ingredients to success: your money management plan, your psychology, and your trading system.
Of the three, the easiest one to take care of is probably your money management plan. Once you figure out something which is conservative and consistent enough to protect your account, you are pretty much set. Psychology is a lot tougher to master, and definitely an ongoing journey.
But finding and selecting a trading system … that is undeniably tricky, and you need one before you can even get started with any hope to succeed.
I should make a correction here and get a little more specific. Finding trading systems is easy. There are systems everywhere you look. You will find them on your binary options broker’s website in the educational system, in eBooks and hardback books, and on forums. All in all, you have hundreds of systems to choose from without spending a dime.
But therein lies the challenge. While finding a system is easy, choosing a system is not.
In fact, choosing a system is so difficult for so many traders that it imposes a seemingly uncrossable barrier. Some traders never can seem to pick a system to begin with. Others pick one right away, but dispense of it shortly after and choose another, and another (what I refer to as “system hopping”).
5 Reasons Why Is Picking a System So Hard
I believe there are a number of factors that play into the challenge of choosing a system, but here are a few that I have identified:
A lot of traders are searching for perfection—literally. They think that there is a trading system out there that will give them 100% returns. Even if they do not literally believe that, they are dead-set on getting as close to 100% as possible. If they get 85% returns, they are not satisfied until they get 90%. If they somehow manage that, they need 95%. So they give up on systems that work because they want something that works even better (it does not help that all of us know some guy who claims to get 95% or higher—whether that is true or not is probably a different story).
Difficulty finding a system which fits with the trader’s personalities, skills, and needs.
Many traders make the mistake of thinking at the outset of their search that their goal is just to find a system that could potentially generate results if traded with perfection. But over time they discover there is more complexity to the problem than that. They need to find a system that suits their specific, individual needs—and that can be quite challenging (I will delve into this more soon).
Lots of dross in the way.
For every working trading system out there, there are a dozen systems which do not work very well—or which may only produce results for a handful of traders. Many people post experimental systems which are not proven yet to work. You have to wade through all of that to find the systems that do work.
Pressure from other traders.
Another barrier that can unexpectedly stand in the way of finding a good system is pressure from other binary options traders. This is related to the first point that I mentioned about unrealistic expectations. As I said before, we all seem to know some guy who claims to get an impossibly high win percentage. Usually, according to that guy, his way of trading is the one true way, and everyone should be using his system if they want to succeed.
This is not the only form this pressure can take either. A lot of traders sign up for coaching programs which are supposed to help them to find their way. Sometimes, however, the coaching program does the opposite by pressuring students in the direction of a particular method of trading which may not suit them.
It is difficult to try to find your own way when people who are more experienced than you keep telling you the need to use their way.
The need to customize.
Finally, one more barrier worth discussing is the need to customize trading systems. While you can in theory find a system and use it exactly as you discovered it, in most cases some degree of customization and innovation on your part will be necessary. A lot of traders shy away from this creative process, both because it is difficult and because they don’t know where to start. So even if they find a system which might work if they just adapted it a bit, they continue on their search for a system that is perfect for them right out of the box.
How to Overcome The Problems With Developing A System?
I believe that simply adjusting perspective is the first step to overcoming these obstacles and choosing the right trading system. Once you have an understanding of some of what may be standing in your way, you can make smarter decisions about the methods that you do stumble across.
All of this still leaves the question of what criteria to use when selecting a trading system. For whatever reason, this is not a topic that I have seen addressed in many other articles or blog posts. There is a lot of nebulous talk about “finding a system that you like,” but not so much about how to identify what suits you in the first place. There are also a lot of articles to delve into identifying whether a system is profitable on a statistical level, but that is really just one criteria for choosing a system.
So now I would like to come up with a list of at least some criteria that you can use when you are browsing for trading methods and are trying to figure out which methods you should invest your time in testing or trading.
7 Criteria for Choosing a Trading System
Statistically proven to work.
While I do not want this to be the focus of this article, it is still a criteria worth briefly discussing. It is astonishing how many traders will even pay money for systems or trading robots that are backed by no statistical evidence whatsoever.
Even if you are not paying money for a system, you should always look for proof before you attempt to use it. Your time is valuable, and you cannot waste it on systems that do not offer even the possibility of results.
On that note, you are also responsible for trading a system only after you have tested it. If you cannot generate statistically profitable results, that is not a system that you want to rely on to make money.
Fits with your schedule.
Here is one aspect of trading system selection which I very rarely see anyone discuss. A lot of trading methods are simply not feasible for everyone, because not everyone has the luxury of spending the time necessary to use them.
Imagine for example that you find a trading method which would be ideal for 60 Second trades. At first glance, this may seem like something that would save you time, but that is not always the case. Remember that in order to trade on such a short time frame, you need to be ready to spend a great deal of time physically in front of your computer looking for trades as they form. Because this kind of trading requires so much time, you may not actually be able to fit it into your schedule.
Or picture another example, maybe on a longer timeframe, maybe not. Think about a system that you test only to discover that the great results it generates would require you to trade when you are not available, for example while you are at work or asleep. This trading system might be excellent for someone who can spend the time when they need to, but that does not make it a good system for you.
There is no simple way around this problem, but a lot of traders who are just starting out discover that they actually have an easier time if they select very long-term trades which take weeks or months to unfold. This type of trading requires a lot less time sitting in front of your computer.
As mechanical or discretionary as you like.
Another aspect of system selection comes down to whether a given trading technique is mechanical or discretionary. Very few systems fall at the extreme ends of the spectrum; most are somewhere in the middle, but closer to one end or the other.
This is an aspect of trading which needs to fit harmoniously with your personality. Oftentimes, this means taking a look at your strengths and weaknesses. If you have a good intuitive grasp for making decisions about trading, a more discretionary system may be a good fit for you. If however you have a tendency to make irrational decisions under pressure, a more mechanical system can keep those impulses in check.
Plays to your strengths and assets.
When you embark on your search for a trading system, perhaps the first thing you should do is take stock of your assets and strengths. Even if you are complete beginner with binary options trading, there is a good chance you have something on your side that could help you.
If you majored in economics in college, it would make a lot more sense to look at fundamental analysis before you consider technical methods. You already have a lot of the foundational knowledge that you may need to succeed with a fundamental technique. That is something well worth taking advantage of.
Another example of an asset already on your side would be if you know somebody else who trades binary options and does so successfully. If that person has a system that you can use, it may make a lot more sense to go with that than it would to try and find another system. It could save you a tremendous amount of time and effort, and that person is there to answer your questions. If nothing else, it gives you a great starting point, and sometimes getting started is the hardest part.
Intuitive and easy to understand.
Perhaps the single most important guideline in selecting a trading system is to pick something that you find intuitive and can grasp naturally. Maybe you know someone who trades a system based on fundamental analysis who gets outstanding results, and he thinks that you should try trading with that system, but you do not understand it at all.
Meanwhile, you have discovered a system that uses price action which you find very easy to grasp, and which you understand on a deeper level. Even though you may be mechanically following the system rules, you know why those rules work. If something were to go wrong, or you needed to make an adjustment, you would know what to do. Meanwhile, if you were using that fundamental analysis system and something went awry, you would be completely lost.
That person you know who trades fundamental analysis may insist that you are wasting your time since his system can generate even better results than yours (he may point at his statistics as proof), but you need to remember that it generates better results for him. You need a system that will generate the best results for you.
So many traders struggle to use systems they do not understand simply because they have heard time and time again that those systems have the potential to make them more money. But you are a different person, and you will have the best results when you use a system that you can become an expert with.
Trade what you enjoy.
On a similar note, another important criteria which is often overlooked is pure and simple enjoyment. If you absolutely hate a trading technique, even if it brings in winning trades, over the long run you are going to struggle to stick with it. When you dread trading, you create a lot of unnecessary stress for yourself, and you learn to associate trading with negative emotions and experiences, even if you win money.
Imagine what a waste it would be to burn out of a career that you have great potential with simply because you are driving yourself crazy using a trading system that you do not enjoy.
For that reason, I recommend that you only commit yourself to a trading system that you are passionate about using. That is going to become especially critical later down the line when something changes in the market and you need to adjust your system to stay profitable. That is a lot of difficult work, and you will only get through it if you love that system.
Backed by a community.
Lastly, here is a criteria that I would argue is not necessarily vital, but it is still a great asset, and may make all the difference in the world when you need it. There are hundreds of trading systems, but a lot of them are only used by a handful of people, or even just one person. What you can go it alone, you will find it much easier to trade if you are using a system which has some form of community built around it.
At times when you are having difficulties, and cannot figure what to do to troubleshoot those problems, a community can come to your rescue. Plus, it is much easier to find people you can talk to about trading when you are part of a community they can relate to the techniques that you use on a daily basis.
Chances are after reading this that you still feel daunted by the challenge of finding and selecting the right trading system, but hopefully now you will feel a little less lost during the process. If you can, see if any of your existing assets and connections can point you in the direction of your first trading system. If not, I recommend searching trading forums for systems that you find intuitive and interesting.
If something grabs you and has statistics to back it up, give it a try. If your initial tests with the system are promising, you can conduct longer more formal tests to determine if it is really the right system for you. Keep your expectations realistic, and don’t cave in to pressures from others who may not know what is best for you. Eventually you should find something you like. When you do, you will be on target to becoming a winner.