How to Deal with Binary Options Trading Uncertainties

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A Guide to Trading Binary Options in the U.S.

Binary options are financial options that come with one of two payoff options: a fixed amount or nothing at all. That’s why they’re called binary options—because there is no other settlement possible. The premise behind a binary option is a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time?

Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

Binary options traded outside the U.S. are typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative—but only if the trader fully understands the two potential outcomes of these exotic options.

Now that you know some of the basics, read on to find out more about binary options, how they operate, and how you can trade them in the United States.

U.S. Binary Options Explained

Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.

Let’s take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?

If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.

The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you’ll sell at $42.50.

Let’s assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money. But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss, compared to letting it expire out of the money.

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A Zero-Sum Game

Eventually, every option settles at $100 or $0—$100 if the binary option proposition is true and $0 if it turns out to be false. Thus, each binary option has a total value potential of $100, and it is a zero-sum game—what you make, someone else loses, and what you lose, someone else makes.

Each trader must put up the capital for their side of the trade. In the examples above, you purchased an option at $44.50, and someone sold you that option. Your maximum risk is $44.50 if the option settles at $0, and so the trade costs you $44.50. The person who sold to you has a maximum risk of $55.50 if the option settles at $100—$100 – $44.50 = $55.50.

A trader may purchase multiple contracts if desired. Here’s another example:

  • NASDAQ US Tech 100 index > $3,784 (11 a.m.).

The current bid and offer are $74.00 and $80.00, respectively. If you think the index will be above $3,784 at 11 a.m., you buy the binary option at $80, or place a bid at a lower price and hope someone sells to you at that price. If you think the index will be below $3,784 at that time, you sell at $74.00, or place an offer above that price and hope someone buys it from you.

You decide to sell at $74.00, believing the index is going to fall below $3,784 (called the strike price) by 11 a.m. And if you really like the trade, you can sell (or buy) multiple contracts.

Figure 1 shows a trade to sell five contracts (size) at $74.00. The Nadex platform automatically calculates your maximum loss and gain when you create an order, called a ticket.

Nadex Trade Ticket with Max Profit and Max Loss (Figure 1)

5 Types of Fear Binary Options Traders Face

It is not a fun fact of life, but you will be regularly facing it when you trade binary options: fear. Most of us are programmed mentally to avoid situations that make us feel fear. Fear is unpleasant, and it causes an adrenaline surge which is usually pretty unpleasant as well. Nobody likes to look at an uncertain future and feel unsure of themselves, but in trading, you are always facing uncertainty. Risk is something that every person in business must learn to live with, but with trading, the risk is emphasized, because how you work around it is exactly what will determine your likely success. Fear can be broken into several different common categories for traders:

Fear of losing trades

Fear of losing something else

Fear of missing opportunities

Fear of being wrong

Fear of success

1. Fear of Losing Trades

This is probably the most common form of fear faced by traders. When you are frightened of losing trades, and eventually perhaps your entire binary options account, you can become paralyzed. You may not enter when your signals tell you to, and that may cause you to lose more trades than you should as a percentage of your account, because you start missing all the good trades. You also might begin breaking other trading rules, leading to even more problems.

Another common mistake that results from this particular type of fear is exiting too early. You might find yourself tempted to take profit or cut your losses with the “early closure” feature which many brokers provide when you should stay in your trade longer. If your wins become smaller than your losses, but you do not overwhelmingly win the vast majority of your trades, you may start seeing your account going in the red.

Also in this category is the broad fear of trading failure. Some people are not just consumed with their doubts in the moment—they may suffer from the terror that they will lose everything in a broad sense. These traders may have experienced repeated failures in other areas of life, and expect that those failures will translate to their trading. This may cause foolish trading mistakes, or may prevent them from trading at all. After all, what you never know can’t hurt you.

What is the best way to solve this kind of problem? Test, test, test. Have a trading method you know can work, because you have personally proven it to yourself on historical data, and then on current data through demo testing. Get used to facing that pressure in real time, and when you start seeing great results, start trading small amounts of money. Only after you get used to that should you fully fund your account as you intended.

2. Fear of Losing Something Else

This may sound a bit obscure, but bear with me, because at least a few of you probably will recognize what I am talking about. Why are you trading? Is it because you are confident in the revenue you have, and you want to build off of that success? Or does part of you not believe in your current living, and feel like you need trading to come along and save you from destitution, either now or in some distant, imaginary future? Are you convinced your boss is going to fire you? Or that you cannot cut it in your own line of work?

See, I am guessing that not a lot of people have thought this through, because I have never seen another article that mentions it, but I believe many traders are paralyzed by these kinds of fears that do not directly relate to their trading. I know this has to be common simply because of the way I see binary options systems, signal services, and brokers commonly advertised. So many of the videos I watch on YouTube say things like, “Quit your day job,” and “Make $100 into $10,000 in a week.” These are desperate bids made to desperate potential customers, who would do anything to turn their lives around overnight.

See what I mean?

Maybe you really are up against a wall of fear in real life, and you have good reason to be scared. Perhaps your boss is about to fire you. Maybe your business is failing. If that is the case, I strongly suggest you back away from the market altogether, unless you have a lot of funds sitting around, and you can afford time off from work while you build something else. Otherwise, find a job or create a job which is going to pay you regular, reliable revenue, and then come back to trading when you are less afraid.

Sometimes, though, it is all in your head. In the economy we’ve been living through, a lot of us have become a bit gun-shy when it comes to living in general. If you have had the rug pulled out from under you enough times, you can have a hard time ever feeling secure again. But look at what you do have and if you have no signs to believe it is failing, then do your best to be grateful, humble, and confident in what you have. You will have poor luck with trading (and possibly sabotage your current income) if you have no faith in what you are doing.

If trading makes you wrestle with these issues, my best recommendation is to make trading about something other than money. It does not mean you should not aim to make money, but make trading about something else, like developing self-discipline or confidence. Avoid thinking of it as a possible replacement for your current income until it actually is a viable replacement.

3. Fear of Missing Opportunities

Overtrading is a huge problem for some people. It is one of the most common trading mistakes out there. Some traders do it as a habit, while for others it may be a rare experience, but sometimes you may feel the urge to push the trigger when you should be sitting and waiting for good trades. What prompts this type of behavior? Usually it is the fear that you will miss an opportunity. This is connected to the fear of failure. If you miss a chance at success, you might fail. You may convince yourself you have limited opportunities to succeed, and if you let them pass you by, you will be doomed to failure for the rest of your life.

Life rarely actually works this way. Actually, it may not work that way at all, even though we may feel like it at times. Things are always changing, and there is never going to come a day when the markets devolve into complete and utter chaos. And that means there are always going to be opportunities to make money with top shelf trade setups. So yes—it is worth it to be patient.

4. Fear of Being Wrong

This may be the most lethal fear of all when you are trading—the fear that you, infallible person that you are, might possibly be caught making a mistake. But none of us are infallible; we all make mistakes. There is no shame in making an error, only in refusing to see your errors. The worst mistake any trader can ever make is ongoing dishonesty. I say ongoing because now and again, even the most honest trader is probably going to commit the sin of pride and lie to himself about trading mistakes in an effort to avoid acknowledging culpability. Admitting you lied to yourself is also an important ability to have for this reason—it is just one more way you can be wrong, and one more sin you have to be willing to come to grips with.

You are not, and never will be, smarter than the market. The market is not an opponent sitting opposite you, trying to out-think you and make you lose. The market does not care if you win or lose; it is indifferent to your success or failure. It has no pride. So when you become conceited and lose your honesty, you place yourself utterly at its mercy.

You also must be willing to admit you are wrong to people who count on you in financial matters, like family members who are dependent on you. If you lose your accountability to those people, you are not only going to mess up your trading career, but also your relationships with the people who are most important. It is okay to be wrong now and again. Only by acknowledging your wrongs can you correct them with better behavior, move forward, and get back to being profitable. These tips on how to recover may help you cope with your fear of being wrong.

5. Fear of Success

Success? Why would anyone fear success? There are a lot of reasons actually, especially if you are usually consumed by failure. Success is a major life change, and change always means facing the unknown. Even when the unknown is positive, it can be scary to some people. Self-sabotage is a fairly common psychological issue, and plenty of ordinary people face it. If you are afraid of success, it does not necessarily mean you have deep-seated issues of self-loathing; it probably just means that you are afraid of change.

Deal with this fear by understanding it, and by accepting that the unknown is not always a negative. Just because you do not know what is going to happen next does not mean that you are not going to be happy. You may be happier than you ever have been before. Move forward with faith in yourself and in your trading method, and your life may turn around for the better.

How to Deal with Binary Options Trading Uncertainties

Binary options trading, like any other type of investing, entails a great deal of risk and uncertainty. When things are going well and you are winning a lot of trades, you may feel confident enough to let that fact sit in the back of your brain for a while. It doesn’t take much though for it to come right back to the forefront. In fact, all it really takes is one bad day. If you suffer a major drawdown in your account, all of that uncertainty and doubt comes hurtling back. You can quickly find yourself feeling very confused and frightened, if not outright lost.

At times like these, you will ask yourself the same question over and over again:

“Why am I losing money?”

You will wonder what you can possibly do about it, and you will likely feel yourself being pulled in a dozen directions at once, desperate to solve the mystery. After all, you do not have a moment to spare, especially if you trade for a living. Your account is what you rely on. Without it, you have nothing.

This is when you need to take a deep breath and do what you can to get your head together. In my experience, even though these situations feel turbulent and complex, there are three distinct possibilities. Your first task is to figure out which of these three possibilities explains your recent string of losses. From there, you can figure out a plan of action for getting back on track.

Here are the three possibilities for what is going on when you are losing money trading:

1. Nothing whatsoever is really going on.
2. You are making a mistake.
3. The market conditions are changing.

Now we can look at each of these and talk about what they mean.

1. Nothing whatsoever is really going on.

This does not mean your losses are “all in your head” of course—you can clearly see them reflected in your account balance. But what it does mean is that your panic and the significance you are attaching to the losses may very well be all just in your mind. Just because you have lost a few trades and you have some drawdown in your account does not necessarily mean that it is significant.

How can drawdown not be significant? Even if you have a system that wins 90% of the time, you are still going to have losses in your account, and even losing streaks. And most systems do not perform at remotely that level. You will have losing days, weeks, and sometimes months or even longer. There are a lot of reasons why you might read into these events sometimes and not other times. Maybe it is your longest losing streak to date, or perhaps you have something else on your mind that is causing you to feel anxious. When you are nervous about one thing, it is easy to overreact to another. You may read disaster where nothing is written.

The problem with reacting to each and every losing streak you have is that you will constantly be making changes to what you do. That means that you will never build expertise, confidence, and a solid record of success with any particular mode of doing things. In fact, you may just cripple yourself as a trader now and over time. In essence, by trying to fix what is not broken, you are breaking it yourself, over and over again.

While it can be difficult to know whether you are in a “nothing is really happening” situation or whether you are in one of the other two possible situations, one good rule of thumb is this: If your losing streak is within the bounds of your expectations based on the tests you have run, just leave it alone and keep trading. Of course, if you know there is a problem, then stop and fix it. That means that your situation is probably the one below.

2. You are making a mistake.

There are a lot of mistakes you could be making while trading that are costing you money. Some of these include:

  • Breaking your own system rules or money management rules. It is easy for performance to “drift” over time. You get so used to trading your system that you become careless, thinking you are doing everything right automatically, because you have been doing it for so long. Look closely at your recent trades and see if you can spot a rule you have been breaking. If you do, try correcting the problem and see if results improve.
  • Allowing distractions into your trading. Has something changed in your trading environment? Are you allowing conversations with others, noise in your surroundings, or other factors to distract you from what you are doing?
  • Letting your emotions get the better of you. Sometimes frustration can take its own toll, which can quickly turn into a self-perpetuating loop. Whether you are feeling angry, scared, overconfident, or even are allowing yourself to be distracted by something unrelated to trading, any of these can cause you to lose money.
  • You are skipping steps in your process. When you place a trade, even with a very simple system, there are a number of steps that you have to follow. It is entirely possible to skip small, seemingly minor steps without intending to, and then discover that these small steps actually are quite important and have a large effect on your wins and losses. A checklist can help prevent this.
  • You are changing the way you use your own discretion. If you are a discretionary trader, or even a trader with a method which is part discretionary and part mechanical, you may introduce variables unwittingly into your trading without even noticing. Even if you are following all your mechanical steps the same way you always do, you may be changing the way you apply discretion to your decisions. Because it is hard to constrain discretionary choices in a systematic way, this is an area where mistakes are common.

If you know you are doing everything right, and your drawdown is exceeding your expectations based on testing, the explanation is almost always going to be the third possibility.

3. Market conditions are changing.

This possibility catches a lot of traders off guard. Novice traders are not the only ones who are susceptible to missing these changes; even traders who have been around for quite some time can miss them. Nonetheless, this problem is particularly confusing the first time you encounter it, because you have never seen it before.

Changes in market conditions can be somewhat unintuitive to the uninitiated for the simple reason that you are dealing with shifts in the market every day. That is after all what you profit off of as a trader. So how can changes suddenly make you lose money?

The key here is to understand that we are talking about changes that occur at a higher level than the level you trade at—and I am not simply referring to a higher timeframe. Changing market conditions may reflect new trends, shifting volatility, and other factors that can have an unexpected impact on your trade outcomes. Think about it this way: Imagine you are taking a journey across desert terrain. You have learned how to navigate all the boulders and cacti and other obstacles that come into your path. But then one day you cross a threshold into a grassland. While may encounter similar obstacles in the terrain, the terrain itself has shifted, and different rules now apply.

This is one of the most difficult situations, because getting through it is not simply a matter of getting back to doing what you already know how to do correctly. It is not a matter of waiting for things to self-correct either. Instead, you have to adapt your trading method to the new conditions.

The good news here is that this generally is possible. If you know others who use a similar trading method as you, some of them may already be successfully adapting the system. And if you ask around, you may discover that people have used variations on your trading method for decades with subtle adjustments over the time to stay profitable in changing conditions. And returning to our metaphor about hiking across different types of terrains, while a hiker will need new skills to cross different environments, many of the basic skills and actions will be the same in different settings.

It is always going to feel like you are in a tough predicament when something which usually works suddenly stops working. You can feel completely lost and afraid, and for many traders, the experience is a paralyzing one.

But once you figure out which of these 3 possibilities describes your situation, you can take concrete steps to recover. If you believe nothing is truly happening, get your head together and wait for the situation to self-correct. Have faith in the trading method that you have tested and used so successfully. If you believe you are making a mistake, go over your trading journals and read through your plan, system steps, and checklists, and identify it. If you believe market conditions have changed, then it is time to go back to testing and start experimenting with adjustments. Reach out to members of the trading community who use a similar system and ask for help.

The most important thing to keep in mind in these situations is that there is always a step you can take to move forward again. You are never stranded or helpless. Once you calm down and start methodically tackling the problem, you will be able to resolve it and move on. Then you can get back to trading binary options profitably.

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