Market Psychology in Binary Options

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7 Binary Options

There is a lot more than meets the eye that goes into reading analytical charts to help you get the information that you need to place your binary options trades. It’s not just numbers on paper that go into forming the charts and there subsequent analysis. For example, Fibonacci retracement use mathematical formulas and ratios, and Elliot Wave Theory uses market psychology forces. Let’s talk a little bit more about market psychology.

Market psychology simply put, is the dominant feeling or sentiment that the market is influenced by at a particular time. It is how the human side of trading impacts the market. It is based on such emotions as fear, exuberance, greed and sometimes unfounded expectations. But if enough people are experiencing the same emotions when trading, then it can have a profound effect on price movement.

So market psychology differs greatly from standard financial theory and failure to consider it in trading can sometimes be disastrous. Conventional theories have more to do with rational behavior of the market, whereas, market psychology is somewhat of a wild card. There is definitely an emotional aspect to trading that needs to be taken into consideration.

Many traders will look at trends and patterns to see if they can assess the psychological state of the current market in order to determine and predict whether an asset will be trending in an upward or downward direction.

So one of the keys to successful trading is to triumph over your own worst enemy and that worst enemy is sometime you and other trader’s emotions. The ability to be able to look at how trader’s emotions are affecting the market can be the deciding factor in how you place your trades.

So don’t be afraid to look at the market sometimes as an extension of human behavior and patterns. Just like price movement can be charted based on past history, somewhat can market psychology also if you know what to look for.

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Trading psychology and money management

In my recent blog posts I’ve been doing a lot of trade analysis, going over my daily trades and explaining the thought process that went into each one. But quite honestly, the reason why many traders have issues becoming consistently profitable is not so much about finding an effective strategy (although it’s immensely important) as it is battling the mental obstacles that can derail your trading.

I truly believe that the top trait that separates successful from unsuccessful traders is the ability to stay patient and wait for only the best set-ups. In my spot forex trading (trading off the four-hour and daily time compressions), I largely avoid this issue because I’m setting limit orders, stop losses, and take-profit levels all at pre-determined points in the market. However, in binary options with strike-entry brokers, I don’t have that convenience, so I’m forced to wait and play close attention to the charts to execute a trade exactly where I want it to be. This is, in my opinion, what makes binary options trading so much more difficult than swing trading spot forex. But mentally I don’t have an approach to binary options that is fundamentally any different from the way I approach forex. Strategy-wise, it might be slightly different since I’m waiting for confirmation to take a trade at my price levels in binaries, whereas in spot forex I simply enter in a limit order price and the trade triggers automatically if the market reaches that level. But with regard to my mental approach, I always have everything planned out – specifically what level I’m targeting potential call option set-ups, and what level I’m targeting put options right down to the tenth of a pip. Sometimes I may only be considering one type of option (call or put) if the trend is sharply in one direction or another. In rare instances, I may not be considering any type of trades at all if the market is simply too wild (e.g., impending important macroeconomic news releases). And if the market does get to the level I’m looking at, I’m not just excitedly hitting the button to take the trade, but rather waiting for price to reject that level and taking the trade if it touches on the next candle. Then and only then am I taking the trade.

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Always stay patient when trading, even if that means looking at the charts for eight hours yet not finding a set-up worth trading. Exercising patience is the same as exercising rationality, as it’s a uniquely human ability and exercises higher-order cognitive functions, and not the more primitive parts of the brain that take over when an individual trades emotionally. Overtrading is a definite problem for many individuals and is probably the number one trading-related issue that prevents many from becoming good traders. It only makes sense. People want to make money quickly and binary options do seem like a good means to rapidly multiply your available capital. Therefore, they trade a lot as if they’re trying to compel the markets to make money for them. It takes a certain maturation process to understand that you’re not going to become rich right off the bat in trading, especially since lowly capitalized traders tend to be beginning traders.

Then again, if you’re eyeing a certain price level, be confident in your set-ups. On the other side of the spectrum, being “overly patient” and “undertrading” – i.e., having issues pulling the trigger – is another problem that definitely affects traders. In fact, in many cases a trader might have both issues at some point or another. But when trading a support and resistance based strategy similar to what I use, you should always have your price levels planned out ahead of time and take your trades when you receive validation that they are likely to hold (similar to the touch-rejection-and-retouch strategy I’ve discussed in my recent trade analysis posts). And, of course, ensure you are keeping your trade sizes small enough such that you have absolutely no emotion over the outcome of the trade.

If you’re ever experiencing anxiety over a trade’s outcome, I can safely assert that you have are putting way too much money into a single trade. When deciding on an investment amount, it should be so small that it almost feels like a waste to even take the trade. By that, I mean you should be investing less than 1% of the money you can afford to lose (leftover disposable income) on any given trade.

Also, never ever set a certain profit target for the day. Or even the week, month, or year. This never turns out well, as inevitably failing to meet that monetary target routinely causes individuals to trade emotionally because money – instead of trading the market – becomes the primary mental focus. Trying to recoup previous losses by doubling up, tripling up, quadrupling up, and so forth in Martingale-style fashion will result in disaster at some point sooner or later. I believe the best strategy for traders is to invest a relatively small, fixed amount of money on each trade. As you become more advanced and can sufficiently assess the general probability of a trade working out, you can be afforded some leeway and mix up the amounts from time to time. But as a binary trader, you should be focused on your winning percentage (60% in-the-money is a realistic goal). If you are achieving your desired winning percentage (which, of course, should be above break-even) and keeping a fixed-amount money management strategy in place, you can consistently make money doing this.

Obviously, there are several mental and emotional hurdles that traders encounter on their trading journey. Of all the issues I discussed above, I personally went through every single one of them at one point and wiped out several accounts in the process. But in all honestly, finding an effective strategy wasn’t my biggest issue at all. With some refinement, I’ve basically been using the same price level-based strategy since I first began trading seriously roughly two years ago. There are many excellent technical analysts out there, but there are a much smaller number of consistently profitable traders. That, of course, resides in the fact that you have to master the mental aspects of trading before you can truly become good at it.

The good news is that learning these things is not difficult. As a matter of fact, you probably found everything I just said very self-evident. Truth be told, just about all of us have been good at a certain activity or profession in our lives. But whatever skills we needed to be successful in that endeavor very likely has little to no relevance to what it takes to being successful as a trader. It just takes time, practice, and the right mindset toward the markets. If an individual can master and ingrain these seemingly simple and common-sense psychological tidbits and combine it with an effective strategy and money management plan, he or she can ultimately become a profitable trader.

Binary options trading and the psychology that surrounds the market

When trading binary options you cannot just focus on the practice of analyzing numbers. Sure, this is a large piece of the puzzle. Analyzing charts and to sort out the statistical information is very important and key to your success in the binary options field. However, it is not all numbers. You also have to mind the market psychology. If you want to trust in mathematical formulas and ratios, Fibonacci retracement is your pick. If you’re more into market psychology, you will probably find success with the Elliot Wave Theory. How can psychology be part of an otherwise highly sophisticated market? When trading, you always have to recognize the human mindset involved in trading. People give in to emotions, which in turn affect the market with, usually, irrational market and price movements. Emotions that often can be found in a market are fear, greed, excitement and crazy expectations.

The financial theory does not always incorporate the large effect that psychology has on the market and this can be devastating to price movements. When you pick up a financial theory or formula for predicting price movements you usually build your assumptions on rational behavior. The reason why your predictions may go wrong is because you will still get human emotions as your joker. You need to mind the psychological effect that comes with trading a financial instrument or derivative.

To be able to make estimates and predictions, a lot of traders will turn to trends and patterns in a test to try and understand the current mood of the market. The market psychology is hard to determine but the goal is to evaluate if the price is in an upward trend or downward trend.

You will eventually find yourself facing your own, and other’s, worst enemy – the human emotions. However, it is critical to understand that you need to master your trading and not give in to emotions and market psychology. One way to do so is to understand how psychology affects market movements and how you can parry it when you make trades.

When you study financial theory and market movements you need to be aware that these may very well be an extension of human emotions. If you know how to weed out the movements of market psychology and it is easier to understand the price movements if you can plot psychology just like historical prices.

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