Psychology of Trading
Binary Options Trading – Inside the Mind of a Trader
While there is (rightfully) much emphasis placed on the role of education in successful and profitable binary options trading, there another very important element in successful trading which is often overlooked – that of a proper mindset.
Trading binary options is as much a psychological endeavor as it is one of intelligence and knowledge, and there are a number of things that all traders should keep in mind when investing money in binary options.
Fear: As many traders are held back by fear of losing money as are defeated by actually losing money. Yes, the possibility of losing money exists on every transaction in binary options, but traders who actually lose money have an opportunity to reevaluate what they are doing, and to develop new strategies – either through further education or consulting with trained brokers.
On the other hand, traders who are paralyzed by fear never even have the opportunity to discover which methods are successful for them and which are not. They are stuck at the starting gate without the ability move forward and learn. This fear is completely natural. Trading binary options – like anything else in life – involves risk. And risk, by definition, means that there is no guarantee of success.
So what can a person do to overcome their fear?
- Develop a detailed trading plan. With the help of an experienced trader or broker, set goals for every day, week and month, determine how much or how little you will invest at any given time, and draw red lines as to how much you would need to lose before calling a “time-out” and revising your strategy.
- Practice trades with a demo account. Many online brokers allow you to place practice “trades” and to see how you would do had you invested actual funds. This allows you the opportunity to get a sense as to how the markets work, and develop your own strategies. In a sense, it's not unlike watching television game shows at home, and seeing how many of the answers you know and how well you would do if you were an actual contestant. The difference is, with binary options trading, once you see how well you could do, you're able to get started.
- Spend time focusing on education. Before you jump into trading, take full advantage of the training videos, webinars and ebooks offered by most of the leading online brokers. Some even provide 1-on-1 training sessions with a personal account manager. These educational opportunities are invaluable in terms of overcoming fear of trading.
- Social trading. Also known as Copy Trading or Mirror Trading, an increasing number of brokers are providing this service through their websites. This is a tool by which the broker displays a list of the most successful traders on the site, both in terms of success rate as well as actual profits. Choose one (or more) of the traders, and you can automatically mirror the trades that they make. You choose the maximum investment on a Copy Trade, and whenever the trader that you have chosen to follow places a Call or Put option on any asset, the same investment will automatically be placed from your account. Besides giving you earning potential by copying a successful trader, if you pay attention to what trades they place – the assets, the time, the circumstances, etc., it is an excellent opportunity to learn the strategies used by the successful traders.
There is a wisdom in knowing when be satisfied with a successful day and when to “cut your losses” on an unsuccessful one. Ignoring either of these wisdoms is generally motivated by greed.
A major factor in avoiding greed is to have realistic expectations. Traders who jump in with both feet expecting to earn tens of thousands of dollars in their first month, are the traders most likely to lose all of their funds and be the poster children for unsuccessful traders.
Allow yourself to earn modestly while you get to know the markets, and gradually build up your profits. At the same time, be smart enough to know when a “winning streak” has, or is about to peak, and close up for the day while you are ahead. Markets can be very volatile and 10 successful trades in a row could easily be followed by 11 unsuccessful ones.
While the opposite can also be true, if you have experienced several unsuccessful trades, it would be foolhardy to assume that streak of winning trades is soon to follow. There will be days in which the markets simply are not your “friends” and those are the days when the truly wise trader says “Enough. Tomorrow is another day.”
The biggest psychological factor is the need to know yourself – know your strengths and weaknesses. If you know, for example, that you are the type of person who can lose track of time and continue an activity long past the time when you should, set up a timer, and decide that, no matter what, when your time is up – you stop. No matter how successful (or not) the day has been.
If you are so competitive that you cannot lose without feeling the absolute need to win back what you have lost, set a percentage that you refuse to lose more than – and if you hit that limit, swallow your competitive pride and stop trading. Your entire career in binary options may well depend on that ability.
On the other hand, if you know yourself to be a very careful person whop knows how to learn from unsuccessful ventures, use that to your advantage as well. Perhaps you won't place as many trades per day, or earn as much money, but with each unsuccessful trade that you explore to see how you might have acted differently, you can help ensure more future success than otherwise.