The online retail binary options market is rapidly expanding and becoming extremely popular, especially because due to its simplicity it is truly easily accessible for all, rendering it the most accessible financial market in the world. However, amongst the vast numbers of binary options traders that hold active trading accounts with various binary options brokers, very few are the truly successful ones. The reasons why failure appears to be a common outcome of many binary options trades placed on a daily basis are wide and varied. What follows is an attempt to identify and briefly discuss the most common failure-conducive factors, in the hope that binary options traders will be able to avoid the pitfalls in the future and thus increase their chances of achieving their investment goals:
Trading Without Discipline
The largest mistake any trader can make is to allow his/her emotions to be the decisive factor when taking a trading decision. Often the road towards becoming a successful binary options trader entails the suffering of a number of small losses, while or even before achieving a handful of big wins. If however the losing streak is prolonged then this can cause a great deal of emotional grief and stress to the trader, testing once limits, patience and self-confidence. If such emotions are allowed to take control of the trading decisions, then such feelings such as fear or even greed could mean that winning traders are cut short or losing trades are allowed to get out of control. The best way to keep one’s emotions under tight control while trading is through maintaining high levels of trading discipline and follow a well thought-out and developed trading plan without deviation.
Lack of a Plan when Trading
Perhaps the most accurate motto when it comes to all types of trading, but especially true in the case of trading binary options is that failing to plan equates to planning to fail. Indeed, having a plan and sticking to it is the first step towards achieving trading success. Having said that, the plan to be followed needs to be well-documented and include provisions that adhere to the basic risk management practices and also include the expected return on investment that the trader anticipates to receive. If one follows the plan committedly then the trading strategy should lead to the avoidance of the most common trading pitfalls.
Not Adapting to Market Changes
No matter how good a plan is before entering each trade, the fact also remains that markets are volatile and often unpredictable. One could argue that large losses could be limited if one makes sure to have in advance a plan in mind for every possible market situation, which should include the possible moves and countermoves to be undertaken under each different scenario. However, as the markets are dynamic, each change in the prevailing market conditions gives rise to new and different opportunities as well as risks. This is why it is imperative for traders wishing to achieve success to be able to quickly adjust and adapt to changes in the market conditions and be prepared to make the necessary amendments to their strategies. Moreover, to maximize their success chances they have to be always vigilant and well prepared and have ready contingency plans for every possible event or market change, even those that are far less likely to occur. If a trader is well educated, well prepared, flexible and adaptable then it would always be possible to devise innovative and creative manners to make a profit from the ever evolving binary options trading markets.
Avoiding the Use of Demo Accounts
Many eager traders jump into real trading through live funded accounts and disregard the opportunity to make use of the demo accounts that brokers often have available for novice traders. This rushed eagerness is rather frivolous because it takes away from traders the chance to first learn how to trade and how to read the markets effectively, through the safety given via trading using a demo account. Practice makes perfect and a demo account gives one the luxury to trade risk free and get the hang of the whole process without risking a penny. Once one practices adequately through the demo account only then it is advisable to start trading in the real money and risking real funds, having attained the necessary level of skills and feeling comfortable to trade successfully.
Choosing Trial and Error instead of Formal Education
A successful binary options trader is one who has learned how to properly trade the various markets. One method to achieve this kind of learning is through the method of trial and error, however choosing this learning procedure will definitely come at a high price tag as it means actually sustaining several financial losses in order to learn from one’s mistakes. One the contrary a less expensive and much more efficient way to become a successful binary option trader is to access and take advantage of the accumulated experience of existing successful traders. This can be achieved either through a formal trading education or through a mentor relationship with someone who has a successful track record in binary options trading. The abundance of forums, and copy- and social- trading methods that have recently emerged renders this venture very simple to accomplish.
Setting Unrealistic Goals
If one enters binary options trading with the sole aim of making super big profits in no time, then he is most likely to fail dismally. Rather than a get-rich-quick scheme one’s successful involvement with trading should be viewed more as a marathon rather than a sprint, because it takes time and persistence to become proficient and be able to effectively implement the trading strategies. Setting unrealistic goals and harbouring gains expectations that are not likely to occur will lead one to forego discipline in their trading decisions and let greed and frivolity take over. This is a disastrous recipe that will most probably lead to profound losses as it ignores risk and money management rules.
Relying on Poor Risk and Money Management Strategies
Traders should direct as much focus, time and effort on adopting adequate risk management methods as they do on developing their trading strategy and they should always ensure that they have a clear picture at any given point in time of exactly how much of their investment capital is at risk and make sure that the risk is justified in relation to the anticipated benefits. Diversification among trading strategies and tradable assets, as well as trading types and expiry times could potentially insulate a trading account from unfixable losses. In fact the most serious and capable of traders only tie a small portion of their account balance for high-risk trades, while the rest of the balance is usually traded conservatively, since a proper fund allocation strategy insulates one’s trading accounts from devastating losses as a result of completely unpredictable changes in market conditions.
Investing too little
At first sight the lack of adequate capital to invest is not regarded as a problem when trading binary options as one of the most usual promotion methods chosen by binary options brokers is making trading accessible to people who do not have much money to trade. On the vast majority of binary options websites an account can be opened with initial deposits of just $200-$250. If your initial deposit is higher, for example $500 or $1,000, you stand to receive more benefits and perks but the truth is that when it comes to placing actual trades even those amounts are not that much
Trading with a small account poses several dangers, the most common being that the trader will almost certainly soon become impatient since investing small amounts automatically means that the amounts you are making, even if the trade is successful, are equally small. Thus, it will take a long time for any substantial profit to be achieved and the realization that you are not getting anywhere any time soon will render it very difficult to be patient and stick to good money management rules.
Another problem is created by the fact that most brokers will not allow traders to place trades for very small amounts, except perhaps when they are trading very short time frames, for example 30 seconds or 60 seconds binary options trading, which are however not recommended for novice traders as they are riskier and more addictive. Therefore, if the broker requires a minimum investment amount of $25 per trade, a trader needs an account with at least $500-$1,000 in it. Thus it would make sense to adopt a waiting strategy until one amasses sufficient funds before making their initial deposit, because this will mean that you will be able to place larger trades and not trade so slowly. In short, trading with very small amounts requires being able to handle one’s own impatience if it is to prove successful, but in reality very few traders achieve this.
A very good way to avoid some of the frequently occurring pitfalls outlined above is building a relationship with other successful binary options traders, who are willing and able to share their “secrets” with you and teach you the trading tactics they employ, including the risk and money management rules required to effectively trade the binary options market. Equipped with such knowledge you will be in a position to plan appropriately and trade binary options while having the level of return expectations that will stop you from taking excessive risks.
George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.