Trader Psychology for Binary Options Traders
Trader Psychology for Binary Options
A large part of the trading process is all about psychology. Psychology of trading simply refers to the trader’s emotional response to the events in the market.
In trading, the following emotional responses to the events occurring in the market are seen to occur very commonly:
- Fear
- Confusion
- Doubt
- Panic
- Greed
- Hunches
We will analyze each of these emotions to see how they affect traders in the binary options market.
Fear
The fear factor usually comes up when a trader has made a trade entry based on his strategy, but the market starts to retreat against his position to erode the value of the position. When you use platforms like those of Binary.com, this is usually shown to the trader in the Portfolio section of the trading platform. If the market price is against the trade position in the middle of the trade, something like this is displayed:
- Cost of position: $100.00
- Value of position: $12.01
If the binary options trader is unsure of his strategy, this is sure to evoke fear. Worse still, a button comes up urging the trader to sell off the position at a loss. Fearful traders will not hesitate to use this button to save what is left of the position.
Fear is a factor that breeds discouragement, and stops traders from benefiting from the position.
Confusion
Confusion results from not being able to make sense of what is happening on the charts or in the market, and usually results in an inappropriate response to the market events or a null response, leaving profits on the table.
Doubt
Doubt usually precedes fear. This usually comes up if the trader uses a strategy that is unproven, or has made a trade entry based on guesswork rather than on careful analysis. When doubt is not controlled, it now leads to fear and the cascade mechanism described above comes to fruition.
Panic
Fear and panic go hand in hand. Panic is also a factor seen when a trader has made a series of unsuccessful trades and is anxious to make up lost ground immediately. Such actions reek of panic and can lead the trader to make mistakes such as choosing wrong investment amounts, clicking one option when the intention was to click the other (e.g. clicking CALL when the trader meant to click PUT), and muddling up expiry time selection.
Greed
When series of losses have been sustained, the temptation to cover up ground using the DOUBLE UP and ROLLOVER functions is high. These functions are good but only when used responsibly. They should not be used to cover up lost ground or postpone the evil day. Greed invariably also leads to bad risk management practices.
Acting on a Gut Feeling/Hunch
Since a trade in binary options always has a 50% chance of success, many binary options traders are always tempted to trade on a hunch. It gets worse with the short term trades. Hunch trading is plain guesswork and turns the whole trading process into a gambling operation; something many regulators are trying to change.
These are all negative emotions and these will all invariably lead to one outcome: trade losses. Remember that with binary options, once an amount has been invested there is no way to curtail the losses except if there is an option to sell off the option before expiry for whatever it is worth. Binary options traders can avoid all these emotionally charged situations by adopting a number of strategies.
How Binary Options Traders Can Avoid Negative Emotions
The following strategies will help binary options traders stave off the negative emotions mentioned above.
- Never trade on a hunch and never gamble on a trade. If binary options traders can adopt this first strategy, at least 2 out of 3 trade losses will be prevented totally.
- Always use a proven, profitable strategy. The good thing about this point is that binary options traders do not need to know more than 2 strategies to succeed in the market. Two proven and profitable strategies can do the job. With the possibility of taking many trades in a day from as many as 50 assets due to the short expiry times available, there will be something for even the trader with a scalping mentality.
- Always use good risk management by not risking more than 2-3% of your account capital as maximum exposure.
- Always make sure your account is properly capitalized for the trading style you will adopt. Watching a rather small account get further depleted will breed fear and everything that goes with it. You cannot use a $250 account with a minimum investment size of $25 per trade to do anything meaningful. If all you have is $250, get a broker that will allow you trade with as low as $5. If you are stuck with a $25 minimum investment broker, deposit thousands of dollars in your account.
Conclusion
Try to read these two books to take control of your mindset as you trade: “The Psychology of Trading” by B. Steenbarger and “Trading in the Zone” by Mark Douglas.
