Every trader is looking for the edge. Traders are always in the pursuit of ways to increase their trading profitability.
Many are of the view that there is a simple solution to their trading profitably. They think that they need to follow a simple strategy, method or use certain software that will lead to endless returns.
Unfortunately, nothing is that easy. Trading Binary Options is just like any other undertaking in life. In order to really well you have to devote some time, effort and have strong discipline.
Although there is no such magic formula, and it depends on individual circumstances, there are certain things that you can do to increase your chance of trading binary options profitably.
Set Realistic Goals
Too many people who get involved with Binary Options have completely unrealistic goals and expectations around what they can realistically achieve trading. They have a view that they merely have to place a few trades a day and their bank account will grow exponentially.
Indeed, this was probably as a result of the many binary option scams that seemed to litter the internet. It made many new traders think that they were invested in some sort of revolutionary product where the simple rules of risk and return did not apply.
In financial markets, the efficient market hypothesis states that markets are perfectly efficient. What this implies is that traders are rewarded more in profit for taking more risk. If there is a situation where the returns are not roughly equal to the risks, it would be quickly priced out of the market.
Moreover, psychologically having unrealistic return objectives can hamper effective trading decision making. For example, if you are “only” achieving 10% a month you may think that your performance is far from what is reasonable. You then start taking more risks and using really inefficient and dangerous strategies.
Therefore, you need to have the right goals and return objectives in place when you trade binary options. Even if you are “only” able to achieve 10% returns per month on your trading objectives this should be looked at positively. It is probably still better than the returns you can expect on the S&P 500 or FTSE 100.
Start from the Basics
Binary options are derivative instruments on other assets. This means that their value is derived from that of some underlying other asset such as equity or forex. Therefore, before you can actually trade binary options profitably, you have to have a basic understanding of what drives the underlying asset price and how to trade that.
This means that you will need to brush up on your knowledge of basic economic principles as well as how various factors impact on asset classes. What is the interest rate parity relationship and how will interest rate announcements move the Euro Dollar? How will the latest company earnings results impact on the share price of some of the largest companies?
This does not require an in depth analysis and Economics / Finance are vast disciplines that incorporate numerous different concepts that are not relevant. It is merely required that a binary options trader knows what could move the needle and impact on the price of the asset while they are trading.
You should also decide which asset class is the most interesting for yourself to trade. Stocks and Equities are more “traditional” as people have a fair idea of what the company does and there are usually a defined list of factors that will impact on the stock price. However, if you would like to trade out of hours or overnight, the Forex markets are nearly always open which could allow you to trade binary options after work.
It is also important for the trader to focus on a particular asset type and possibly even an individual asset. This is because traders who are able to specialise and zone in on only one asset are generally more proficient at it. If one trader is able to study everything there is to know about that asset then they can be much more profitable doing it. Although this may seem quite narrow for an open minded individual, the main goal is profitability and in trading one can’t really be a “jack of all trades”.
Understand Binary Options
Once you have an idea of which underlying asset you would like to trade and how it moves, you need to take the time to understand the basics of binary options. Traditional OTC (Over the Counter) binary options that are traded on Wall Street are indeed quite exotic and complicated instruments. There are a number of factors that goes into pricing these options.
However, in order to trade binary options profitably, the underlying theory behind it is not really required. However, knowing exactly how the payoff structures work as well as all of the inputs is essential. There are also a number of different binary option types that the trader can make use of at some brokers. Knowing how each of these are used combined with the strategies that we talk about below can really improve your profitability. There are numerous binary option education resources online for you to read up on.
Trade with a Strategy
This is where nearly all new traders’ profitability tends to take a knock. They just jump into trading binary options without having any strategy. Too many traders treat trading like gambling and merely enter and exit trades based on their feeling of whether the market will move in the direction that they have assumed. Although some traders may enjoy this type of trading, those who want to really be profitable need to be structured.
When it comes to developing a trading strategy, there is no one size fits all. Trading strategies are usually split into two different types. These are technical strategies and fundamental strategies. These are synonymous with technical and fundamental analysis which is the study of these strategies.
Fundamental analysis is the study of the underlying economic factors behind the asset. These fundamental factors are things like interest rates, GDP, inflation and balance of payments when looking at Forex. They are also such numbers as earnings, ratios and financial analysis when taking a look at stocks and equity. If you are the type of trader who likes to deeply analyse numbers and trade over the slightly longer term then you would be more interested in fundamental analysis.
Technical analysis is the study of charts, indicators and key price levels. It is based in the belief that trends follow the same pattern with regularity. Hence, they study different charts and learn to spot key resistance / support levels. This strategy is focused more on the short term and is used to a large degree by day traders. If you are interested in fast paced trading and have a keen eye for patterns then technical analysis could be of interest to you.
Of course, the best traders have an understanding of both and don’t trade only one strategy in isolation. You would need to have a vague understanding of how general fundamental numbers will drive the binary options that you may be trading with a technical based strategy.
Apart from the trading strategies, you also have to have an effective money management strategy. This strategy can really impact your Binary Options profitability. A trader cannot merely invest a continuous amount of funds when trading binary options. They would need to decide how much they should invest based on a number of factors. This is also where discipline comes in. Emotion can often lead a trader to invest more or less than they should which is based on factors which have nothing to do with the numbers, “fear” and “greed”.
Find the Right Broker
Where most traders see their profitability plummet is when they use an ineffective, or even worse, dishonest broker. This is probably why so many people are scared to invest with these instruments. There are any number of stories about binary option scams which has led to some traders giving up on trading all together.
This is unfortunate as a little due diligence on the broker could have gone a long way. It is not just about jumping with the first broker who gives you a call and offers you endless riches. It is about trying a number of different brokers and asking them all the really important questions.
When you are deciding on what binary options brokers to use you should make sure that a few fundamental boxes are ticked. Is the broker regulated? What are their policies with regards to withdrawals and what are the spreads? More importantly, what tools do they have on their platform and is it functional? If most traders ask these questions, they will greatly improve trading profitability.
Of course, finding a broker that does tick these boxes is great, but you cannot be certain that this is indeed the best broker or platform for you. That is where the binary option demo account can be extremely handy. Not only can this give you a chance to see how efficient and functional the broker platform is, but it also allows you to get a better sense of how the broker operates.
Similarly, because the demo account is free, you can open as many as you like with other brokers. You can test out a number of different brokers and see which platform works best for your trading style. Another great benefit of a demo account is that it allows you to practice your trading strategies mentioned above in a non-threatening manner.
Most brokers would give you more demo funds if you were to run out and hence there is no downside to using a demo account to your heart’s content. It also allows you the opportunity to adapt your trading strategy and tweak it should you not be achieving the profits you will have liked. It may be a cliché, but in binary options trading as in any other discipline, practice makes perfect.
Persistence to Profitability
One of the most important ways to trading Binary Options profitably is through persistence. There may be times when a strategy that you have previously used did not work according to plan. This is sometimes not as a result of your trading but due to abnormal market conditions. This should not deter you from trading any further. Even some of the best traders in the world have been through periods of losses. However, they have sometimes come back with a vigorous and profitable return.
When you have had a period of losses, this could merely be temporary. Markets often tend to revert to a mean and a long term trend line. Hence, if your strategy has been profitable over a certain period of time in the past then a short term loss should be looked at in the context of a longer term horizon. This is another very important reason as to why you should not have unrealistically short time horizons as your expectation.
Sometimes, a strategy itself does indeed break down and what has worked in the past is no longer the case. This should also not be a reason for you to throw in the towel. Trading is a never ending learning experience with opportunities to refine or adapt your strategy at every corner. Try to understand why your trading approach is no longer working, think about whether it needs to be scrapped or merely adapted.
Trading Binary Options profitably also requires constant development. As an online trader who usually operates on their own account, there is usually a lack of interaction that is one would find as standard in other industries. This is why trading communities such as the Binary Trading club are a great way to interact with fellow traders. This will give you the opportunity to bounce ideas off of other traders and ask them for help in shaping your binary options trading strategy and making it profitable.