Trading binary options successfully obviously requires a strategy which has an 'edge' and can be proven, over time, to perform successfully against simply selecting random higher or lower options. Equally important, however, is the way that a trader psychologically approaches the trade. Even the most successful investors say that in order to succeed a trader needs to master the psychological aspects of trading binary options. Initially, this can seem as though it is the simply a case of being executive in trading decisions to invest, or not, in any trading opportunity. However, there are other fundamental aspects to the psychology of trading binary options which also have to take into consideration once the options have been purchased.
The Role of Emotions in Market PsychologyEmotions often play tricks on traders after they have purchased an option - if it remains in the money right up to its expiry date, the trader will no doubt be thrilled and have increased confidence. However this often leads to overtrading, and again, this can lead to losses in the end. Conversely, if an option stays out of the money right up to its expiry date and then the trade is lost, the trader will generally lose faith. While remaining neutral is desirable, most traders find that easier said than done and struggle to eliminate the element of emotion from their trading experience. Although the principles of binary options trading are centred around choosing the correct expiry date and striking price, discipline and self control also have a major role to play. Being self-aware and in control of one's own mind is often more important than the trade itself as the financial markets never behave rationally. This is especially vital when trading the news as in this event, traders are actually buying and selling based on a comparison between a forecasted view and the actual figures released, and often, the first reaction of traders will be invalidated. For example, if the outcome of a report releases figures that are lower than those forecast, it may be logically assumed that the market would move to the downside and therefore traders would consider placing put options. However, frequently, this first reaction will be swiftly retraced as the algorithms involved are about breaking and hitting stops at the key levels of support and resistance.
One of the most important principles of trading psychology
One of the most important points that underlie success in trading and trading psychology is accepting the fact that no trader is able to control the market, and accepting this fact finally, leads to realism in trading and knowing of the main character of the market.
When a Binary Options trader has no control over the market, the best solution is having control over himself and his emotion. Actually, controlling and managing emotions while trading helps traders to increase the chance of success.
An important point to regard for the Binary Options traders
A Binary Option trader should learn that there is no certainty in no financial market. This certainty is not available on the Binary Options market(a hundred percent prediction in analysis). Having emotions such as hopes, greed and destructive thoughts are major obstacles for everyone to make a permanent profit and to succeed on the market.
Successful traders have accepted this principle well and don't involve themselves in an emotional trading which in fact is trusting an analysis completely. This is due to the fact that their mind has accepted that the market is able to do anything and destroy any analysis.
Temptations to use broker tools
Most binary options trading platforms have introduced new tools for traders beyond the traditional binary option format. Although many of these are marketed as tools to 'assist' the trader, some of these have been designed to take advantage of the psychological elements of binary options trading. One example of this is the 'close early' feature offered by many platforms and which allows binary options traders to expire their options for either a partial loss of profit. Although, on the face of it, this seems like a very useful tool, it creates a psychological dilemma for traders who are holding profitable positions.
Closing early taps in to the uncertainty and fear of incurring a loss from a profitable position but at the same time undermines both the trading strategy employed by the trader and the profit-to-loss ratio over time. If all trades are closed before reaching their predetermined profit target then it is very likely that the value of in the money trades will be significantly lower than out of the money losses. Platforms already know that by offering the temptation of early closure will require that a trader will have to also increase their frequency of winners in order to be profitable. Over time this will almost certainly benefit the binary options broker over the trader
Binary Options Overtrading
Let's say a trader loses a trade. The prediction was simply wrong, or the market took an unexpected turn. It is in human nature to try and compensate for the loss. So, in most cases, the trader will place another trade, often furious, mad and without proper analysis. Often will happen that the trades placed afterward will be a complete failure. Why? Because trader allowed emotions to control him rather than common sense.
This behavior is often known as overtrading and is considered to be one of the biggest sins in binary options trading. When emotions take control, a trader usually places more trades than originally planned, but that's not all. In most cases, the trades aren't executed properly and are placed without prior analysis.
Overconfidence in Binary Trading
There is another effect similar to overtrading, and it is overconfidence. Overconfidence usually happens when the trader is on a winning streak. Trader profits from the first trade, the second, the third - and the self-esteem only grow. Soon, the trader feels invincible. Confidence gives trader enough courage to place even more and more trades, as he is convinced all of them will be successful.
Of course, this is also a type of overtrading, and what is interesting is that it often interacts with the first type. Sooner or later, the trader will lose a trade, as lost is a part of binary trading just like a win. In that moment, overtrading can go in other direction, as the trader will be desperate to gain the lost investment again.
Important characteristic of a successful Binary Options trader
One of the secrets of success in the field of the market psychology is a consolidation of emotion control and focus on the current situations without any attention to the previous results. Successful Binary Options traders act according to this principle while trading.
Most of the beginner traders usually influence by their trading results and lose their focus. If their previous trade was closed with loss, they think of taking revenge (sense of fury and anger). Provided they have several consecutive profitable trades, they think of making more profit on the market (sense of greed and false hope), and finally, they obtain a bad result.
Providing that a trader thinks of taking revenge on the market, naturally loses his focus and his analysis becomes wrong and inappropriate. As a result, this leads to emotional trades that increase the probability of the failure. On the other hand, a trader who has had several profitable trades, thinks the market is under his control. He is able to predict all the market changes and with the increase in the volume of transactions (trampling on the capital management). Lack of concentration on the market, will get involved in some wrong and inappropriate analyses.By the contrary, a successful trader without thinking about previous results, and just by focusing on the current situation of the market, starts to analyze and predict, and doesn't get himself involved in adverse feelings that could occupy his mind.
Of course, keeping a cold head is much easier said than done. As emotional beings, humans find it hard to admit they were wrong and accept the consequences. It is very important for binary traders to be realistic and aware of their personal flaws before they start trading, as this is the only ways to prevent mistakes and unprofitable trades on time.
Also, traders should utilize all features and tools that are often provided by the broker for free. For example, sell feature allows traders to sell binary options that seem unprofitable. There are also rollover and double up features that can help the trader to be more profitable.
Probably, the most important tool for successful binary trading is investment plan. Every trader must be aware of the fact that trading without a plan is rarely profitable. A good investment plan can help traders to remain rational even when it seems that all markets are against them. It can also prevent them from overtrading or force trading.
Also, traders who accept education as essential part of binary trading will rarely get under the influence of emotions, as they know the importance of analysis. While doing the analysis, traders can cool their head and make rational decisions that will help them gain more long-term profit.
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